New bidding rules for hydro resources in the Western EIM will take effect this month, after federal energy regulators partially approved a proposal by the California ISO.

FERC on Sept. 30 approved CAISO's changes to the rules under which it mitigates possible market power from hydro resources in the EIM [ER19-2347]. Hydro owners said CAISO's current practices are leading to over-mitigation and affecting their desire to participate in the EIM. FERC approved the changes, but rejected one portion—CAISO's proposal to allow limits on dispatch of hydro exports under certain conditions.

The hydro owners include Eugene Water and Electric Board, Public Generating Pool, Public Power Council, Chelan County PUD, Powerex and Snohomish County PUD.

The changes FERC approved alter the timing of market mitigation. Under the current rules, any market mitigation triggered during a 15-minute market interval stays in place for the full trading hour. The new rules effective Oct. 14 eliminate the mitigation for the balance of the hour and throughout the balance of the 15-minute interval in the real-time dispatch.

"We agree with CAISO and commenters that this proposal will improve the accuracy of CAISO's market power mitigation and minimize bid mitigation when market power does not, in fact, exist," FERC said in the order.

Also approved by FERC was a new default energy bid for hydroelectric resources with storage. CAISO said its current method can undervalue a resource's marginal cost, because it does not include a transparent methodology that appropriately captures the opportunity costs for water, including the potential to sell output in the future and other regulatory, environmental and legal constraints.

Default energy bids are currently established in a negotiation process for hydro resources in the day-ahead and real-time markets, but these negotiations don't provide sufficient transparency and certainty to resource owners as to how their marginal costs will be valued, CAISO said.

The enhancements CAISO 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 power to exporting it when their bid prices are mitigated.

The other is "economic displacement," which can occur when mitigation is triggered to correct for market power; EIM participants have identified some cases where this causes the market to dispatch their hydro resources at prices below their marginal costs, and often in quantities greater than needed to resolve market power.

FERC said CAISO's proposal represents a transparent alternative to the existing negotiated default energy bid (DEB) option and will allow hydroelectric resources with storage to reflect their opportunity costs in their DEBs, which will help ensure that hydroelectric resources will be dispatched when they are most needed.

However, FERC rejected CAISO's request to allow EIM entities to limit their net exports under certain conditions.

"We conclude that CAISO's net export limit proposal is inconsistent with the market power mitigation framework in the EIM and is not an appropriately calibrated solution to the concerns CAISO identifies," FERC said. "In particular, CAISO's proposal could weaken CAISO's market power mitigation process by allowing EIM entities to withhold generation through the submission of high supply bids and restricting EIM transfers out of their [balancing authority areas]."

FERC said that according to CAISO, the proposal is needed to address the unique situation faced by hydroelectric resources with storage capability that are dispatched at default energy bid levels that might not reflect their true opportunity costs. However, CAISO's proposal would be available to any current or future EIM entity and would apply to any resource type, FERC said.

CAISO explained to FERC that it must begin preparing any hydro default energy bid requested prior to its required effective date to ensure scheduling coordinators have a functional hydro DEB by the time the changes are implemented. So CAISO requested that the commission accept the tariff provisions regarding development of the hydro default energy bid effective Oct. 14, which FERC granted.