Texas ALJ Would Order ERCOT To Provide Remedy To QSEs To Improperly Charged PTP Obligations, Implicates Potential Uplift To Market

October 26, 2020

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A Texas ALJ, in a proposal for decision, would find that ERCOT violated ERCOT Nodal Protocols §§ 4.4.6 and 4.5.1(13) when it issued the resettlement statements forcing DC Energy Texas, LLC and Monterey TX, LLC to pay for point-to-point (PTP) obligations in the day-ahead market (DAM) at prices more than $0.01/MWh above their not-to-exceed bid prices

The ALJ would also find that DC Energy and Monterey are entitled to a remedy that places them back in the position they would have been in had they never been awarded PTP Obligations at prices more than $0.01/MWh above their not-to-exceed bid prices.

Such a remedy may potentially require uplift to the market, though the ALJ does not order any specific remedy in the proposal for decision

The proposal for decision would not entirely resolve the matter, as the ALJ finds factual disputes exist as to the monetary amount of the remedy due to DC Energy and Monterey

The ALJ also said that, "Factual disputes still exist regarding ... the specifics of the mechanism whereby the funds to pay the remedy might be collected from other market participants."

The ALJ would remand the case to docket management for further proceedings on these discrete issues

The proposal decision is not final and parties may file exceptions to the proposal

The ALJ summarized the case as follows

"DC Energy and Monterey are registered as qualified scheduling entities (QSEs) in ERCOT and participate in ERCOT’s DAM. Consistent with their normal business practice, DC Energy and Monterey each submitted bids for PTP obligations in the DAM for a number of operating days in September 2019. Each bid was capped at the maximum price the company was willing to pay (the not-to-exceed price) for the PTP obligations. For operating days September 16-23, 2019, ERCOT initially concluded that the DAM clearing prices were lower than the not-to-exceed bids offered by DC Energy and Monterey. Accordingly, the bids offered by Monterey and DC Energy were accepted by ERCOT and the companies were 'awarded' PTP obligations at the DAM clearing prices," the ALJ said

"On September 24, 2019, ERCOT determined that its software had created errors in prices for a number of operating days. A few months earlier, in May 2019, ERCOT had installed market management system software that ERCOT states was intended to model 'outages in DAM and reliability unit commitment.' After detecting the error created by this software, ERCOT conducted an investigation and concluded that, for operating days September 16-23, 2019, the day-ahead locational marginal prices (LMPs), day-ahead settlement point prices (SPPs), and market clearing prices for capacity (MCPCs) were 'significantly affected' by errors in the market management system software. Therefore, on December 10, 2019, the ERCOT board of directors approved price corrections for DAM for operating days September 16-23, 2019. This resulted in ERCOT 'resettling' the DAM by applying the corrected LMPs, MCPCs, and SPPs to the PTP obligations originally awarded in the DAM, and issuing resettlement statements to DC Energy and Monterey," the ALJ said

"There is no dispute that these resettlements imposed significant adverse economic impacts on DC Energy and Monterey. Each company received DAM resettlement statements for the PTP obligations. In many instances, the resettlement statements charged each company for PTP obligations at prices that were above, sometimes far above, their not-to-exceed bids. For example, for hour ending 23 on operating day September 16, 2019, DC Energy submitted a not-to-exceed bid of $1.60 per megawatt per hour (/MWh). This bid was originally cleared by ERCOT for 163.5 MWs at $0.21/MWh. When ERCOT corrected the prices and issued the resettlements, however, the price shot up to $270.50/MWh and DC Energy was charged at this new price for the same cleared volume. If DC Energy had been charged for this one hour of PTP obligations at its not-to-exceed bid price, it would have paid a total of $261.60 ($1.60 x 163.5 MWs). When it was charged by ERCOT for this one hour of PTP obligations at the resettled price, however, DC Energy was required to pay a total of $44,226.75 ($270.50 x 163.5 MWs)," the ALJ said

"The parties have only minor disagreements about the magnitude of the economic consequences of ERCOT forcing DC Energy and Monterey to resettle at prices above their not-to-exceed bids. DC Energy asserts that, as a result of the resettlements, it was charged a total of $285,436.54 for PTP obligations in the DAM at prices more than $0.01/MWh above its not-to-exceed bids. Settlement of these same positions in the real-time market generated revenue of $16,153.32 for DC Energy. Thus, the company contends that the net adverse economic impact of ERCOT resettling at prices above DC Energy’s not-to-exceed bids is $269,283.22. In this proceeding, DC Energy seeks reimbursement of this amount, plus interest. ERCOT believes the amount is only slightly lower, at $268,393.29 ($284,870.58 in resettlement charges less $16,477.29 in offsetting revenue)," the ALJ said

"Monterey claims that, in the resettlements, it was charged a total of $89,416.59 for PTP obligations in the DAM at prices more than $0.01/MWh above its not-to-exceed bids. It seeks reimbursement of this amount, plus interest. ERCOT believes the amount is slightly higher, at $89,983.55, but that that amount should be offset by $3,335.57 in Monterey revenue generated by the settlement of these same positions in the real-time market, thus netting the adverse economic impact at $86,647.98. For purposes of ruling on its motion for summary decision, Monterey has stated that it is willing to stipulate to ERCOT’s calculation of $86,647.98," the ALJ said

"The legal theory of the case posited by DC Energy and Monterey is straightforward: they contend that ERCOT violated ERCOT Nodal Protocols §§ 4.4.6 and 4.5.1(13) when it issued the resettlement statements forcing the two companies to pay for PTP obligations in the DAM at prices more than $0.01/MWh above their not-to-exceed bid prices. ERCOT Nodal Protocols § 4.4.6(1) defines the kind of bid at issue in this case, a PTP obligation bid, as 'a bid that specifies the source and sink, a range of hours, and a maximum price that the bidder is willing to pay (‘Not-to-Exceed Price’).' ERCOT Nodal Protocols § 4.5.1 sets out the DAM clearing process. Subpart (13) of that protocol reads as follows: 'PTP Obligation bids shall not be awarded where the DAM clearing price for the PTP Obligation is greater than the PTP Obligation bid price plus $0.01/MW per hour.' DC Energy and Monterey argue that ERCOT’s after-the-fact resettlement statements forced DC Energy and Monterey to pay DAM clearing prices that were in excess of their not-to-exceed bids prices plus $0.01/MW per hour, thereby violating the protocols," the ALJ said

"ERCOT concedes that, through the resettlements, it forced DC Energy and Monterey to pay for PTP obligations at prices above their not-to-exceed bids. However, ERCOT argues that it had the legal right to so because it was done through the price correction method set out in ERCOT Nodal Protocols § 4.5.3. Under ERCOT Nodal Protocols § 4.5.3(1), by 1:30 p.m. in the 'Day-Ahead,' ERCOT must notify the buyer and seller in each cleared DAM transaction of the results of the DAM, including the awarded PTP obligation bids, the number of PTP obligations in MW, source and sink settlement points, and the price for each settlement interval of the awarded bid. Thereafter, under ERCOT Nodal Protocols § 4.5.3(4), ERCOT 'shall' correct prices if it determines that a market solution was invalid due to, among other things, a pricing error caused by software implementation errors in the DAM clearing process," the ALJ said

"ERCOT contends that, when it detected the errors caused by its software, it followed the procedure outlined in ERCOT Nodal Protocols § 4.5.3(5), revised the LMPs, SPPs, and MCPCs for operating days September 16-23, 2019, and appropriately issued the resulting resettlement statements to DC Energy and Monterey," the ALJ said

"ERCOT points out that ERCOT Nodal Protocols § 4.5.3(5) only allows the correction of pricing, it does not allow the undoing of the PTP obligations awarded to DC Energy and Monterey. Under ERCOT Nodal Protocols § 4.5.3(1), the PTP obligation awarded amounts became final, argues ERCOT, by 1:30 p.m. in the 'Day-Ahead,' the time by which ERCOT was obligated to notify the buyer and seller of the award. ERCOT also points out that there is no provision in the protocols that would allow ERCOT to later change those awarded quantities. Moreover, ERCOT points out that there is no feasible way to alter the awarded quantities during the price correction process because the PTP commitments will have already come and gone by the time the DAM price correction is performed," the ALJ said

"As noted above, ERCOT Nodal Protocols § 4.5.1(13) states: 'PTP Obligation bids shall not be awarded where the DAM clearing price for the PTP Obligation is greater than the PTP Obligation bid price plus $0.01/MW per hour.' ERCOT suggests there is a temporal component to the word 'awarded.' That is, ERCOT argues that the word 'awarded' only applies during the DAM clearing process, but does not apply during the price correction process," the ALJ said

Turning to the proposed decision, the ALJ stated, "The ALJ finds ERCOT’s arguments to be unpersuasive."

"The arguments can be summarized as follows: correctly-priced PTP obligations cannot be awarded at prices above not-to-exceed bids, but incorrectly-priced PTP obligations can be awarded and then subsequently re-priced at prices in excess, even far in excess, of not-to-exceed bids. This is a reading of protocols drafted and implemented by ERCOT that has obviously harsh effects on entities like DC Energy and Monterey who had a reasonable right to believe that their not-to-exceed bids protected their exposure to risk. They argue, and the ALJ agrees, that the purpose of the not-to-exceed limit is to allow market participants to manage risk exposure and provide certainty. This purpose is obviously undermined by ERCOT’s reading of the protocols," the ALJ said

"ERCOT’s reading is made even more unpalatable by the fact that the errors in pricing were caused not by DC Energy or Monterey, but solely by ERCOT. Thus, ERCOT’s position is that DC Energy and Monterey alone must bear the full cost of the pricing errors ERCOT caused. ERCOT would have the Commission find that 'sound policy' requires an interpretation of the protocols that forces DC Energy to pay $44,226.75 for one hour of PTP obligations which, if its not-to-exceed bid price had been honored, would have cost DC Energy no more than $261.60," the ALJ said

"The ALJ concludes that PTP obligations at prices below their not-to-exceed bids were never awarded to DC Energy and Monterey in the first place. By way of illustration, assume Monterey had placed a bid on a crate of apples, ERCOT then 'awarded' Monterey with what all parties thought was a crate of apples because the label on the outside of the crate said 'apples,' but when Monterey opened the box it was found to be full of oranges. In that case, Monterey would never have been awarded apples in the first place. The parties might have been under a mistaken belief as to what had been awarded but, in fact, the thing bid for (apples) had not actually been awarded," the ALJ said

"In the present case, DC Energy and Monterey placed bids for PTP obligations containing not-to-exceed prices. ERCOT 'awarded' PTP obligations at what everyone thought were prices below the not-to-exceed bids. In reality, however, the actual prices were not below the not-to-exceed bids. In other words, ERCOT never, in fact, awarded to DC Energy and Monterey PTP obligations with actual prices below the not-to-exceed bids, which is what ERCOT Nodal Protocols § 4.5.1(13) dictates DC Energy and Monterey were entitled to. Just as a label on the outside of a crate cannot turn oranges into apples, an inaccurate price tag on a PTP obligation cannot reduce the actual price of that obligation. The actual prices of the PTP obligations were always above the not-to-exceed bids of DC Energy and Monterey, and ERCOT’s placing of inaccurate price tags on those obligations did change that reality. In other words, the violation of the Nodal Protocols occurred at the time the PTP obligations were awarded. The subsequent price correction merely documented the magnitude of the violation," the ALJ said

"According to ERCOT, there is no basis for the belief that a not-to-exceed bid is entitled to 'special treatment that requires compensating a Market Participant for charges incurred in excess of the PTP Obligation bid price due to a DAM price correction.' The ALJ fundamentally disagrees. ERCOT’s interpretation violates the text and purpose of ERCOT Nodal Protocols § 4.5.1(13), which is obviously meant to protect bidders from paying more than they are willing for PTP obligations. The ALJ does not agree that the word 'awarded' in the protocol has a temporal limit or somehow means that a not-to-exceed bid ceases to have meaning after the DAM clearing process. The whole point of an offer and acceptance between buyer and seller is to get to the closing of the transaction, because that is when the subject of the transaction changes hands. In other words, the point of a not-to-exceed bid is not to ensure what is awarded, but what is ultimately paid," the ALJ said

"ERCOT suggests that ERCOT Nodal Protocols §§ 4.4.6(1) and 4.5.1(13), on the one hand, and 4.5.3(5), on the other hand, are in conflict and that 4.5.3(5) should prevail because it is more specific. The ALJ disagrees, and does not believe one protocol is more specific than the others. They are all specific, but on different topics. Sections 4.4.6(1) and 4.5.1(13) are specific as to what must be in a PTP obligation bid and how a not-to-exceed bid must be honored. Section 4.5.3(5) is specific as to how erroneous prices are to be corrected, but never states that not-to-exceed bids are irrelevant during a price correction, and never explicitly states who must pay the corrected price," the ALJ said

"The protocols must be construed, if possible, in a manner that does not create conflict between them and gives meaning to all of their text. ERCOT acknowledges that the Nodal Protocols 'must be interpreted and harmonized in a manner that, when possible, gives effect to every provision and does not lead to unreasonable or absurd results.' The ALJ concludes that the interpretation offered by ERCOT in the present case creates conflict among the protocols, fails to give effect to every provision in the protocols, and leads to unreasonable and absurd results," the ALJ said

"The ALJ believes that the protocols can be construed in a way that harmonizes the various sections and avoids unreasonable or absurd results. As already stated, § 4.5.3(5) specifies to how erroneous prices are to be corrected. But it stands to reason that not every price correction results in new prices that are in excess of not-to-exceed bids. In other words, it is reasonable to assume that ERCOT Nodal Protocols §§ 4.4.6(1), 4.5.1(13), and 4.5.3(5) often function in perfect harmony—an incorrectly-priced PTP obligation can be 'awarded' with a price below the not-to-exceed bid, and then the price can be corrected while still remaining below the not-to-exceed bid,' the ALJ said

"The difficulty comes in the scenario presented in the present case. That is, how can the protocols be applied in a manner that does not create conflict when an incorrectly-priced PTP obligation is 'awarded' with a price below the not-to-exceed bid, but the corrected price is then above the not-to-exceed bid? The ALJ agrees that, in that scenario, the underlying PTP obligation cannot be undone, because the obligation would have come and gone before the price correction occurs. Instead, the ALJ concludes that the re-priced cost of the obligation must be allocated first to the bidder in the transaction at issue, but only up to $0.01/MW per hour above the bidders’ not-to-exceed bid, with the remainder being allocated among a wider pool of market participants," the ALJ said

"ERCOT argues there is no authority provided in the ERCOT Nodal Protocols to shift such costs to other market participants. The ALJ disagrees. ERCOT’s claim is that ERCOT Nodal Protocols § 4.5.3(5) does not expressly allow it to 'uplift' the corrected prices upon other market participants. The ALJ’s first response is that the neither [sic] does the protocol expressly allow ERCOT to uplift the corrected prices upon the specific market participants involved in the transaction requiring the correction, especially where the uplift would result in prices above the not-to-exceed bid. Moreover, the text of Section 4.5.3(5) does give some indication that the cost can be uplifted to all market participants. Under the protocol, if the ERCOT board believes a price correction is warranted, it must give notice to 'market participants.' The protocol does not state that notice must be given to, for example, 'the market participants who are specifically involved in the transaction at issue.' The protocol itself requires ERCOT to notify all market participants that a price correction is in the offing. It follows, then, that all market participants might be obligated to pay for the correction," the ALJ said

"The ALJ concludes that Section 4.5.3(5) is no clearer that the bidder must pay the corrected price than that all market participants must pay the corrected price. The protocol never explicitly states what is to be done with the corrected price. ERCOT could have included in the protocol language such as: 'The market participant whose bid was accepted for the underlying PTP obligation shall pay the corrected price,' and added that the bidder must pay the corrected price even if it is in excess of the bidder’s not-to-exceed bid, but ERCOT chose not to do so," the ALJ said

"Thus, we are left with a protocol saying that the ERCOT board may correct prices and must notify 'market participants' when it does so. This leads the ALJ to conclude that all market participants may be forced to share in whatever burden may be created by the price correction. This conclusion is buttressed by other language found in Section 4.5.3(5)(a), which specifies, 'nothing in this section shall be understood to limit or otherwise inhibit . . . (iii) ERCOT’s authority to grant relief to a Market Participant pursuant to the timelines specified in [ERCOT Nodal Protocols] Section 20, Alternative Dispute Resolution Procedure.' ERCOT Nodal Protocols § 20.10.1 gives ERCOT authority to issue invoices to all market participants to remedy a protocol violation," the ALJ said

"The ALJ’s conclusion is further buttressed by ERCOT past practice. ERCOT has, on at least one prior occasion, forced all market participants to reimburse a bidder whose PTP obligation bids were awarded at prices above its not-to-exceed bids. In the North Maple ADR, North Maple Energy LLC was charged for PTP obligations at prices that exceeded North Maple’s not-to-exceed bids. In that case, the cost of all of North Maple’s awarded bid obligations would have been $13,228.36 if its not-to-exceed bids had been honored, but North Maple was billed by ERCOT a total of $2,111.747.69 for those obligations. This then caused a cascade of troubles for North Maple when it could not pay the $2-plus million bill—ERCOT banned North Maple from further participation in the ERCOT markets and its assets were repossessed by ERCOT and sold at auction. North Maple initiated an ADR proceeding with ERCOT, the ultimate outcome of which was that ERCOT concluded it had violated the Nodal Protocols by charging North Maple 'for PTP Obligations at prices that exceeded [North Maple’s] stated [not-to-exceed] bid prices.' ERCOT acknowledged that, by requiring North Maple to pay at prices above its not-to-exceed bids, ERCOT effectively, and illegally, rendered the not-to-exceed verbiage in Nodal Protocols § 4.4.6 'mere surplusage.' The outcome of the ADR process was that, under its authority granted in ERCOT Nodal Protocols § 20.10.1, ERCOT granted relief designed to put North Maple 'back in the position it would have been [in] had it never been awarded any PTP Obligations over stated [North Maple] bid prices,' by awarding it more than $1 million and uplifting the cost of this award onto other market participants," the ALJ said

"ERCOT contends ERCOT Nodal Protocols § 20.10.1 is not applicable here, because it did not first determine that it had violated a protocol. The ALJ agrees that, in the ADR process, ERCOT concluded it did not violate any protocol in regard to DC Energy and Monterey. However, this Proposal for Interim Decision now reaches the opposite conclusion. If the Commission adopts this Proposal for Interim Decision, the predicate will have been laid for ERCOT to then uplift to market participants, under ERCOT Nodal Protocols § 20.10.1, the cost of remedying the damage caused to DC Energy and Monterey. In the event that the Commission adopts this Proposal for Interim Decision, it could, therefore, refer the case back to ERCOT with the instruction that the ADR process be reopened. Alternatively, the Commission has the authority, under PURA § 39.151(d), (d-4)(6), and 16 TAC § 22.251(o), to itself issue an order uplifting the cost to market participants," the ALJ said

"This does not entirely dispose of the issues in the case. Factual disputes still exist regarding the monetary amount of the remedy due to DC Energy and Monterey and the specifics of the mechanism whereby the funds to pay the remedy might be collected from other market participants," the ALJ said

"If the Commission adopts this Proposal for Interim Decision, the ALJ recommends remanding this matter to Docket Management for further processing consistent with the Commission’s order," the ALJ said

Docket No. 50871

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