Texas "Small Fish Swim Free" Rule In Jeopardy As Two PUC Commissioners Favor, Or Lean Toward, Elimination

June 27, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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During a Texas PUC open meeting discussion of real-time co-optimization in the ERCOT market, the current "small fish swim free" rule in the market was criticized as several Commissioners questioned whether it should continue

The small fish swim free, Subst. R. §25.504(c), currently provides that entities with less than 5% of ERCOT installed capacity do not have ERCOT-wide market power.

The discussion of the small fish swim free arose from a discussion of "must offer" ancillary service requirements under real time co-optimization, which led to a broader discussion

The Independent Market Monitor, who opposes the small fish swim free rule, said that, if the rule is maintained, some clarification is needed in the rule such that it does not apply to ancillary services

Texas Industrial Energy Consumers favors retaining the small fish rule, though TIEC agreed that the PUC should clarify that the rule only applies to the real-time energy market as it does today

On keeping the "small fish swim free" rule for the energy market, TIEC noted in April 2019 comments that opponents justify elimination of the rule on the premise that scarcity pricing will be provided primarily through the ancillary service demand curves in RTC. TIEC responded that, "While TIEC understands this point, scarcity pricing will depend on both the ancillary service demand curves and the actual submitted energy offers of market resources ... [U]nless there are sufficient resource offers at the SWOC, the combination of the marginal energy offer and the demand curves may not approach the Value of Lost Load (VOLL). As a result, TIEC believes it is beneficial to still allow resources who do not have market power to submit offers that are above their marginal cost to achieve a greater likelihood of prices being at VOLL during scarcity."

Texas PUC Chairman DeAnn Walker questioned whether this issue needed to be addressed now

However, during the discussion of the small fish rule, Walker said she believes that the "whole thing" should be eliminated

Commissioner Arthur D'Andrea said that he hadn't heard anyone say that the small fish rule is still needed with the ORDC (as noted above, TIEC has made such a case), but said that the Commission hasn't had full briefing on it either, and said that the NOIEs haven't commented on it

D'Andrea said that he's "leaning" towards getting rid of the small fish rule in energy, but hesitated to do so without more briefing

Walker said that a broad rulemaking is going to be required in any event, which would encompass the more discrete small fish issue, and said that the Commission wasn't in the position to make any decisions today.

The Commission previously addressed a petition to end the small fish rule in 2014. At such time, Commissioners agreed that small fish cannot exercise market power because of entry by competitors, with then-Chair Donna Nelson stating, "To the extent somebody is a small fish and exercises market power and bids above short-run marginal cost, others will enter the market, so it is a short-term issue, and one that I think the market handles well."

With the Commission concluding its small fish discussion without any action, Commissioners agreed with a proposal from Walker for setting the SWOC and Value of Lost Load (VOLL) under real-time co-optimization in the ERCOT market, and agreeing with her suggestion for further discussion of day-ahead issues

Commissioners agreed to proposal as set forth in a memo by Walker

Walker wrote in the memo that, "As a fundamental starting point, I believe that the Commission should set forth decisions on the implementation of real-time co-optimization that will maintain the recent decisions made by the Commission in January 2019 related to the operating reserve demand curve (ORDC) in Project No. 48551 - Review of Summer 2018 ERCOT Market Performance and in May 2019 related to 16 TAC §25.505 in Project No. 48721 - Rulemaking Proceeding to Amend 16 TAC §25.505, Relating to Resource Adequacy in the Electric Reliability Council of Texas Power Region and to Repeal 16 TAC § 25.508, Relating to the High System-Wide Offer Cap in the Electric Reliability Council of Texas Power Region."

The Commission adopted Walker's proposals below to accomplish that goal.

System-Wide Offer Cap and the Value of Lost Load

ERCOT had requested direction from the PUC on setting the initial value of the System-Wide Offer Cap (SWOC) and the Value of Lost Load (VOLL) in the real-time co-optimization market.

Commissioners agreed with the recommendation of the Commission Staff to implement the following values:

• Set the SWOC to $2,000 per MWh;

• Set the maximum Ancillary Service Demand Curve (ASDC) value to $9,000 per MWh;

• Set VOLL to $9,000 per MWh; and

• Cap the total energy price at $9,000, exclusive of congestion costs.

"It is my understanding that establishing the above values will maintain the decisions made by the Commission in January 2019 related to the ORDC. As previously set forth, I believe that the Commission should honor the decisions that were recently made to modify the ORDC and neither increase nor decrease the market impacts of those decisions," Walker wrote

Low System-Wide Offer Cap

For the same reasons of maintaining the impacts of recent decisions, Commissioners agreed with the recommendation of the Commission Staff to implement the following values for the Low System-Wide Offer cap (LCAP):

• Set the LCAP to $2,000 per MWh;

• Set the maximum ASDC value to $2,000 per MWh;

• Set VOLL to $2,000 per MWh; and

• Cap the total energy price at $2,000, exclusive of congestion costs.

"It is my understanding that setting these parameters in this manner is consistent with decisions the Commission made earlier this year in Project No. 48551 and Project No. 48721," Walker wrote

Ancillary Service Demand Curves

Commissioners also agreed with the recommendation of the Commission Staff regarding the design of the ASDCs. These demand curves should be designed for real-time co-optimization to replicate the pricing outcomes of the ORDC. Furthermore, the set of ancillary services approved by the ERCOT Board of Directors in Nodal Protocol Revision Request 863 should form the basis for the ASDC design, Commissioners agreed

Day-Ahead Market

"Through discussions with stakeholders, ERCOT, and the Commission Staff, I believe that various positions on the day-ahead market continue to be discussed and refined," Walker wrote, as her fellow Commissioners agreed with this assessment

"Because decisions regarding the day-ahead market do not need to be made immediately, I would like to give stakeholders an opportunity to provide additional input regarding potential changes to the day-ahead market through another set of comments. In order to obtain additional information, I propose requesting that the Commission Staff develop some questions that the Commission can consider at the July 18, 2019 open meeting. It is my understanding that ERCOT would need a decision on this issue in several months," Walker wrote

Market Rules for Ancillary Services

The Commission Staff had recommended that the current prohibition against withholding in the energy market be applied to the ancillary services market in real-time co-optimization. The Commission received comments from stakeholders who were opposed to such withholding prohibition for ancillary services due to concerns over resource capabilities.

Walker wrote that, "It is my understanding that ERCOT plans to implement the real-time co-optimization systems and protocols in a manner to allow for resources to indicate whether those resources are capable of providing ancillary services over the full range of their output. Therefore, it is my understanding that the manner in which ERCOT plans to implement the system and protocols addresses the concerns of the stakeholders. Thus, I do not believe that the Commission needs to address this issue because the stakeholder process at ERCOT will address the details regarding a requirement that resources provide an offer curve for capacity that is qualified, online, and capable of providing ancillary services."

Docket 48540

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