FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION AND THE WESTERN POWER TRADING FORUM ON THE COMPREHENSIVE MARKET DESIGN PROPOSAL OF THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR
PROTEST
On May 1, 2002, the CAISO filed its proposed MD02 for the Federal Energy Regulatory Commission’s review. The market design changes, required by the Commission’s December 19, 2001 Order on Clarification and Rehearing, are “intended to address known deficiencies in the ISO’s existing market design and to support the ISO’s core function – that of providing open, reliable and non-discriminatory transmission service.”
At the outset, it is important to note that the CAISO’s MD02 filing takes many important steps towards the Standard Market Design (SMD) outlined in the Commission Staff’s Working Paper of March 15, 2002. Examples of positive elements in the CAISO’s proposal include the implementation of a day-ahead energy market, simultaneous auctions for energy and ancillary services, use of a full network model, elimination of balanced schedules, etc. Filing Parties have previously endorsed the Commission’s SMD efforts and, to the extent the CAISO proposal moves towards a day-ahead and real-time market with locational based marginal pricing for congestion, it is an important step in the right direction. As Filing Parties have repeatedly pointed out, a well-designed and robust competitive wholesale power market provides significant consumer benefits and is the best way to guard against abuse of market power.
Nonetheless, the Filing Parties are disappointed by the timetable outlined in the CAISO filing. While the Commission’s December 19th Rehearing Order expressly required a comprehensive approach to congestion management and a day-ahead market in the May 1st filing, both of these critical market design elements are pushed off to future phases. The current filing focuses almost exclusively on market mitigation. The Commission needs to insist that the CAISO refocus its efforts on the elements of a workable market design to address anti-competitive behavior through a well-functioning market rather than remedial mitigation methods.
The market redesign efforts presented the CAISO with a perfect opportunity to put in place rules and procedures that will provide California customers with the benefits of a robust competitive market. Unfortunately, the CAISO has chosen instead to focus its efforts solely on mitigation, fearful that the Commission will not extend the current price cap regime past September 30, 2002. If a market design with the elements outlined in the Staff Working Paper were adopted instead, many of the problems perceived by the CAISO would be eliminated.
The CAISO has had plenty of notice that the Commission has long been dissatisfied with its congestion management approach. In its November 1, 2000 Order Proposing Remedies for the California Wholesale Electric Markets, the Commission found “the ISO’s existing congestion management to be flawed, and, on that basis, we direct the ISO to develop and submit to the Commission a comprehensive congestion management redesigned.” That Order also found that “the current congestion management system is fundamentally flawed and needs to be overhauled or replaced.” The November 1st Order was issued 18 months ago, requiring the CAISO to solicit input on redesigning its congestion management system from all stakeholders. Instead of moving to quickly adopt an LMP system, which has been proven in the East and is the core design feature of the SMD Working paper, the CAISO postpones real congestion management reform until 2004. FERC needs to direct the CAISO to accelerate the implementation of Phase 3 of its proposal.
Although the CAISO’s proposal is a step in the right direction, there are some areas where it can be improved further. For example, the proposal to introduce penalties for uninstructed deviations should be unnecessary if prices in the real-time market are set to reflect actual dispatch. Although the Commission’s Staff’s Working Paper allows for penalties, PJM does not rely on penalties. The proposal can also be improved by incorporating in some detail the concept of virtual bidding as used by the NYISO.
In addition to concerns about the CAISO’s timetable, the Filing Parties will focus their comments on four critical and over-arching issues: (1) market monitoring and mitigation, (2) independence of the California ISO Board, (3) development of a Western market, and (4) support for the on-going FERC-mediated stakeholder process that has an enourmous potential for settling critical issues regarding the CAISO’s proposal. First, the Commission must reject calls by the CAISO to put in place market mitigation programs that will continue to stymie the development of workably competitive markets and significantly hinder further generation development in a market downturn. A belts, suspenders, buttons and velcro approach to market mitigation will chase away much needed investment in new generation, demand response and the development of appropriate risk management tools. The Commission needs to put in place workable market structures, with appropriate market monitoring and mitigation, and allow supply and demand to interact to send efficient price signals to consumers.
Second, the Commission must take this opportunity to clarify, once and for all, that the CAISO Board is no longer properly constituted or independent and must be replaced. Numerous aspects of the MD02 proposal are evidence of the problem inherent in having the grid managed by a self-interested market participant. It is time for the Commission to address this issue.
Third, as the Commission has repeatedly recognized, California is not an island. California is an integral part of the Western Interconnection and the Commission must insist on a defined timetable to implement elements of the Commission’s standard market design. In the Western RTO development process, the primary focus must be on the Commission’s Standard Market Design process and preventing the development of mismatched seams as the RTOs are formed.
Fourth, on April 4th and 5th of this year, and again on May 9th and 10th, FERC staff conducted technical conferences in San Francisco on the CAISO's market-redesign proposals. These meetings were well attended by all stakeholders, and became an excellent forum for airing disputes, discussing alternative proposals for the Residual Unit Commitment (RUC) and the Available Capacity (ACAP) markets. At the May Technical Conference, a proposed "next step" included a week-long settlement conference, possibly this summer, at which all stakeholders would come prepared to reach consensus on key elements of the CAISO proposed market redesign. The Filing Parties support the week-long settlement conference and, in light of that possibility, reserve many of the detailed comments on elements of the CAISO redesign that otherwise would be included here in our protest.
A. Market Mitigation
As the Filing Parties have argued repeatedly, good market design is a critical part of mitigating market power and must be part of any workable solution to California’s energy woes. As we have regularly asserted in our filings, the reliability of the electricity system in the West, and indeed throughout the country, depends upon robust well-functioning competitive markets. It is vitally important for the Commission to ensure that all market participants are treated fairly and comparably and that obstacles to the successful completion of transactions in wholesale power markets are removed.
However, the bulk of the MD02 Phase 1 proposal, which would be implemented on October 1, 2002, is unbalanced, with a primary focus on an inappropriate approach to market mitigation. At the core of the CAISO's motivation is its belief that California's wholesale market is not workably competitive, but rather than aggressively focusing on structural remedies to the underlying causes of this concern, CAISO defaults to remedial mitigation measures. The CAISO never provides a definition as to what are the indicia that constitute markets that are either workably competitive or not. The supporters of the "unworkably competitive" market theory posit that, as markets become more competitive, the CAISO will ease up and relax the chokehold on market participants. The opposite, however, is the more likely result. A vicious cycle is being put in place whereby investment dollars will not flow to California if these measures are imposed, which will further exacerbate the inability for new supply to keep up with growing demand and the retirement of older generating units.
While ignoring the need for fundamental changes to achieve the Commission’s policy objectives, the MD02 proposal focuses on retaining the current market mitigation measures, or substituting equally strenuous and intrusive measures – including a $108/MWh price cap. As evidenced by the May 15th testimony of CAISO CEO Terry Winter at the Senate Committee on Energy and Natural Resources hearing to examine manipulation in western energy markets during 2000-2001, the CAISO has expended considerable energy over the past several years developing, implementing and enforcing price caps, despite repeated evidence of their failure to address the fundamental problems of supply or demand. If the CAISO had expended only a fraction of this energy on developing a workable SMD, building largely on existing successful models, the market power problems they continue to complain of would be largely eliminated.
In addition, the CAISO fails to recognize that many of the conditions that initially drove the CAISO to conclude that mitigation was needed no longer exist. Most significantly, the size of the real-time energy market has fallen to 5 percent of the forecasted load. Self-provision by utility-retained assets and long-term contracts with DWR set the price for the vast majority of California load. In addition, according to the NERC 2002 Summer Assessment, over 10,000 megawatts of additional resources are now available in the Western Interconnection, coupled with a 3,300 MW reduction in load in California. Hydro resources are at significantly higher levels as well. In this significantly improved environment, the Commission should be very wary of taking dramatic steps to extend or enhance the existing price controls in order to address problems that no longer exist.
As the Filing Parties have argued repeatedly, any market redesign must focus on the critical issues of poorly designed markets, inadequate generation resources and deficient infrastructure. A continued witch hunt for evidence of market power, together with continuing credit problems, now pose the greatest obstacle to the promise and potential of robust competitive markets and the enhanced reliability they provide.
If adopted, the CAISO’s plan will have a negative effect on new investment, since it perpetuates the current lack of market and regulatory stability and increases risk for investment in California. The MD02 simply reiterates the CAISO’s oft-repeated and unsubstantiated allegations of the exercise of “market power” in California. Again, as the Filing Parties have often pointed out, high prices in and of themselves is not proof of anti-competitive behavior or market power abuse. However, once again, the CAISO is arguing that high prices are attributable to market power, without documenting any illegal behavior or accounting for the full cost of capacity value, opportunity costs, scarcity value, transmission constraints, emission offsets and risks, including credit risk, in California’s supply-constrained market.
Filing Parties have argued in numerous other filings that bid caps do great harm to markets. The CAISO proposes to retain the current mitigation procedures or, in the alternative, to impose a damage control bid cap, automatic bid mitigation procedures, penalties for failure to comply with dispatch instructions, a rolling 12-Month Competitive Index and a cap on decremental bids. Despite their number and variety, these requirements bear no relationship to how prices clear in a market. Thus, under the CAISO’s plan, the market will send no price signals, either to encourage new investment or for load to reduce demand. Further, price caps undermine the development of the risk-management tools needed for successful market development.
On the surface, the CAISO’s mitigation proposals might seem to resemble the procedures in other ISOs, e.g. the NYISO AMP. While the Filing Parties do not endorse the NYISO’s AMP, it is useful to observe it as a foil to the CAISO’s proposal, which is much more stringent. The CAISO’s mitigation measure contains no exemptions for small portfolios and hydro generators. It has stricter thresholds for the impact and conduct tests. It selects reference prices based on cost estimates rather than historical bids during competitive periods. At the same time, the CAISO proposes a much lower level for a damage control bid cap (DCBC).
EPSA has recently filed principles for market mitigation in the context of the Commission’s efforts on Standard Market Design, as well as a research paper on volatility in today’s electricity markets titled “Still Waters Run Deep.” The points made in those two documents with respect to Standard Market Design are equally applicable to the CAISO filing, and the Filing Parties attach both documents to this filing. The approach to mitigation discussed in those papers is the approach that should be adopted in California. Market mitigation is not a substitute for workable market design and the Commission should reject the CAISO’s approach to mitigation and insist on the development of markets in accordance with the Commission’s Standard Market Design effort.
B. The CAISO Board Should be Disbanded
This is not a new issue and the Commission must act quickly and decisively to end the ongoing saga of the CAISO Board. To recap briefly, as early as November 1996, the Commission addressed the importance of an independent CAISO, rejecting as unduly discriminatory, and inconsistent with the Commission's goal of ensuring broad-based transmission, a proposal that would have limited participation on the CAISO Governing Board to California residents. The Commission also found that limited Board participation to California residents would discourage participation in the CAISO by out-of-state entities thereby denying them meaningful representation.
In its August 5, 1999 Order accepting the modified CAISO governance structure in California Senate Bill 96 (S.B. 96), the Commission acknowledged its concern that “to the extent the governing board selection is controlled by a single state, or limited to residents of a single state, it will serve to hamper the progress [towards] regional market structures….” The Commission approved the modified CAISO governance structure “[b]ased on the intent expressed in S.B. 96 and in the EOB’s petition to promote the development of regional electricity transmission markets in the western states, as well as the legislature’s stated intent that the CAISO and California Power Exchange (PX) evolve into regional organizations.”
By November 2000, it had become apparent that the existing CAISO “stakeholder” Board of Governors was incapable of effectively carrying out its responsibilities. Therefore, in its November 1st Order, the Commission proposed to eliminate the existing CAISO Board and replace it with a non-stakeholder board. The Commission recognized that an ineffective CAISO, riddled by political influence from outside forces, would impact all markets in the Western Interconnection, not just California. The importance of an independent ISO Board cannot be overstated:
The CAISO is an institution that is central to the functioning of wholesale power markets in the West and unless it is able to resolve matters in a timely manner and is independent of market participants, we cannot be assured that rates, terms or conditions of its jurisdictional services will be just, reasonable and not unduly discriminatory or preferential. The transmission assets that the CAISO operates are a critical part of the interstate transmission grid located in the Western Interconnection which provide essential support to the electric market. Any failings by the CAISO in its obligation to ensure reliable operation of the transmission grid would have grave consequences for the residents and business in the Western states. Operation of this interstate transmission grid must be controlled by an expert board that is free from the influence of any market participant or market segment.
The November 1st Order proposed, therefore, the establishment of a new CAISO Board with the expertise to operate the critical transmission assets. The Board would consist of seven members with experience in corporate leadership (at the director or board level) and professional expertise in either finance, accounting, engineering or utility law and regulation. More importantly, the Commission wanted members with experience in the operation and planning of transmission systems. Finally, the Commission proposed that members were to be selected from a slate of candidates developed by an independent consultant.
The next major Order was issued on December 15, 2000. While certain aspects of the Commission’s requirements with respect to the CAISO Board changed between the November 1st Order and the December 15th Order, the requirement of an independent CAISO Governing Board remained a critical element of the Commission’s requirements. The Commission firmly reiterated that state selection of all the Board members was not a reasonable position in light of the Commission’s prior determinations and the current procedures that allowed the state to veto approximately half of the prospective candidates. The Commission emphasized that the state may have an appropriate role in Board selection only “as long as the independence of the board members can be assured.”
The December 15th Order directed that the CAISO Governing Board be replaced with a non-stakeholder Board, and that the members selected to serve on the new Board be independent of market participants. The Commission expressed its intention to establish further on-the-record procedures to discuss with state representatives the selection process for the new CAISO Board. If no consensus was reached regarding an acceptable means to select new CAISO Board members within 90 days of the December 15th Order, then the Commission ordered that the procedures proposed in the November 1st Order were to be carried out. The Commission also directed that, on January 29, 2001, CAISO Governing Board members must turn over decision-making power and operating control to the management of the CAISO, but would be permitted to continue functioning as members of a stakeholder advisory committee. Thus, the stakeholder advisory committee was to provide input to CAISO management until such time as a new Board was seated, or until April 27, 2001, whichever occurred sooner. On January 29, 2001, the CAISO Governing Board's bylaws became null and void to the extent they were inconsistent with the Commission’s December 15th Order.
On January 18, 2001, however, the governor of California signed into law A.B. x5 that unilaterally directed the replacement of the existing CAISO Board with a five-member board to be appointed by the governor and subject to confirmation and oversight by the EOB. A.B. x5 expressly prohibits the CAISO from entering into a multi-state entity or a regional organization unless that entry is approved by the EOB. On January 23, 2001, in an emergency meeting, the EOB confirmed the governor’s appointments to the new, five-member CAISO Board. That same day, California’s attorney general filed a suit in quo warranto in Sacramento County Superior Court to compel the 26 stakeholder members to vacate their offices. Meanwhile, the California Legislature also enacted legislation authorizing the California Department of Water Resources (DWR) to enter into contracts for the purchase of electricity from any person under such terms and for such periods as the DWR deems appropriate. The power purchased on the wholesale market would be used to serve retail customers in California.
On January 25, 2002 the Commission released an Operational Audit of the California Independent System Operator (Audit Report), prepared by Vantage Consulting, Inc. The Audit Report was issued in response to the Commission’s request, dated October 9, 2001, to perform an operational audit of the CAISO. At the top of the Audit Report’s list of concerns and recommendations was the establishment of a new and independent Board of Governors for the CAISO.
Subsequent to the Commission’s December 15th Order, the State of California has moved beyond simple regulation to become a dominant participant in the California energy markets. At the same time, the CAISO has been transformed from an “independent operator” of interstate transmission resources to a partisan advocate for the State of California. Because of the conflicts inherent in the politicization of the CAISO, there exists an urgent need for the Commission to remedy the situation. In the past, the Commission has declined to consider filings tendered by utilities at the direction of a state regulatory agency. Congress has also given the Commission the authority to seek judicial enforcement of its orders. Filing Parties believe that the time has come for the Commission to enforce its December 15th Order mandating a truly independent CAISO. The first step in such enforcement is to replace the incumbent CAISO Board with an independent Board.
There can be no doubt that the State of California has become a dominant, if not the dominant, market participant in California. By virtue of legislation requiring the DWR to purchase wholesale electric energy for resale, the DWR has acquired substantial long-term contracts for energy to serve retail load. California has also created the Consumer Power and Conservation Financing Authority, with authority to construct, own and operate generating plants.
At the same time, the incumbent CAISO Board has been subject to executive, legislative and regulatory authority of the State of California, which has wholly undermined its independence. As the result of A.B. x5, the CAISO Governing Board now serves at the pleasure of the Governor of California. If the governor is dissatisfied with the Board’s decisions, he can appoint a new Board and direct the state attorney general to file suit to compel the resignation of the current board members. Alternatively, the governor can simply issue an executive order directing the Board to undertake whatever action the governor desires. The consequences of the political power being exercised over the CAISO are palpable. The CAISO has taken positions before the Commission, unrelated to the reliability of the transmission system, which were unashamedly intended to favor the interests of the State of California and DWR over other market participants in negotiations for the sale of energy. The most recent scandal involves a transcript recently released by Representative Doug Ose (R-CA) in which a staff member of the CAISO called an Enron trader and asked the trader to bid a $91/MWh price in the hour ahead market in an effort to drive up the market clearing price!
The CAISO filing notes that its responsibility and authority under its tariff should be limited to ensuring the physical reliability and safe operation of that portion of the interstate electric transmission system located in California. The politicization of the incumbent CAISO Board has led to a shift in focus from transmission system reliability to maximization of available generation, which is apparent in the focus on withholding as the source of all market power problems in California. In addition, the Board inexplicably voted to “approve Management’s recommendations for a hypothetical Comprehensive Market Design….” Exactly what is “hypothetical” about the MD02 filing, or the implications of such a concept, raise numerous questions about the integrity of the development of a market in California and reflects the inherent political tensions between the Commission’s goals and a state-appointed Board.
Establishment of an independent CAISO is vital to the long-term resolution of California’s energy problems and the stability of the entire Western region. The continued influx of capital for new or expanded in-state generation, the willingness on the part of out-of-state suppliers to sell into the California market and the ability to seamlessly integrate California’s grid with other western Regional Transmission Organization (RTOs) will require a CAISO that can function as an “honest broker.”
The Commission should implement appropriate measures to enforce its December 15th Order, including the decertification of the CAISO Board. Given the extensive history to date, the Commission must also give serious consideration to other measures, including seeking judicial enforcement of its December 15th Order, to restore independence to the CAISO.
C. The Commission Should Require a Clearly Defined Timetable For Development of a Seamless Market in the West
As noted above, Filing Parties are concerned about the lack of independence of the CAISO and the effect this lack of independence has on the operation of energy markets in California. There is, however, another equally compelling cause for concern. Since Order No. 2000 was issued in 1999, great strides have been made in several regions of the country to develop large regional transmission organizations that facilitate market development and seamless trading across regions. In the West, however, California has doggedly insisted on a “go it alone” approach, despite wide-spread recognition by the Commission and the rest of the industry that California is not an electrical island, but is, in fact, an integral part of the Western Interconnection.
The interdependence between California and the rest of the West was recognized in the filing made by the CAISO June 1, 2001 seeking recognition as an RTO. The filing stated that the “western market is interdependent and California is, and for the foreseeable future will remain, a net importer of electricity.” Similarly, PG&E stated in its filing:
California is a net importer of up to one-third of its daily energy needs. With that reality, it is not possible to solve the market dysfunction problems within California alone. The Western region is a series of markets that are integrally interconnected, and the Commission correctly recognizes that broad regional solutions are a necessary part of any long-term effort to maintain reliability, improve efficiency and lower costs.
In its Market Mitigation Orders, the Commission consistently found that the Western region of the United States is an integrated electricity market and attributed, at least in part, problems in California “to the continued balkanization of the Western grid and the absence of a true RTO with regional scope.”
In ultimately allowing a role for California entities in the creation of the CAISO, FERC found that state influence was permissible, as long as it would not (a) give the state of California any undue power over any regional transmission body that otherwise would form in the Western region, (b) create a disincentive to the establishment of a Western Regional Transmission Organization, and (c) impede progress toward regional market structures. Events have shown that the state has in fact frustrated each of the Commission’s goals and has proved a major impediment to the development of West-wide markets.
It is now time for the Commission to take clear and decisive action to ensure that RTO development in the West ultimately supports a seamless market of sufficient scope and configuration to support efficient and non-discriminatory power trading and maintain system reliability. While Filing Parties support the development of RTO West and WestConnect, each RTO must develop market structures in a manner consistent with the Commission’s Standard Market Design initiatives and ensure that seams issues are not created or exacerbated by allowing each RTO to develop inconsistent or incompatible systems and procedures.
To see the benefits of robust competition and attract much needed investment in new generation, the West must have an efficiently run transmission system, not one geared solely to California interests. Accordingly, Filing Parties urge the Commission to take an active role in establishing a unified regional market for the entire Western Interconnection. The goal, as with the Commission’s efforts elsewhere, must be to create a seamless market in the West. To that end, the Commission should establish a definitive timetable for West-wide RTO development and ensure that the Western market includes the elements of the Commission’s Standard Market Design.
This approach is even more urgent as both RTO West and WestConnect proceed with their own RTO development efforts, promoting their own market designs, which are at odds with each other and with the Commission’s Standard Market Design efforts. Experience in the East has taught that even relatively simple variations in market design and function can cause large disruptions to seamless trading. As RTO West, WestConnect and the CAISO each begin software development, at great expense, the potential problems will be magnified and increasingly difficult to correct. Lacking clear guidance from the Commission, the independent development of software by each of the Western RTOs will only lead to excessive and redundant expenditures. If the consumer savings envisaged by FERC’s recent RTO Cost/Benefit Study are to be realized, the Commission must provide guidance on these issues. Now is the time for the Commission to require a specific and defined timetable for the development of a seamless Western regional market.
As this process unfolds, it is important for the Commission to ensure that common software is developed, along with common business systems and business practices. Deliberately or inadvertently, differing approaches to scheduling, congestion management and settlements, for example, cannot be allowed to create roadblocks to interregional trading. While the Filing Parties urge the Commission to approve the creation of both RTO West and WestConnect, the Commission must require that they harmonize rules and eliminate seams to ensure a west-wide market no later than 2005.
In addition, while some technical issues can wait to be resolved once both RTOs have had some opportunity to take their first steps and gain experience with their operations, some issues should be addressed for “Day One.” For example, an independent regional market monitoring function should be in place from the outset. A west-wide market monitor would be well-positioned to review the activities of all market participants – including the RTOs – to identify necessary rule changes, assess market performance, and administer any FERC-approved market mitigation. Issues such as how to treat confidential data are clearly ones that should be addressed on a regional basis on Day One and doing so is clearly compatible with the Commission’s stated goals.
D. The Commission Should Facilitate a Week-long Settlement Conference
As evidenced by the two technical conferences facilitated by Commission Staff, progress was made by stakeholders in advancing the understanding of the CAISO's proposals and discussing the attendant ramifications. Further, several parties had the opportunity to propose alternative proposals for items such as the Available Capacity market put forward by Reliant Energy and the State of California.
At the last technical conference, it became apparent there were strong opinions about different elements of the CAISO's proposed market redesign that could not be overcome through discussion and exchange of views. Clearly, a process more forceful and binding is required. A suggested "next step" to the technical conferences was a week-long settlement conference facilitated by FERC staff. Lacking a settlement conference process, the Commission will be faced with protest filings and reply filings from a large number of parties that will leave the Commission with the unenviable task of selecting the best approach without the benefit of consensus amongst the same. Indeed, there is no guarantee that a settlement conference will result in a broad consensus. However, the intractable positions of parties on some issues will no doubt bend as the discussions take place in the environment of a settlement-style conference.