California’s grid operator is seeking federal approval of new market rules meant to address a bidding problem for Northwest hydro resources in the Western EIM, but is facing some resistance from state regulators.
The California ISO, hydro owners and others are defending CAISO’s proposed local market-power mitigation enhancements, currently being reviewed by FERC [ER19-2347].
Also showing support is CAISO’s Department of Market Monitoring (DMM), which raised concerns about aspects of the mitigation proposal but approves of it overall.
The California PUC filed a protest July 23 at FERC over CAISO’s proposal, saying it doesn’t account for the value of transmission capacity. One provision in the new proposal would allow hydro units to base their bids on prices at distant geographic hubs.
“The CPUC is concerned that, under the current proposal, resource owners could use future prices at distant high-value hubs to set local hub prices through their default energy bids,” the state agency told FERC in its protest. “The proposal could allow resource owners with transmission rights (or a pattern of buying transmission rights in the past) to distort prices in their local areas and unfairly raise prices for ratepayers.”
When power is transacted, the difference in prices between the origin hub and the distant hub should roughly equal the value of transmission between the two hubs, CPUC said. If a resource is in a low-priced area, but has transmission rights to a high-priced area, CAISO’s proposal would allow the resource’s default energy bid in the low-priced area to reflect the prices in the high-priced area.
“Because default energy bids can set prices when resources have market power, the use of this type of default energy bid can raise the resource’s local price to be equal to or greater than the futures price at the distant high value hub,” the CPUC said in its filing. “As the DMM explained in its comments, this would allow the value of transmission from point A to point B to be reflected in the price of energy at point A. This is not appropriate.”
The ISO usually calculates default energy bids for hydro resources using formulas developed through confidential individual negotiations. But the current bid formulas do not always account for the many factors that can change the availability of water, such as environmental restrictions.
DMM’s filing said the proposed changes should address the concerns about bid mitigation that have been raised by some entities considering whether to join the EIM.
“Some elements of the proposed changes involve potential trade-offs between the benefits of market power mitigation versus the potential for increased participation in the EIM by hydro resources,” DMM said. But the market monitor said it supports the proposal on balance because of the specific nature of the hydro resources, the lack of a “must-offer” obligation in the EIM, and the potential benefits of bringing more hydro into the EIM.
But a group of Northwest hydro owners said in an Aug. 8 filing that several of them transact at dozens of locations throughout the region, at delivery points in CAISO, into the Desert Southwest, and as far away as Alberta. Canadian power marketer Powerex transacts at as many as 80 locations in the West in a given year, the Pacific Northwest Joint Commenters group said.
“The Joint Commenters believe that the CPUC’s stated concerns are misguided and premised on an unduly narrow view of the opportunity costs of resources located outside of the CAISO,” the group told FERC. The commenters include Eugene Water and Electric Board, Public Generating Pool, Public Power Council, Chelan County PUD, Powerex and Snohomish County PUD.
A default energy bid based only on current and future index prices at an external hydro resource’s “default” geographic location, or closest local hub, has the potential to understate the value of the opportunities in other locations in the West where power could be sold. The group said that for resources in the Pacific Northwest, the prices at the most proximate hub, Mid-Columbia, often represent the lowest-value market opportunity.
Forcing hydro owners to inefficiently deplete hydro resources results in forgone sales at more profitable times and locations, which could discourage robust participation in the EIM, the group said.
The CPUC’s opposition to this aspect of CAISO’s proposal is based on its assumption that any price differential between a resource’s local hub and a distant hub should equal the value of transmission, the group said. But that assumption is rooted in the dynamics of a regional transmission organization with locational marginal pricing, where the value of energy and transmission are fully de-linked, which does not apply to the Western markets outside of CAISO.
“The opportunity cost of forgone sales in a remote geographic location in the West cannot be captured by the price of the transmission alone, as is the case within an RTO,” the group said.
CAISO’s enhancements filed with FERC are aimed at addressing two problems. One is “flow reversal,” when balancing authority areas in the EIM are forced to switch from importing to exporting power when their bid prices are mitigated.
The other is “economic displacement,” exemplified by cases EIM participants have identified where market-power mitigation results in the market dispatching their hydro resources at prices below their marginal costs, and often in quantities greater than needed to resolve market power.