By Hudson Sangree
FERC last week approved CAISO’s plan to reduce the capacity available in its congestion revenue rights auctions but rejected a proposal to cut CRR payments that had garnered opposition.
The commission approved CAISO’s proposal to reduce transmission system capacity available in the annual CRR allocation and auction processes from 75% to 65%, which was unopposed. But FERC rejected as unjust and unreasonable a plan to eliminate full funding of CRRs and instead scale payouts to align with revenue collected through the day-ahead market and congestion charges (ER18-2034).
The rejection means CAISO may have to seek additional changes to fix a system it says unfairly charges ratepayers around $100 million annually, largely to fund speculators’ profits.
CRRs are financial instruments that can be used as a hedge against congestion charges or as an investment to speculate that the congestion rent will be greater than the purchase price. Shortfalls between CRR revenues and payouts resulted in ratepayers making up a difference of approximately $500 million over five years, the ISO has argued.
Under the scaling plan, CAISO would have compared the congestion revenue and revenue from counterflow CRR holders for each constraint to the payments due to prevailing flow CRR holders for that constraint. When it did not collect enough revenue to pay prevailing flow CRRs the full value for an hour, the ISO would reduce the payments proportionally.
CAISO proposed scaling CRR payments only in the prevailing flow direction, not payments due from counterflow CRR holders on the same constraint. Because counterflow CRRs fund prevailing flow CRRs, CAISO said discounting counterflow CRRs could increase revenue insufficiency.
The scaling plan was opposed by Calpine, the Western Power Trading Forum, the Alliance for Retail Energy Markets and others.
“As protesters note, the commission has long held that counterflow and prevailing flow CRRs should be netted against one another such that the expected net value of two obligation CRRs of equal megawatts from A to B and B to A will be equal to zero,” FERC wrote, citing its 2006 ruling on CAISO’s Market Redesign and Technology Upgrade (MRTU) and a 2016 order on PJM’s financial transmission rights market. (See FERC Finds PJM ARR/FTR Market Design Flawed; Rejects Proposed Fix.)
“Consistent with the commission’s findings in the MRTU and 2016 PJM FTR orders, we continue to believe that a symmetric approach is just and reasonable, while an asymmetric approach has not been shown to be just and reasonable.”
The commission added that CAISO’s proposal would have the “undesirable” effect of making the CRR product less transparent.
“Market participants could face difficulties valuing a counterflow hedge relative to a prevailing flow hedge, since one would be discounted while the other would not,” the commission said. “This lack of transparency could discourage market participants from bidding for counterflow CRRs, which could reduce liquidity and could, in turn, exacerbate the CAISO CRR market’s current market efficiency problems,” such as the auction revenue shortfalls.
The capacity release reduction proposal will cut the amount of CRRs made available in the annual auction while increasing those available through the monthly auction. In approving the plan, the commission noted that it “shifts the release of CRR capacity from the annual auction to the monthly auction, where CAISO has more information concerning the topology of the transmission system. CAISO’s analysis shows that a 10% decrease in available annual capacity would decrease the amount of CRRs that are likely to be infeasible in the day-ahead market and reduce CRR revenue insufficiencies.”
CAISO’s Board of Governors had approved the CRR rule changes in June. (See CAISO Board Approves More CRR Auction Changes.)
The issue has pitted the ISO’s Department of Market Monitoring against financial traders, which the department says were the biggest beneficiaries of the current market design.
In the first half of 2016, the Monitor said, financial traders made $22.7 million in profits, more than doubling their investments as they paid 49 cents into the ISO’s auctions for every dollar earned. Over the same period, power marketers and generators took in about $3.9 million and $800,000, respectively, paying 82 and 85 cents for every dollar of congestion revenue earned. (See CAISO Monitor Seeks Congestion Rights Revenue Auction Reform.)
Thursday’s order was the second time this year that FERC has addressed CAISO’s attempts to upgrade its CRR auctions.
In June, FERC approved a separate set of CRR rule changes, including limiting allowable source-and-sink pairs for CRR transactions to those that align with typical supply delivery paths. (See FERC OKs Tighter Rules for CAISO CRR Auction.)
Transactions using non-delivery sources and sinks, such as between two generator locations, represent about 81% of auction shortfalls, the ISO noted in arguing for the change.