Annual Report Market Issues and Performance 2006 Department of Market Monitoring California Independent System Operator Department of Market Monitoring – California ISO April 2007 TABLE OF CONTENTS Executive Summary ...................................................................................................... 1 Overview................................................................................................................................................... 1 Total Wholesale Energy and Ancillary Service Costs ..............................................................................3 Market Rule Changes ............................................................................................................................... 4 Increase in Bid Cap for Energy and Ancillary Services........................................................................ 4 Enforcement of Amendment 72 – Load Scheduling Requirement....................................................... 5 System Resource Adequacy Requirements ........................................................................................ 6 Reliability Capacity Service Tariff (RCST) ........................................................................................... 7 Long-term Procurement Plans ............................................................................................................. 9 General Market Conditions..................................................................................................................... 10 Demand .............................................................................................................................................. 10 Supply................................................................................................................................................. 12 Generation Outages ........................................................................................................................... 13 Short-term Energy Market Performance................................................................................................. 15 Estimated Mark-up of Short-term Bilateral Transactions ................................................................... 15 Twelve-Month Market Competitiveness Index ................................................................................... 16 Structural Measure of Market Competitiveness: Residual Supplier Index......................................... 17 Revenue Adequacy of New Generation............................................................................................. 18 Real Time Energy Market....................................................................................................................... 20 Competitiveness of Real-time Energy Market.................................................................................... 21 Real-time Congestion (Intra-Zonal).................................................................................................... 22 Ancillary Services Market ....................................................................................................................... 23 Inter-Zonal Congestion Market ............................................................................................................... 25 Summary and Conclusions..................................................................................................................... 26 1 Market Structure and Design Changes ............................................................. 1.1 1.1 Introduction/Background........................................................................................................... 1.1 1.2 Market Design Changes ...........................................................................................................1.1 1.2.1 Increase in Bid Cap for Energy and Ancillary Services........................................................ 1.1 1.2.2 2006 Resource Adequacy Requirements ............................................................................ 1.2 1.2.3 Changes to the Must-Offer Requirement ............................................................................. 1.5 1.2.4 Reliability Capacity Services Tariff....................................................................................... 1.6 1.2.5 CPUC Long Term Procurement Rules............................................................................... 1.12 1.3 Generation Additions and Retirements................................................................................... 1.13 1.3.1 Generation Additions and Retirements in 2006 ................................................................. 1.13 1.3.2 Anticipated New and Retired Generation in 2007.............................................................. 1.15 1.4 Transmission System Enhancements .................................................................................... 1.17 1.4.1 Path 26 Remedial Action Scheme Enhancement .............................................................. 1.17 1.4.2 New Jefferson-Martin Line ................................................................................................. 1.18 1.4.3 East/West of the River Upgrades....................................................................................... 1.18 1.5 Administration of the Enforcement Protocol ........................................................................... 1.19 1.5.1 Enforcement Protocols ....................................................................................................... 1.19 2 Summary of Energy Market Performance......................................................... 2.1 2.1 Demand Conditions .................................................................................................................. 2.1 2.2 Supply Conditions..................................................................................................................... 2.5 2.2.1 Hydroelectric......................................................................................................................... 2.5 2.2.2 Imports and Exports .............................................................................................................2.7 2.2.3 Generation Outages ............................................................................................................. 2.8 2.2.4 Natural Gas Prices ............................................................................................................. 2.10 2.2.5 Generation by Fuel Source ................................................................................................ 2.11 Annual Report on Market Issues and Performance i Department of Market Monitoring – California ISO April 2007 2.3 Periods of Market Stress ........................................................................................................2.12 2.3.1 Spring Hydro Runoff........................................................................................................... 2.12 2.3.2 Heat Wave of July 5-28, 2006............................................................................................ 2.21 2.4 Total Wholesale Energy and Ancillary Services Costs........................................................... 2.34 2.5 Market Competitiveness Indices............................................................................................. 2.40 2.5.1 Residual Supplier Index for Total Energy Purchases......................................................... 2.40 2.5.2 Price-to-Cost Mark-up for Short Term Energy Purchases ................................................. 2.41 2.5.3 Twelve-Month Competitiveness Index ............................................................................... 2.45 2.5.4 Price to Cost Mark-up for Imbalance Energy ..................................................................... 2.45 2.5.5 Residual Supplier Index for Imbalance Energy.................................................................. 2.48 2.6 Incentives for New Generation Investment............................................................................. 2.51 2.6.1 Revenue Adequacy for New Generation Investment......................................................... 2.51 2.6.2 Methodology....................................................................................................................... 2.52 2.6.3 Results................................................................................................................................ 2.55 2.6.4 Discussion .......................................................................................................................... 2.55 2.7 Performance of Mitigation Instruments................................................................................... 2.58 2.7.1 Damage Control Bid Cap ................................................................................................... 2.58 2.7.2 AMP Mitigation Performance.............................................................................................. 2.59 3 Real Time Market Performance.......................................................................... 3.1 3.1 Overview................................................................................................................................... 3.1 3.2 Real Time Market Trends .........................................................................................................3.2 3.2.1 Prices and Volumes 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