By Robert Mullin

PORTLAND, Ore. — Two months after making a smooth integration into the Western Energy Imbalance Market, Canada-based Powerex now finds itself navigating a turbulent relationship with market rules the company says undercut the value of its hydroelectric resources, company officials said last week.

At issue for Powerex is the frequency with which transmission constraints at the U.S.-Canada border trigger CAISO’s local market power mitigation (LMPM) process in the EIM, which mandates use of default energy bids (DEBs) to settle transactions. Inflexibility in the formulas underpinning the DEBs often leave Powerex market operations out of the money, the company says.

“The LMPM processes and the DEB options are not workable for Powerex or for external hydro more generally,” Powerex Director of Power Jeff Spires said during a presentation at a June 6 meeting of the EIM Regional Issues Forum meeting at Bonneville Power Administration offices.

Powerex, which markets surplus power for the government-owned BC Hydro utility, began transacting in the EIM on April 4. As part of its membership, Powerex has volunteered about 300 MW of its transfer capacity into the market, half of which links British Columbia with the Puget Sound Energy balancing authority area (BAA) near Seattle. The other half allows transfers into CAISO via the Malin delivery point on the California-Oregon Intertie.

“We participate with large-scale hydro that’s very fast-ramping,” Mike Goodenough, Powerex trading manager, told the forum. “Often times we’re in a ‘buy’ mode, and particularly when the market is in oversupply, we’re buying, and the transmission can become constrained because we ramp so fast during the market power mitigation market run [that] the ties fill. And at that point, there’s a constraint and market power [mitigation] kicks in. The default bids then kick in and override all of our bids and offers.”

DEB Options ‘Formulaic’

The problem in those instances, Goodenough said, is that the EIM’s DEB options are “more or less formulaic” and “often very wrong” with respect to Powerex’s opportunity costs during a trading interval.

The result is “very frequent mitigation” that forces Powerex to sell below its opportunity costs when it intends to be purchasing in the market to take advantage of arbitrage, Goodenough said.

During these periods, Powerex’s traders seek to raise their sell offers upward to avoid sales but are prevented from doing so when mitigation kicks in, defaulting the market to rely on DEBs.

“And because the default bids are wrong, where we would be a buyer, we are now in the dispatch run as a seller,” he said. “And so, there’s obviously two problems there. One is, we’re now selling into a market in which there might already be in oversupply. But more importantly for us, we’re now depleting energy-limited resources at the wrong time.”

In an April 30 presentation to a CAISO workshop on broader DEB issues, Powerex described the shortcomings of each default bid option available to EIM market participants heavily reliant on hydro assets:

• The “variable cost” option, based on heat rates, fuel price and greenhouse gas costs, is “not relevant” for hydro resources that are more driven by opportunity costs than variable production costs.
• The “backward-looking” LMP option — based on the on the lowest 25th percentile of LMPs at which a resource has been dispatched during the previous 90 days — is “not workable” for hydro resources whose opportunity costs “are driven by current and expected future conditions.”
• The “negotiated rate” option, in which a formula is negotiated between a resource’s scheduling coordinator and CAISO and its Department of Market Monitoring, is “theoretically workable” for all resources but “not workable in practice” for hydro resources outside the CAISO BAA. This option requires the ability to determine a methodology to estimate expected marginal costs, “which are complex, dynamic, and involve both objective and subjective factors,” Powerex said.

“You can’t precisely estimate costs for hydro,” Spires told the forum. “External [to the CAISO BAA] hydro in particular has multiple bilateral opportunities. We have a myriad of constraints within the BC network,” including seasonal monthly, weekly and daily storage requirements, as well as recreational constraints.

“There’s so many different things and they can change at the drop of a hat and you need to be able to respond to that, and so we really support flexibility in determining what your marginal opportunity costs are,” Spires said. He said the flexibility is required to avoid “forced sales.”

Spires said that the EIM’s LMPM process functions as if the supplier conduct threshold for triggering mitigation is zero, meaning that “as soon as your bid or offer price is even a penny above the reference price, then you’re subject to potential mitigation if the transmission is constrained.”

“It goes beyond the commercial impact — it’s an operation impact as well,” Spires said. “And it’s a loss of control of being able to decide what to do with your resources in light of the information that you have at the time.”

Unlike other EIM members, Powerex functions only as a marketing operation and not as a balancing authority or load-serving entity, which means it has no ratepayers exposed to EIM prices.

Thus, the company says its import transfer path into British Columbia is used primarily for “economic displacement” (importing low-priced power to displace use of internal generation) and doesn’t serve any retail customers. In its April 30 presentation, the company questioned whether it was appropriate to apply LMPM to transfer paths where “there is no potential for market power.”

Spires said the situation is discouraging Powerex’s participation in the EIM.

“It’s frankly less attractive than the existing real-time market — the intertie bidding framework where we don’t face these issues, [and] particularly for us, because we have transmission access to the CAISO and so we’ve got the opportunity to deliver a clean supply into that market,” he said. “And so the EIM is a step backwards from that perspective.”

Spires concluded his presentation by expressing appreciation for CAISO’s support in transitioning Powerex into the EIM, but he also urged the ISO to address the company’s dilemma soon.

“We think that it is important to others, and we’re looking forward to working on these issues, but we need a resolution quickly.”

Interim Solution?

In April, CAISO asked FERC to approve a Tariff waiver to alleviate the impact of LMPM on Powerex’s operations by reducing the number of intervals for which mitigation applies after being triggered (ER13-1889).

“The interim solution consists of an automated process by which Powerex’s EIM transfers will be restricted only during intervals in which this condition [producing forced sales] occurs, as well as limiting mitigation of Powerex’s aggregated participating resource to the market interval in which the mitigation of that resource is triggered,” CAISO said in its filing.

The ISO said the interim solution “will apply solely to Powerex’s aggregated participating resource operating under the unique Canadian EIM entity arrangements.”

But while the potential Tariff waiver would partially alleviate the LMPM issue for Powerex, the company has noted it would not address the company’s underlying concerns about the DEB calculation options or the fact that its sales prices would be mitigated to uneconomic levels when LMPM is triggered.

During the April 30 workshop, CAISO Vice President for Market Quality and Renewable Integration Mark Rothleder acknowledged “there is a gap” between what some stakeholders “feel their ultimate opportunity costs are and what they believe a calculated DEB under the existing mechanisms can achieve.”

“This may be the fundamental issue in terms of continuing the EIM and the success of the EIM, so we have to get this right,” Rothleder said, adding that the ISO must receive comments from stakeholders before kicking off an initiative to address the DEB issue.

While time might be of the essence for Powerex, CAISO told RTO Insider on Monday that “no time frame has been set for this miscellaneous stakeholder process as of this time, although we do plan to have a second workshop in July to further discuss the concerns and some ideas for addressing them.”