By Robert Mullin

CAISO on Monday scored two out of three as FERC rejected one of the ISO’s proposed Tariff revisions to address concerns that the Western Energy Imbalance Market’s rules constrain the operations of hydroelectric producers and undercut the value of their resources (ER19-2347).

Canada-based Powerex called for the changes shortly after joining the EIM in spring 2018. The company, which markets surplus hydro output produced by government-owned BC Hydro, complained about the frequency with which transmission constraints at the U.S.-Canada border were triggering CAISO’s local market power mitigation (LMPM) process in the EIM, which mandates use of default energy bids (DEBs) to settle transactions. (See Troubled Waters for Powerex in EIM.)

Powerex found that LMPM repeatedly kicked in just as its traders were seeking to buy up energy during periods of low prices. As the company filled inbound transmission with purchases, the mitigation process detected constraints in an area not actually requiring additional power — forcing the company to sell into already flush markets.

The company complained that the inflexibility of the formulas underpinning the DEBs often left its EIM operations out of the money, prompting it to avoid trading in the market altogether.

The hydro-heavy Bonneville Power Administration, which recently signed an implementation agreement to join the EIM, also called for changes. (See Bonneville Power Signs Agreement with EIM.)

CAISO’s Board of Governors responded to the hydro producers’ concerns in March by unanimously approving a set of EIM revisions, including a proposal to create a specially targeted “hydro DEB” that the ISO said “better estimates these resources’ actual costs, which typically consist of opportunity costs reflecting their limited water availability.” (See CAISO Board OKs Market Power Mitigation Remedy.)

The hydro DEB represents the minimum payment a hydro resource would receive under EIM dispatch. The change stipulates the DEB will be calculated at the maximum of one of three components:

• Long-term/geographic: representing the opportunity costs for the potential of a resource to sell output in the future, including in different bilateral markets.
• Short-term: represents opportunity costs created by short-term water use limitations.
• Gas floor: representing the cost of replacement energy in the EIM if the resource exceeds its short-term limitations. It would be calculated based on the average gas turbine heat rate multiplied by the gas price applicable to the relevant region.

The long-term and gas floor components would also include a 10% adder to account for variation between published indices and the prices of actual bilateral transactions, while the short-term component would include a 40% adder to prevent it from being dispatched too frequently on a particular day.

CAISO’s changes also include a provision that alters the timing of LMPM so that the triggering of mitigation during a 15-minute interval will no longer apply to every five-minute period within that 15-minute span; it also will not apply to all subsequent intervals within the same hour. In proposing the change, the ISO expressed concern that existing rules can force EIM resources to sell energy out of their balancing authority areas at mitigated prices even during intervals when no market power has been detected.

A Question of Discretion

In its ruling Monday, FERC approved both the hydro DEB and mitigation timing changes. But the commission rejected CAISO’s proposal to implement a mechanism that would have allowed EIM entities to limit net exports from their BAAs under certain conditions.

In its filing, CAISO explained how an EIM entity must pass a resource sufficiency test at the beginning of each market interval in order for the market to dispatch energy in and out the entity’s BAA during that interval. The test ensures the entity has scheduled sufficient resources and enough flexible ramping capacity to meet its own demand for the interval. There is no requirement for resources within the BAA to offer energy beyond that amount.

“Despite this, the existing market power mitigation process can mitigate a resource’s bids when multiple balancing authority areas are import-constrained, and a resource can be dispatched for additional exports at mitigated bid prices for greater quantities of energy than were required to be offered. This can discourage offering energy and transmission to the EIM,” CAISO noted.

To address the issue, the ISO proposed to introduce a “net export limit” feature that would allow EIM entities to limit the additional dispatch of resources when resources’ bids are reduced because of their BAAs becoming subject to bid mitigation.

As FERC explained in its order, “the optional feature would allow EIM entities to limit net transfers out of the mitigated BAA to the greater of: (1) the pre-mitigation transfer quantity, or (2) the base transfer quantity, plus, for both (1) and (2), the sum of the flexible ramping up awards in the market power mitigation run in excess of the BAA’s flexible ramping-up requirement.”

CAISO intended to enforce the rule in both the 15-minute and real-time markets to ensure that every interval limit was determined separately.

“Each EIM entity would have the option to activate this rule so that the EIM transfer limitations are enforced after mitigation,” CAISO explained.

In rejecting the provision, FERC ruled that it was “inconsistent” with the EIM’s market power mitigation framework and “not an appropriately calibrated solution to the concerns CAISO identifies.”

“In particular, CAISO’s proposal could weaken CAISO’s market power mitigation process by allowing EIM entities to withhold generation through the submission of high supply bids and restricting EIM transfers out of their BAAs,” the commission wrote. “Under CAISO’s proposal, those bids would be mitigated when the potential to exercise market power was detected, but it is the unmitigated bids that would determine the dispatch of resources to serve load outside of the EIM entities’ BAAs. As a result, CAISO’s proposal would effectively allow market participants in the EIM to raise prices above competitive levels at the discretion of the EIM entity, resulting in potentially unjust and unreasonable rates.”

The commission also dismissed CAISO’s argument that the provision was acceptable because the EIM is a “voluntary” market, saying that the Federal Power Act requires FERC to ensure just and reasonable rates in all markets it oversees.

“Resources in the EIM do not have a must-offer obligation in the same way that many resources in CAISO do, but this distinction is not a compelling basis for weakening the protections against anticompetitive behavior in the EIM. Even if resources are not under a contractual or legal obligation to offer supply into a market, allowing the unmitigated exercise of market power by those resources may result in unjust and unreasonable rates,” FERC said.

Pointing out that the proposed change could apply to any resource type, the commission additionally rejected CAISO’s contention that the option was fashioned to address the “unique situation” of hydro resources with storage capability that are dispatched at DEBs that don’t reflect their true opportunity costs.

“Under this proposal, EIM entities could decide whether the net export limit constraint applies to generation within their BAA and then receive congestion revenue as a result of the application of this constraint,” FERC said. “We find that this discretion could potentially undermine CAISO’s independent operation of the EIM because it would allow EIM entities, which are also participants in the EIM, discretion over what constraints are applied to them.”