Calif. ISO Files Tariff Changes to Address Market Power That Could Lead to Excessive Payments

The California ISO has filed tariff changes at FERC, "to build upon and enhance the existing provisions of the ISO tariff that prevent exposure to excessive payments that can be caused by the exercise of market power."

CAISO sought a waiver of the 60-day notice requirement so that the changes take effect August 29, 2012. "Waiver is appropriate and necessary to enable the ISO to eliminate immediately current incentives for market participants to engage in the identified bidding strategies that, if left unaddressed, may result in excessive payments," CAISO said.

"The ISO seeks to amend its tariff to address market power in two areas of the ISO market that, if left unchecked, can result in unjust and unreasonable payments to resources that exercise such market power. The ISO has, to date, observed only one market participant taking advantage of these opportunities to exercise market power, and available mitigation measures have limited excessive gains from this behavior. However, the ISO has determined that additional mitigation authority is warranted to protect the market from noncompetitive behavior," CAISO said.

"The ISO proposes to do this in two ways. First, the ISO proposes to expand the circumstances under which it is permitted to mitigate the amount of exceptional dispatch energy payments to include all exceptional dispatches that are needed to move a resource from its minimum physical operating level to its 'minimum dispatchable level,' at which the ISO is able to use the resource effectively to meet certain reliability criteria. This revision will prevent a resource from inflating the price that the ISO must pay for such dispatches through the exercise of market power," CAISO said.

"Second, the ISO proposes to amend tariff provisions governing payment for residual imbalance energy. Residual imbalance energy is energy attributable to a resource ramping down from a real-time dispatch at the end of a previous hour or ramping up to a real-time dispatch at the beginning of an upcoming hour. The ISO created this category of energy for settlement purposes because ramping energy that occurs as a result of instructions issued by the ISO in a preceding or subsequent hour is settled differently than ramping energy that occurs within a given hour. The ISO settles ramping energy that occurs within the same hour in which the instruction is issued based on the locational marginal price ('LMP') and guarantees the resource's bid through the bid cost recovery process. Residual imbalance energy, however, is currently paid as bid. This payment structure creates an opportunity for the exercise of unilateral market power, through which resources can inflate payments for such energy to levels that far exceed their costs of producing that energy. The ISO proposes to pay the resources the LMP unless the LMP is lower than their bid, in which case the ISO will pay the resource the lesser of the resource's bid price or the default energy bid," CAISO said.

"Both of these rule changes address situations in which a market participant's bidding behavior can create or contribute to the exercise of market power. Also, both of these changes eliminate the incentive for participants to bid and participate in the ISO markets in an effort to inflate payments through these two out-of-market mechanisms. The ISO seeks to provide incentives for parties to submit bids reflecting their true marginal cost of energy so that the ISO market can continue to create efficient and feasible dispatches and prices that reflect the true cost of serving load through the ISO system. The two rule changes further this goal, benefitting overall market efficiency," CAISO said.

Docket: ER12-2539.