By Robert Mullin

CAISO’s decision to consider reforms to its congestion revenue rights auctions as one of its top priorities for 2017 has provoked mixed reactions from stakeholders.

Opponents of the move say the ISO’s pursuit of the CRR issue lacks widespread stakeholder support and therefore doesn’t warrant a top spot within the policy roadmap for this year’s discretionary initiatives. They contend CAISO is elevating the concerns of its internal Market Monitor above those of most stakeholders, who want the ISO to focus on other priorities.

But the initiative has its backers, some of whom argue that the ISO should move as quickly as possible to determine why auction revenues are consistently outpaced by payments made to CRR holders, leaving ratepayers to make up the difference.

CAISO has included the issue in its draft final policy roadmap of “discretionary” stakeholder initiatives in response to concerns expressed by its internal Market Monitor. “Discretionary” initiatives represent policies the ISO can implement out of its own choosing rather than as a result of a regulatory mandate or market necessity.

The Department of Market Monitoring has pointed out that ratepayers lost $520 million from 2012 to 2015 through a market that pays $1 to CRR holders for every 45 cents in revenues received from auctions.

A 2016 report by the Monitor urged the ISO to altogether eliminate the auctions, contending that the program suffers from inherent design flaws that allow speculators to reap large financial gains at ratepayer expense. (See CAISO Monitor Proposes to End Revenue Rights Auction.)

“The consistent underpricing of CRRs calls into question a fundamental assumption of the CRR auction design that competition will drive auction prices to equal the CRR’s expected value,” the Monitor said in its report.

The Monitor’s report offered up a potential alternative to the current auction: a bilateral or exchange market for forward contracts-for-difference for pairs of ISO nodes — also known as locational basis price swaps.

Unlike in the current CRR market, the price swaps would be traded between willing counterparties, rather than leaving ratepayers as the unknowing, and technically outmatched, counterparty.

“We’re not jumping to DMM’s proposed solution,” Brad Cooper, CAISO manager of market design and regulatory policy, said during a Dec. 22 stakeholder meeting. CAISO is taking up the initiative “because DMM has pointed out a significant revenue gap that comes to big money,” he said.

In comments submitted to the ISO supporting the initiative’s inclusion in the roadmap, the “Six Cities” utilities of Anaheim, Azusa, Banning, Colton, Pasadena and Riverside attempted to put the size of that gap into perspective. Revenue deficiencies stemming from the auction equated to $130 million per year over a three-year period, compared with the estimated Energy Imbalance Market (EIM) benefits to ISO market participants in 2015 of $12.7 million, they pointed out.

“Thus, the average annual costs to ISO LSEs resulting from the design of the CRR auction process have been more than 10 times the estimated EIM benefits to ISO market participants in 2015,” the utilities said.

Noting that the ISO has signaled a need to perform additional analysis before formally committing to the initiative, the Six Cities encouraged staff to move with all deliberate speed.

“Any preliminary analysis considered necessary should commence as soon as possible (and well before the middle of 2017) so that an appropriate solution to the CRR auction revenue deficiencies can be implemented prior to the auction for annual CRRs for 2018,” the utilities said.

Northern California Power Agency (NCPA), a joint powers agency established to serve the region’s municipal utilities, added its support to a measure that would address auction shortfalls.

“Modification of the auction process such that bids from entities willing to sell clear against those willing to buy is a reasonable approach to mitigating the long-standing revenue insufficiency concerns that we believe bears careful consideration,” the agency said in its comments.

Still, NCPA faulted the Monitor for its failure to suggest modifications rather than advocate for “abolition” of the auction process.

“NCPA does not at all support doing away with the CRR auction, which is an integral part of the risk mitigation services we provide our members,” the agency wrote.

Pacific Gas and Electric, the state’s largest investor-owned utility, said it was “eager” for the ISO to address CRR revenue inadequacy and “encouraged” by inclusion of the issue on the roadmap.

“In line with the DMM’s recommendation to assess the value of the CRR auction platform, PG&E hopes this initiative will provide an opportunity to consider and evaluate alternative solutions to CRR revenue inadequacy,” the utility wrote in its comments.

Opponents of the initiative include DC Energy, a proprietary trading firm focused on investments “related to the locational and temporal value and volatility in transport markets for power and natural gas,” according to the company’s website.

The company criticized CAISO for giving too much weight to the Monitor’s concerns about the auction issue when ranking the CRR initiative against other potential discretionary initiatives.

“DC Energy appreciates the need for CAISO consideration of DMM’s input,” the company said in its comments. “However, on its face, it appears that one stakeholder’s views were considered for its ranking, despite the volume of diverse comments received.”

The company said the Monitor’s analysis of the CRR market failed to focus on the benefits of the current system and that the ISO would be “best served” in considering various stakeholder and market perspectives when examining the market’s performance.

The current auction design provides a “superior opportunity for both price discovery and hedge acquisition” compared with a bilateral market, DC Energy argued.

“An entity seeking a hedge in the bilateral market might find it challenging or impossible to connect with a willing seller for an exact path,” the company said. “However, within the current CRR auction structure, network capacity is available to any qualified stakeholder, enabling liquidity and multiparty reconfiguration of electrical-location-specific (e.g., ‘nodal’) hedges.”

Western Power Trading Forum (WPTF), an interest group representing regional power traders, took DC Energy’s criticism a step further, contending that the Monitor’s “influence in the initiative-priority process belies [its] supposed independence and is contrary to [its] core functions” as set out in the ISO Tariff.

“WPTF contends that instead of devoting CAISO resources to a pet project of DMM, the CAISO should treat them like any other stakeholder who complained about a small aspect of the market that was naturally improving on its own — and ignore them,” WPTF wrote in its comments.

In support of that last point, the group pointed out that auction revenues as a percentage of payments increased after the ISO implemented practices that improved transparency into how it represents transmission outages in its market models. The Monitor’s findings indicate that the ISO took in 63 cents of auction revenue for every dollar paid out to CRR holders during the first half of last year. (See CAISO Monitor Seeks Congestion Revenue Rights Auction Reforms.)

In their comments, the Six Cities utilities appeared to anticipate the arguments of opponents of the initiative.

“The ISO should reject the efforts by recipients of the wealth transfers documented by the DMM to dissuade the ISO from addressing this misappropriation of the benefits of transmission assets paid for by ratepayers,” the utilities said.