FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION-San Diego Gas & Electric Company -Complainant v. Sellers of Energy and Ancillary Services Into Markets Operated by the California Independent System Operator and the California Power Exchange-Respondents D
2. Articulate clear standards for adjusting transaction prices
The Commission received a consistent message at its public conference regarding the importance to generators and their lenders and investors of certainty as to the criteria that will be employed to mitigate bids above the soft cap. EPSA suggests that a starting point in clarifying the criteria would be to describe in the final order how the cap would be applied by providing real world examples.
In an as-bid auction, suppliers do not bid their costs. Rather, they bid their view of the market clearing price (albeit a market clearing price that only applies to the top bidder and that gets averaged into the price borne by load). Accordingly, the suggestion read into the soft cap proposal by some that it is a cost-based mechanism, would, if true, be ill-suited to an as-bid auction. Any use of the soft cap to limit bids strictly to verifiable operating or opportunity costs would be nothing less than a return to wasteful and discredited cost-based ratemaking. Suppliers should be allowed to bid their estimate of the market clearing price when it is expected to clear above the threshold price.
This problem is particularly acute for marketers selling in California that do not own physical assets in the state. These marketers are essential for the liquidity needed in the market. However, such marketers have no incremental production costs and their opportunity costs are essentially the market in the WSCC. The Commission must clarify how it will apply the bid cap to these types of entities, if such entities are to have the confidence necessary to participate in the market and provide the much needed market liquidity.
Accordingly, EPSA proposes a screening criteria that posits that any bids in California’s ISO and PX markets that do not exceed the highest market clearing price in the WSCC are presumptively justified. EPSA suggests the Commission consider the example of a hypothetical generator with running costs of $120/MWh, but with an opportunity to sell into markets where the prevailing price is $160/MWh. A variant of this example would be if the generator perceives that other generators’ costs will be at or above $160/MWh, or if the bidder expects there to be some high bids (for reasons other than inappropriate withholding or the exercise of market power) at or above $160/MWh. In each of these cases, the generator’s bid should be protected by safe harbors. Moreover, given the limited period during which peaking units run, clearly provisions will have to be made under the cap proposal for such units.
Accordingly, the Commission should consider “market screens,” which would represent a determination of prevailing market opportunity costs for California suppliers. Any bid below the screen price at any given time would automatically be free of further scrutiny or mitigation. The Commission could post estimates of prices prevailing in other, interconnected locational markets, such as the WSCC. The WSCC prices would thus be a screen or presumptive floor for bids for purposes of implementing mitigation scrutiny. In applying a market screen, the Commission must also take notice of bids being made by nonjurisdictional entities and ISO out-of-market purchases that would not be subject to the soft cap. Since non-jurisdictional entities are not subject to mitigation under the soft cap proposal, it would be singularly unfair not to allow jurisdictional bidders to try to underbid such non-jurisdictional entities. Thus, jurisdictional entity bids that are less than bids by non-jurisdictional entities presumptively should be justified. Under such a rule, these non-jurisdictional entities will not have a significant competitive advantage in framing their bidding strategies, especially in times of scarcity.