FERC Filings
BRIEF OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON COMMISSION STAFF’S INTERPRETATION OF THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR’S AND CALIFORNIA POWER EXCHANGE'S MARKET MONITORING AND INFORMATION PROTOCOL
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In support of the Commission’s commendable goal of achieving a vibrant, competitive wholesale marketplace, EPSA agrees that market power abuse cannot be tolerated. Bad actors must be disciplined and bad actions must be penalized. In this brief, however, EPSA addresses only the narrow issue of the Staff’s interpretation that the California Independent System Operator’s (CAISO) Market Monitoring and Information Protocol (MMIP) constitutes: (1) a prohibition on certain market behaviors; (2) sufficient notice to market participants that particular behaviors constitute prohibited market manipulation and/or gaming; and (3) the proper vehicle for retroactive enforcement and punishment for various market behaviors. In the Order on Briefs, the Commission seeks comments on the Staff’s interpretation of the MMIP language.
I. The CAISO MMIP Was Intended to Provide Guidance for Market Improvements and Corrective Actions, but Contained No Standards That Can Serve as a Basis for Retroactive Enforcement
The Final Report describes the CAISO and PX tariffs, along with some background on the inclusion of the MMIPs in each tariff. The MMIP identifies various practices that should be subject to scrutiny by the compliance divisions and market surveillance committees, precursors to today’s Market Monitoring Unit (MMU). As quoted in both the Final Report and the Order on Briefs, these provisions outline very broad conduct that may adversely affect the efficient operation of the ISO and PX markets, and, as such, may be subject to corrective action under the MMIP. Staff concludes that the inclusion of these provisions in the CAISO tariff is sufficient to put market participants on notice that specific practices addressed under the MMIP at some later time can be used to penalize bad acts.
However, it is important to put these provisions into the proper historical context before ordering sanctions or penalties. When the MMIP was proposed and adopted as part of the CAISO and Cal PX tariffs, it was not intended to define specific practices that would be subject to punitive actions on a retroactive basis. Rather, the MMIP protocols were proposed as screening criteria intended to be used by the compliance divisions and market surveillance committees to monitor, evaluate and take corrective action on the market rules. As stated in ISO Appendix 7:
Many practices that might be viewed as aberrant or as gaming the market structure would not necessarily be illegal or violate existing laws, such as the antitrust laws. Hence, it is not proposed to punish aggressive competitors for practices that take advantage of what might in due course be revealed as design flaws or inefficiencies in these markets but which practices are not at the outset indicated as illegal or improper.
In many situations, the more appropriate remedy will be to fix the rules (as discussed above) and, perhaps in so doing, generically to identify certain practices that will not be tolerated under the revised rules. Only after that would formal sanctions be appropriate for the proscribed behavior. (Page 16 - 17 of ISO Appendix 7; emphasis added)
The ISO initially intended the MMIP, as filed in 1997, to be utilized as a broad market screen which would enable the MMU to take further action to refine market rules and operations. The behaviors of interest, such as “gaming” and “anomalous market behavior,” were broadly and vaguely defined. The intent was that prohibited practices would later be defined more narrowly and clearly, or market operation tariffs would be corrected or modified once market experience allowed for the refinement of the protocols. The ISO expressly states: “Further definition on these criteria, and on what categories of practice may be proscribed, will be possible once the ISO and PX begin to administer these markets and to develop a view of what types of behavior or problems these markets are encountering” (page 14 of ISO Appendix 7).
In its discussion of Alternative Dispute Resolution, the CAISO acknowledges:
Because many of the concerns relating to the gaming of the market rules will at the outset be inchoate or ill defined, and because their potential effect on the market power may be hotly disputed between different market players, the use of the new market ADR mechanisms may be a good way of initially dealing with many allegations of aberrant market behavior. Such behavior is likely to be viewed at the outset very much in the eye of the beholder: what may appear aberrant to one competitor may be viewed as superior market strategy by another. (Page 17 of the ISO Appendix 7; emphasis added)
Based on the ISO’s own statements, it appears that the MMIP language is not, and never was, intended to be the mechanism for retroactive enforcement, or the assessment of penalties or refunds, since it was never intended to directly define sanctionable behavior. Rather, the ISO and market participants always anticipated that a subsequent tariff filing adjusting ISO procedures and protocols to improve efficient market operation and/or clarifying and defining behavior would be made as a result of the monitoring process. With very limited exceptions, the ISO and PX never provided clarity on prohibited transactions and, as discussed above, the original protocols never provided for sanctionable behavior but rather included items that would be monitored for possible subsequent corrective actions.
II. Using the CAISO MMIP Language to Impose Retroactive Enforcement Would Lead to Harm in Functional, Competitive Markets
The Commission has, again and again, stressed the importance of clear, uniform rules for market participants. In its Order Establishing Prospective Mitigation and Monitoring Plan for the California Wholesale Electric Markets and Establishing an Investigation of Public Utility Rates in Wholesale Western Energy Markets issued April 26, 2001, the Commission points to the Staff report where it is noted:
The Staff outlined certain core design principles that a good mitigation plan should include: buyers and sellers need to know the rules up front and have confidence that those rules will not be subject to constant change or interpretation; prices should be mitigated before they are charged, not after; price mitigation should be as surgical (least intrusive) as possible and last for as little time as possible; price mitigation should be as market orientated as possible and adopt market solutions and mechanisms to the maximum extent possible; the pricing provisions must encourage, and not discourage, the critically needed investment in infrastructure (e.g. increasing generation supply, adding required transmission, and implementing demand response.)
This need for clear market rules is vital to today’s markets, and for this reason EPSA is concerned by the Commission’s possible adoption of the Staff recommendations proffered in the Final Report. Bad behavior and abuse of
market power cannot be tolerated and must be sanctioned. In California, there has been extensive litigation and numerous administrative proceedings. Refunds and other penalties, if appropriate, will be assessed. However, allowing the use of broad, vague conditions to impose additional penalties and sanctions retroactively will eviscerate any transactional finality in the marketplace and creates serious regulatory and commercial uncertainty going forward, both in California and in other marketplaces.
Given the limited exception to the prohibition against retroactive ratemaking for charging rates in violation of the tariff on file, that tariff language must be clear and precise so that the seller knows in advance the requirements that must be met. The Commission’s use of broad and evolving standards, proposed during the nascency of the California marketplace and unchanged since, to invoke a tariff violation essentially nullifies the benefits of market certainty and finality. By using the vague protocols in these tariffs as the basis for show cause orders, the Commission would be penalizing market participants without adequate notice or definition of the rules, something it has not let ISOs do in the first instance as it is inconsistent with fundamental principles of fair notice and due process.
As the Commission itself has reiterated, the rules of the road must be clear. However, should the Commission utilize the MMIP language as a tool to retroactively enforce market behavior in this case, other RTO and ISO markets may be inclined to look to their own tariffs to find language that, while not intended to do so, may serve to allow for piecemeal retroactive enforcement actions. These actions would certainly cause great harm to markets that are already functional and robust.
PJM, for example, has recently proposed additional fees to be assessed against market participants who submit extraordinarily high numbers of bids. What if, instead, two years after the fact someone suggested that submitting a high number of bids constituted "unusual trades or transactions," "anomalous market behavior," or "bidding patterns that are inconsistent with prevailing supply and demand conditions." Two years later should the Commission allow PJM to seek to unravel those transactions or assess penalties against the market participant based on an after the fact assessment that the number of bids submitted was excessive under some vague standard? No. Rather, PJM determined that the bidding practices reflected a new trading strategy, not market power, and sought a tariff change to assess the costs imposed on PJM by that trading strategy to those who engage in that strategy.
Similar events occur regularly in established markets and are best handled by prospective tariff changes. Otherwise, transactional finality and market confidence will be eroded in those markets as well. Hence, the precedent of this case threatens not only the development of robust competition going forward, but the functional operation of markets in place today.