Ex ante and ex post designs for electric market mitigation: past and present experience and lessons from California

Restructuring in electric power sectors took a significant step backward in the summer of 2000 when wholesale and retail markets in California experienced staggering price increases that continued through June of 2001. During this period, California suppliers neared bankruptcy and one went into bankruptcy, as did the state's cornerstone market institution, the California Power Exchange. While the cause has been alternatively described as the "perfect storm" and "a case of market manipulation" the outcome has been a price mitigation process at the FERC, a series of federal and state lawsuits, and a California Market Design process led by the CA ISO that incorporates four separate proposals for statewide price mitigation. The objective of this paper is to present an analysis of the impact of actual and proposed market mitigation procedures for the California market. Based on detailed analyses (10 minute California electric system operating data for the refund period of October 2000 through June 2001) the paper: (1) reviews and critiques the FERC procedure for calculation of a Mitigation Market Clearing Price to be applied during the refund period, (2) evaluates market mitigation strategies that are being considered for future application in the State and the country as a whole, and (3) evaluates the possible success of any ex post price mitigation. The analysis is focused on the impact of such strategies on wholesale electric market development both in the US and internationally. Recommendations are offered for FERC's ongoing standard market design effort that affects the design of electricity markets throughout the country.