MOTION TO INTERVENE AND COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY ON CAISO AMENDMENT TO IMPLEMENT AN ENERGY IMBALANCE MARKET

Transcription

1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION ) ) DOCKET NO. ER MOTION TO INTERVENE AND COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY ON CAISO AMENDMENT TO IMPLEMENT AN ENERGY IMBALANCE MARKET March 31, 2014

2 Table of Contents I. MOTION TO INTERVENE... 1 II. COMMENTS... 2 A. INTRODUCTION... 2 B. SCE APPRECIATES CAISO S RESPONSIVENESS TO STAKEHOLDER CONCERNS... 4 C. THE COMMISSION SHOULD ORDER REMEDIES TO TWO EIM DESIGN FLAWS TO HELP ENSURE SUCESSFUL EIM IMPLEMENTATION The Commission Should Order Activation of an EIM Regional Market Power Test and Bid Mitigation Process as Part of EIM Implementation The Proposed EIM Bid Adder Should be Modified to Protect California from Excessive Prices and to Prevent Undue Price Discrimination a) Unmitigated Bid Adders of $1000/MWh Are Not Reasonable. The Commission Should Limit Adders to Between Zero and 150% of GHG Compliance Costs.. 9 b) Bid Adder Rules Are Required to Address the Potential for Otherwise Unreasonable Discrimination Against California. 11 c) Payments Related to the Bid Adder Should Be Subject to Refund.. 13 d) The Commission Should Order SCE s Proposed Rules to Ensure Reasonable Results and Durable Benefits From the EIM D. THE EIM DESIGN CREATES NEW PROBLEMS RELATED TO VIRTUAL BIDDING AND UPLIFTS The Commission Should Approve the CAISO s Proposal to Address Certain Uplifts Caused by the Interaction of Convergence Bids and the New EIM Design The CAISO Should Present a Plan to Resolve the Impact of EIM Base Schedules Errors on Virtual Bidding Uplift Within A Year of Go-Live E. SECONDARY ISSUES THAT CAN BE RESOLVED OR MONITORED AFTER IMPLEMENTATION III. CONCLUSION i

3 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION California Independent System Operator Corporation ) ) ) Docket No. ER MOTION TO INTERVENE AND COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY ON CAISO AMENDMENT TO IMPLEMENT AN ENERGY IMBALANCE MARKET Pursuant to Rules 211 and 214 of the Rules and Regulations of the Federal Energy Regulatory Commission ( Commission or FERC ), 18 C.F.R , 214 (2013), and the Combined Notice of Extension of Time issued March 11, 2014 in the above-captioned docket, Southern California Edison Company ( SCE ) hereby moves to intervene and submit its Comments on the California Independent System Operator ( CAISO ) Corporation s proposed Tariff Amendment to Implement an Energy Imbalance Market ( CAISO Filing ). II. MOTION TO INTERVENE SCE, a wholly owned subsidiary of Edison International, is an investor-owned utility, subject to the Commission s jurisdiction. SCE s principal place of business is 2244 Walnut Grove Avenue, Rosemead, California, SCE is a Transmission owner and operator, as well as a Market Participant in the CAISO markets, and thus is affected by the outcome of this proceeding, as it seeks to modify part of the CAISO s tariff. As such, SCE has an immediate interest in the outcome of this proceeding. SCE s interest cannot be represented by any other party and, consequently, SCE respectfully requests that the Commission grant SCE permission to intervene in this proceeding. SCE hereby reserves its rights to raise substantive issues regarding 1

4 all aspects of this proceeding, and to file additional comments, as warranted by the proceeding. SCE designates the following person for service on the Commission s service list in this proceeding: Erin K. Moore Southern California Edison Company 2244 Walnut Grove Avenue Rosemead, CA (626) erin.moore@sce.com III. COMMENTS A. INTRODUCTION On February 28, 2014, the CAISO filed an Amendment to Implement an Energy Imbalance Market ( EIM ). Specifically, the Filing sets out the details of the rules and procedures that will regulate the expansion of the CAISO s real-time markets 1 to other balancing authorities in the western electric grid. SCE applauds the CAISO for its work on this project, including the extensive and thoughtful discussions with affected entities via the stakeholder process that have resulted in a generally well-crafted market design. The inclusion of additional resources, geographic diversity to integrate renewable resources, and load diversity will allow for a more efficient dispatch of resources to meet load, which will then reduce costs and, in turn, benefit SCE s customers. As such, SCE welcomes the addition of these expanded market opportunities. 2 SCE has had lengthy discussions with the CAISO, PacifiCorp, and other future EIM participants, and appreciates the CAISO s willingness to consider provisions SCE considers 1 The CAISO real-time markets are the fifteen minute market and five minute market. 2 The CAISO submitted a study showing the annual benefits to PacifiCorp and CAISO of PacifiCorp s participation in the real-time markets ranged from $21-$128 million depending on transfer capability and other market assumptions. Even if these benefits are overstated, SCE believes that benefits will still accrue sufficiently to warrant moving forward with EIM. 2

5 essential or helpful. Importantly, the CAISO s proposal includes circuit breaker provisions that allow suspension and reversion of the EIM market under extreme circumstances during the first 60 days. 3 SCE strongly supports these provisions and urges the Commission to approve them. These safeguards help ensure a rational and measured response in the unlikely event that things do not function correctly, and allow SCE to more confidently support the CAISO s proposal. While the CAISO has done an admirable job of addressing potential problems, there are some issues that still must be addressed prior to the launch of the EIM. Because SCE, like the CAISO and other stakeholders, desires a successful implementation from Day 1, SCE recommends that the Commission direct the CAISO to make certain relatively minor, but critical, modifications to improve the EIM design. The following modifications will ensure a robust EIM structure that will not only benefit the CAISO s current market participants, but will present attractive opportunities to other entities as well: Implement at launch the regional market power test and mitigation already being created in the CAISO software to mitigate the dynamic issue of potential market power within an EIM Area; Institute additional rules for the Bid Adder to ensure that it cannot be used to unjustly enrich entities that use it; to wit, restrict the use of the adder to only EIM generation with a verifiable CARB GHG compliance obligation, and limit the Bid Adder to 150% of a unit s estimated GHG costs; and Address EIM-related virtual bid uplifts within one year of EIM go-live. Furthermore, in Appendix B to these Comments, SCE offers some minor suggestions to further improve the EIM design. 3 Proposed 29.1(d)(1), Temporary Suspension. 3

6 Nothing SCE suggests, in either these Comments or in Appendix B, should delay the implementation of the new EIM design, yet these modifications will help refine the market design to ensure a successful launch benefiting all participants. B. SCE APPRECIATES CAISO S RESPONSIVENESS TO STAKEHOLDER CONCERNS SCE fully advocates the expansion of energy markets in the West, and supports the CAISO s goal to create and expand real-time markets. To achieve this, the market design must be robust and carefully crafted to address anticipated issues; otherwise, should a significant problem occur, it would considerably delay the benefits of the other balancing authorities joining expanded energy markets. Furthermore, the EIM market will be a voluntary market for many participants, but SCE will be required to participate. Therefore, especially given the mandatory nature of the new market for some Market Participants, it is essential to ensure that from the outset the rules are non-discriminatory and apply consistently to both CAISO and EIM Participants whenever practical. SCE has been an active participant in the EIM stakeholder process from the beginning, and genuinely appreciates the CAISO s commitment to addressing the issues expressed by SCE and other stakeholders. For example, SCE fully supports the following modifications made by the CAISO during the stakeholder process: (1) the inclusion of a flexibility sufficiency test built into the EIM design to address the issue of leaning on a neighboring balancing authority for the use of flexible resources needed for reliability; (2) provisions requiring that EIM dispatch a quick start unit in any balancing authority if it is economic, rather than the original proposal to only allow unit starts in the CAISO; (3) the CAISO s intended use of a real-time congestion balancing account to ensure that congestion costs are kept within the balancing authority in which they are created, to prevent cost shifting between balancing authorities; and (4) certain circuit breaker mechanisms included in the proposal that allow the CAISO to act rapidly to respond to problems, if they arise, during the startup of the EIM. 4

7 Moreover, creating common rules throughout the new EIM footprint is imperative, especially allocating costs on a cost-causation basis uniformly across both the current CAISO market and the proposed EIM. With limited exceptions, discussed infra, the CAISO has done a good job of ensuring that the same rules apply to all players, and SCE sincerely commends the CAISO on this achievement. 4 These items, while problematic and important to resolve, do not take away from the significant nature of the CAISO s achievement in market design and cooperation. C. THE COMMISSION SHOULD ORDER REMEDIES TO TWO EIM DESIGN FLAWS TO HELP ENSURE SUCESSFUL EIM IMPLEMENTATION As discussed in more detail below, the Commission should direct the CAISO to fix two significant design flaws in the proposed EIM market design prior to implementation. First, the market design must include both a regional market power test and bid mitigation. Second, there must be additional bid restrictions on the EIM Bid Adder 5 to prevent unreasonable prices and to limit undue price discrimination. Such limitations will help ensure that the adder is used solely for its originally-intended purpose of allowing reasonable cost recovery associate with emissions costs specific to California. 1. The Commission Should Order Activation of an EIM Regional Market Power Test and Bid Mitigation Process as Part of EIM Implementation SCE is the contracted energy off-taker and scheduler of a wind resource within the new EIM Entity area (PacifiCorp East) that will face direct exposure to the EIM prices. 6 Once the 4 SCE details concerns with the proposed EIM Bid Adder in section C.2 infra, and discusses changes to the allocation of flexible Ramping Constraint costs in Appendix B to these Comments. 5 The proposed CAISO Tariff language ( 29.32) uses the term EIM Bid Adder. SCE prefers the more accurate term CA Bid Adder because it adds to the price of power that is deemed to flow to California, not to EIM participants. 6 SCE has a contract with the Goshen MW wind project located in Idaho. Today, per Schedule 9 of PacifiCorp s tariff, PacifiCorp settles energy imbalance based on an average of day-ahead regional hub prices. 5

8 EIM goes live, PacifiCorp plans to settle uninstructed deviations for all generation based on the 5-minute locational marginal prices (LMPs) generated at each node. As a result, SCE and other parties within PacifiCorp have direct exposure to EIM prices. SCE is concerned that without regional market power mitigation there is no way to be certain that prices will be just and reasonable within the new EIM Entity area. The filed EIM design contains no regional test for market power mitigation. Rather, the CAISO proposes to first develop and perform an undefined structural test and, depending on the results of this undefined test, then obtain approval from the CAISO governing Board to activate the software. 7 The CAISO proposal as filed is inadequate to ensure just and reasonable rates for two critical reasons: ownership concentration and the lack of must-offer obligation in the EIM. First, an analysis performed by SCE shows a large ownership concentration of resources in PacifiCorp, such that regional EIM market power is a concern. The structure of generation ownership in the first two EIM Entity areas, PacifiCorp West (PacWest) and PacifiCorp East (PacEast) shows PacifiCorp owns or controls 92% and 78% respectively of the generation in the EIM Entity areas. 8 This translates to a Herfindahl-Hirschman Index (HHI) exceeding 8,400 in PacWest and 6,000 in PacEast. Since HHI values above 2,500 are typically viewed as highly concentrated, the structural issue of market power in the EIM is significant. SCE is not implying that PacifiCorp will exert market power, but simply observes a structural issue that must be 7 The Energy Imbalance Market software will include functionality that allows the application of market power mitigation rules on an EIM Entity balancing authority area-wide basis when congestion is projected to occur in the import direction on the constraints enforcing the EIM Transfer limits the ISO may activate this software functionality to apply market power mitigation to transmission constraints limiting EIM Transfers into an EIM Entity balancing authority area if it determines that one or more entities have market power at the level of the EIM Entity balancing authority area, and if such action is authorized by the ISO Board of Governors. CAISO Filing, pp Based upon information from PacifiCorp s Triennial Market Power Update to the Commission on June 28, 2011 for the period December 1, 2010 through November 30, 2011 (Docket No. ER ). See, Declaration of Karen Koyano, attached hereto as Appendix A. 6

9 addressed in the EIM design. 9 In addition, the EIM design provides limited opportunities for outside supply to discipline EIM prices. With the advent of the EIM, the real-time (RT) market becomes fundamentally different than it is today; to wit, only resources within PacifiCorp bidding into EIM and imports from the CAISO can supply PacifiCorp s RT EIM load. This is a fundamental difference from the CAISO market today, which, when added to the concentration of ownership, makes it fully appropriate to apply market power mitigation to the EIM region. SCE understands the current projection is a maximum of 200 MW dynamic transfer 10 capability between PacWest and CAISO during peak hours, 0 MW of flow from PacWest to PacEast, and 0 MW from CAISO to PacEast. Therefore, resources in CAISO have a very limited ability to contest prices in PacWest, and CAISO resources are unable to sell to PacEast. 11 Second, because EIM participation and bid submission is voluntary hour-by-hour (i.e. there is no must-offer obligation as there is in the CAISO Day Ahead and Real Time markets), the occurrence of market power is dynamic and requires ongoing, hour-by-hour testing to ensure reasonable results. A static, up-front test will not provide sufficient confidence that regional market power will not exist in actual operations. As noted in the Filing, 12 the CAISO plans to build the capability for regional mitigation into the software before the go-live. This software design allows EIM resources to submit market-based bids; therefore, bids will only be mitigated 9 PacifiCorp currently has market based rate authority, and this authority should continue. In the day-ahead and hour-ahead trading time frames, many entities from all over the WECC can offer supply to PacifiCorp and contest for this market share, but these are transactions that occur outside of the EIM. Mitigation should only apply to the EIM market. 10 Bonneville Power Administration is the transmission operator of the California-Oregon Border intertie, and currently they are limiting the dynamic transfer capability to 200MW. If other parties request use of the dynamic transfer capability, then the amount available for EIM would be reduced further. In addition, BPA proposes additional constraints on PacifiCorp transmission rights within BPA, and will require the CAISO to enforce roughly a dozen flow gates, as well as constraints on 5-minute rates of change in flow. These additional BPA constraints may also restrict competition within the EIM region. See, Stakeholder pdf. 11 PacifiCorp will not allow fifteen minute market bidding at its interties, so resources outside of PacEast cannot mitigate real-time markets prices within PacEast. The only exception is if an external resource is connected to PacifiCorp through a pseudo-tie. See PacifiCorp s Filing for Revisions to the OATT to Implement the Energy Imbalance Market, filed March 25, 2014 in Docket No. ER (PacifiCorp Filing), at pp CAISO Filing, pp

10 under specific conditions when competition is insufficient to discipline bidding. Even under such conditions, the market-based bids will continue in force unless they exceed competitive thresholds. 13 Thus, any bids ultimately mitigated will still be at values that approximate competitive levels. 14 This form of mitigation, used in the CAISO since 2009, allows for marketbased bids when possible and only mitigates bids under non-competitive conditions. SCE supports this approach. SCE requests that the Commission direct the CAISO to activate the regional market power test and bid mitigation concurrently with EIM go-live. At a minimum, the Commission should require the CAISO to file its proposed market power test methodology for review and approval. Without first seeing the test, the Commission has insufficient information to conclude if the test will adequately detect market power. Because the Commission has the ultimate obligation to ensure just and reasonable rates, it should not defer review and approval of this proposed methodology to the CAISO and its Board. Likewise, the Commission should not defer to the CAISO Board the decision on whether or not to implement mitigation. 2. The Proposed EIM Bid Adder Should be Modified to Protect California from Excessive Prices and to Prevent Undue Price Discrimination. SCE recognizes that California has a unique circumstance with respect to the implementation of the California Air Resources Board s (CARB) Greenhouse Gas (GHG) regulations, which create a compliance cost for GHG emissions associated with generation imported into California. The CAISO proposes a uni-directional Bid Adder i.e., it is provided exclusively to any EIM Participating Resources regardless of any CARB compliance such as hydroelectric resources located outside of California, allowing those resources to demand a 13 Under the test, bids will not even be tested for mitigation unless there is congestion from the CAISO into the EIM Entity. SCE understands the CAISO would implement a process similar to its current local market power test and mitigation, except it would look at a wider region and the impact with EIM interchange points between balancing authority areas. 14 The Default Energy Bid is a cost-based Energy Bid Curve used in Local Market Power Mitigation pursuant to 39. 8

11 higher price to sell to California (the CAISO balancing authority) than the price demanded to sell to other EIM Entity Areas. Further, the Bid Adder may be any positive amount, as long as the combination of the energy bid (which can be negative) and Bid Adder does not exceed $1,000/MWh. 15 Further, the Bid Adder is never subject to price mitigation. 16 SCE asks the Commission to modify the proposal by adding two common-sense bidding rules. First, only allow EIM units with verifiable CARB compliance costs to submit the Adder. Second, limit the Adder to a range of 0 150% of each unit s estimate GHG compliance cost. Without these modifications, the proposal is unjust and unreasonable in that it does not sufficiently protect California customers from excessive and unmitigated EIM bids, and allows for undue price discrimination from EIM entities against California. a) Unmitigated Bid Adders of $1000/MWh Are Not Reasonable. The Commission Should Limit Adders to Between Zero and 150% of GHG Compliance Costs. GHG is currently trading around $12/ton. 17 This results in a GHG compliance cost of less than $15/MWh for even a high-ghg emitting coal unit, and about half that for a gas unit. As such, SCE finds no reasonable justification for a $1000/MWh Bid Adder. The CAISO claims that by submitting a very high Bid Adder a resource would largely avoid being deemed to sell to California. 18 This reasoning is problematic. First, providers such as Bonneville Power Administration, which cites a prohibition against complying with CARB GHG regulations, have declared that the CA Bid Adder tool is insufficient. 19 Second, it legitimizes, and in fact authorizes, economic withholding from California. SCE notes that the CAISO plans to introduce 15 See 29.32(a)(3): the combination of the Energy Bid and Bid Adder cannot exceed $1000. Because the energy bid itself can be negative, the Bid Adder could actually exceed $ Proposed states the CAISO will use bid mitigation procedures in the current CAISO tariff ( 39.7), but neither section has been modified to include bid adders in the mitigation procedure. 17 See, oasis.caiso.com. 18 CAISO Filing, p See, 9

12 a flag in the optimization that would allow a resource to select a flag to prevent it from being dispatched to meet ISO load. 20 If resources want to take advantage of the CAISO RT Market s larger pool of potential customers, they should be willing to sell to everyone (since California sellers are forced to sell to everyone), and at the same price (unless they have different costs). SCE recommends that if the flag option of do not sell to California is eventually allowed, the Commission should limit its use to only those participants that can demonstrate a legal restriction that prevents sales to California. Moreover, unlike the treatment of energy bids in the current CAISO market, the Bid Adder is never subject to price mitigation. Currently all units in California are reviewed for market power mitigation, and appropriately, no Adder is ever exempted from review. 21 SCE also notes that only participants within the CAISO s existing footprint will pay the Bid Adder price. Thus, allowing a Bid Adder equal to roughly a hundred times the underlying cost basis without any additional mitigation is inconsistent with current CAISO practices, imprudent and unreasonable. Exacerbating this problem, the California price can still be set by the unmitigated Bid Adder even if the energy bid of the EIM unit is mitigated. Entities incurring a GHG cost to provide power to California should be allowed the reasonable opportunity to reflect such costs in bids. But the Commission must ensure such bids produce just and reasonable results. Such extreme Bid Adders can and likely will at times set prices within California. As such, SCE asks the Commission to order additional safeguards on the Bid Adder in order to both protect market participants and allow reasonable cost recovery for sellers. Specifically, the Commission should limit the Bid Adder to be a positive value no greater than 150% of estimated GHG compliance costs ($/MWh) for each generator. 20 CAISO Filing, p Moreover, once mitigated, to ensure a final competitive market clearing price, the bid remains mitigated irrespective of the ultimate use of the energy (i.e. whether it s used to address local or system issues). 10

13 This limitation is necessary and appropriate to both protect California ratepayers, and to ensure efficient market results. Moreover, a 150% limitation provides sellers considerable flexibility and is consistent with existing CAISO rules that limit costs such as Startup and Minimum Load costs to 150% of estimate production costs. 22 Moreover, based on existing mitigation rules within the CAISO, the CAISO already collects the information needed to perform this calculation. Thus requiring such rules to be utilized in the EIM should not delay EIM implementation. 23 b) Bid Adder Rules Are Required to Address the Potential for Otherwise Unreasonable Discrimination Against California The core effect of the Bid Adder is to facilitate price discrimination. 24 Rather than representing a single price available to any and all buyers, EIM Resources are permitted to discriminate among buyers by naming two prices: a price for EIM Entity buyers, and a higher price for California buyers. However, left unmitigated, broad use of such price discrimination threatens to undermine the benefits of the EIM to California. 25 Taken to the logical extreme, using the Bid Adder, the EIM Entity could capture 100% of the EIM benefits and leave California with no benefits whatsoever. For example, assume the marginal cost of generation (including GHG compliance costs) is $50/MWh from the EIM Entity and $60/MWh in the CAISO. In this case, the EIM Participating Resource has the incentive to add an additional $10/MWh to their Bid Adder to capture the difference in costs. In turn, the resulting price to CAISO will be the higher $60/MWh instead of $50/MWh. By using the Bid Adder, the EIM Resource is paid $60/MWh, 22 CAISO Tariff If full implementation would threaten to delay EIM implementation, a simplified rule could be implemented in the interim. For example, the CAISO could determine the highest GHG compliance cost in the EIM on a daily basis, post the value and restrict bids to 150% of that value. Compliance would not have to be automated initially, but it would be up to market participants to ensure they bid according to the tariff rules. 24 SCE is using the term price discrimination to refer to offering two different prices irrespective of any cost differences to provide service to the buyer. 25 The CAISO EIM benefits study did not include the impacts of a discriminatory bid adder design. 11

14 even though prices within the EIM area remain $50/MWh. 26 California customers lost the benefit of receiving the cheaper $50/MWh power, and instead that surplus is captured by EIM generators. 27 SCE supports an EIM as an effective way to facilitate commerce to the benefit of both California and EIM participants but as shown above, the Bid Adder allows the EIM Entity to capture 100% of the surplus and leave no benefit for California. 28 Such a result would be unjust and unreasonable and requires remedy. To further see the discriminatory nature of the proposal, consider the reverse situation, where the marginal power cost in California is $50/MWh, and in the EIM Entity it is $60/MWh. In this case, the EIM Entity receives the full benefit of the lower California prices (because California resources are not allowed to price discriminate via the Bid Adder), and again captures 100% of the EIM benefits The cornerstone of Commission policy has been to ensure non-discriminatory access to transmission and energy markets. Moreover, SCE is not aware of any other FERC organized market design that provides a pricing tool for such undue price discrimination. Should the Commission adopt the CAISO s proposal without modification specifically to allow all EIM resources access to effectively unmitigated Bid Adders then it will have gone against prudent policy implemented elsewhere and instead institutionalized unmitigated price discrimination. Moreover, approval would establish asymmetric and preferential rules that discriminate against suppliers located in California. The result would be harmful to California and to the potential harm of the EIM itself. 26 The EIM resource could also capture this surplus by simply submitting a $60/MWh energy bids. In this case the resource no longer price discriminates and all buyers, both within the EIM and in California pay $60/MWh for the energy. 27 SCE also opposes implementing unjustified special rules available only to generation outside of California that allow such units to inappropriately capture additional economic rents. The Commission should likewise adopt SCE s recommendation of bidding restrictions to prevent the establishment of otherwise discriminatory treatment of generation. 28 This lost benefit of cheaper power occurs even with congestion because congestion revenue is normally returned to load, however, with the CA Bid Adder part of the congestion revenue will be used to compensate EIM generators deemed to flow to California. 12

15 c) Payments Related to the Bid Adder Should Be Subject to Refund. There are unresolved legal and regulatory concerns regarding CARB s ability to regulate out-of-state generators whose energy is imported into California. It is reasonable to anticipate that after the deadlines for the surrender of compliance obligation (the first of which is November 1, 2014) there may be legal challenges that will determine CARB s jurisdictional authority. Therefore, at this juncture, it is not certain if all EIM Participating Resources will ultimately be CARB-jurisdictional entities, in which case they may not be required to comply with the CARB GHG Cap-and-Trade Program as assumed in the EIM design. If such determination were made after they have been compensated for GHG costs according to the EIM design, then the Participating Resources could be left with windfall profits from payments intended to recover GHG cost. Accordingly, SCE strongly urges the Commission to require all EIM GHG payments be subject to refund until the issue of whether EIM Participating Resources will incur GHG costs for California s GHG Cap-and-Trade Program is resolved. d) The Commission Should Order SCE s Proposed Rules to Ensure Reasonable Results and Durable Benefits From the EIM In summary, SCE s proposed bidding rules are necessary to ensure just and reasonable results, necessary to prevent undue discrimination, and beneficial towards the durable success of the EIM. Given the unprecedented nature of this CAISO Bid Adder design and the associated policy implications as filed, the addition of SCE s common-sense rules should give the Commission the basis to conclude the EIM market will produce just and reasonable results. And further, give both the Commission and stakeholders greater confidence that the EIM will succeed in producing durable benefits for all market participants, both within and outside of California. In particular, the Commission should require that: The proposed tariff language in 29.32(a)(5) limits the submission of only one bid adder per day to limit gaming opportunities. SCE supports this important design element and it should remain. 13

16 Only EIM Resources with a verifiable CARB GHG compliance requirements are eligible to use the Bid Adder; The Bid Adder must be between zero and 150% of the estimated GHG compliance costs ($/MWh) for each generator; Payments for the Bid Adder should be subject to refund. With the above changes, resulting bids and prices should result in more efficient price formation, and both California and the EIM Entities have assurance of receiving appropriate benefits free of discriminatory or preferential treatment. Moreover sellers located anywhere in the market have an opportunity to both bid and receive reasonable and efficient prices, and all buyers have confidence of reasonable results in light of the protections provided by these rational bidding restrictions. D. THE EIM DESIGN CREATES NEW PROBLEMS RELATED TO VIRTUAL BIDDING AND UPLIFTS The EIM design results in significant changes in the market optimization because the market footprint between the day-ahead (DA) and the fifteen minute market (FMM) will be different. After the implementation of EIM, the CAISO will begin a new process of inserting an EIM Entity Base Schedule forecast 30 into the DA market. While this forecast is not financially binding, it results in modeled flows that interact with, and impact, DA market results in the CAISO area. In addition, while the CAISO models EIM transmission topology in the DA market, it will not enforce the EIM transmission constraints until the FMM. When the EIM Entity ultimately submits its actual Base Schedule in the FMM, these Base Schedules have financial implications for the EIM Entity and also impact prices in the CAISO area. As a result, the EIM design creates two significant new issues impacting DA/FMM price convergence, and in turn, virtual bidding uplifts. First, DA prices will not reflect EIM 30 The CAISO will forecast the generation output and load within the EIM Entity Area to develop a base schedule. 14

17 constraints (that are enforced in the FMM). Second, the flows in the CAISO s DA model will have new errors resulting from the difference between the CAISO s forecasted EIM Base Schedules versus the actual EIM Base Schedules used in the FMM. As a result, the EIM creates new issues that can be exploited by virtual bidders, and without modification of the EIM design, such profits would be funded by uplift to load. While the CAISO proposes to mitigate issues due to constraints within the EIM Entity, the problems related to CAISO Base Schedule errors remain unaddressed. 1. The Commission Should Approve the CAISO s Proposal to Address Certain Uplifts Caused by the Interaction of Convergence Bids and the New EIM Design Since the CAISO will not enforce transmission constraints in the EIM Entity in the DA model run, yet will enforce those constraints which may then bind in the real time markets, the EIM may have systematic price differences. The CAISO offers a proposal to address this new problem to help address uplift that would otherwise be created by virtual bidders. 31 SCE supports this proposal and encourages Commission approval. Under the proposal, the CAISO will, in effect, zero out any price impacts on CAISO nodes resulting from EIM binding constraints. This adjusted price will be used to settle impacted virtual bids, but the prices for physical entities will not change. This should help limit uplifts associated with virtual bidding that would otherwise unjustly profit from this systematic DA/FMM modeling difference inherent with the EIM design. It is crucial the Commission address this potential uplift by approving the CAISO s proposal, otherwise load will be unreasonably forced to fund additional virtual bidding profits as such bidders bet against the CAISO s modeling to profit from resulting systematic price differences. Such a result would not be just and reasonable. 31 CAISO Filing, p. 33; proposed (c). 15

18 2. The CAISO Should Present a Plan to Resolve the Impact of EIM Base Schedules Errors on Virtual Bidding Uplift Within A Year of Go-Live Under the new EIM process, the CAISO will forecast the EIM Base Schedules in the DA market, which then get replaced by the actual Base Schedules in the FMM. The difference in these Base Schedules may change flows and congestion in CAISO, and consequently prices, between the DA and same-day markets (FMM and five-minute). To the extent virtual bidders discover systematic differences in the errors from this activity, they can unfairly profit by taking positions against the CAISO s forecast error, which in turn creates uplift to load. Under the EIM proposal, because there is no virtual bidding in EIM Entity areas, the uplift is only charged to CAISO load and exports. 32 While the initial limited transfer capability of PacifiCorp may help temper the magnitude of this issue, SCE expects EIM transfers to materially increase in the near future if neighboring balancing authorities join the EIM. For example, Nevada Energy has expressed interest in joining the EIM, and its participation could result in several thousand megawatts of transfer capability. SCE views the CAISO s EIM proposal as the template for future balancing authority participation in EIM throughout the west and as such, the design must address structural flaws likely to create material problems as participation expands. The CAISO s Market Surveillance Committee (MSC) investigated this issue and concurred that this is a valid concern, 33 but was unable to draw any conclusions on the dollar impact, and recommended the issue be studied during market simulation. Also, the MSC stated that [i]f there appears to be a potential for unacceptably high congestion rent shortfalls due to schedules at particular locations, this potential should be addressed prior to go-live. 34 SCE agrees with this conclusion. 32 This appears to violate the principle of cost causation because the uplift is due to the introduction of EIM Entities, yet they are never allocated any of the cost. 33 See Filing, Attachment G, Opinion on Initial Implementation of the Energy Imbalance Market and Related Market Design Changes, CAISO Market Surveillance Committee, October 30, Id., at p

19 The Commission should require the CAISO to hold a stakeholder process to develop a proposal to address virtual bidding uplift created as a result of the EIM design. The CAISO should review mitigation proposals, report the impact of EIM on congestion rent shortfalls due to virtual bidding, and present a proposal to resolve this, and other discovered design issues, by October SCE believes that viable solutions can be developed in this timeframe. In fact, SCE is currently exploring a framework modeled on the CAISO s virtual bidding proposal in Tariff (c). Under SCE s framework, the CAISO would correct for price distortions resulting from errors between the CAISO s forecast Base Schedules and actual EIM Base Schedules. Impacted virtual bids would be settled at an adjusted DA price that removes the price distortion of the CAISO s EIM Base Schedule forecast error. This framework, as well as alternatives, could be fully developed during the 1-year process proposed above. E. SECONDARY ISSUES THAT CAN BE RESOLVED OR MONITORED AFTER IMPLEMENTATION In addition to the major issues discussed above, SCE has identified certain secondary issues, the resolution of which would benefit the EIM design, but which are less crucial for initial startup, and thus can be deferred if necessary. These issues, which are addressed in more detail in Appendix B to these comments, include the following: (1) the Filing s proposal regarding transmission cost recovery should be temporary; and (2) to ensure equal treatment for resource participants, the EIM Entities should not be permitted to develop their own allocation for flexible constraint costs. IV. CONCLUSION SCE looks forward to the expanded reliability and resource opportunities that will result from the implementation of the EIM. SCE commits to continuing to work closely with the CAISO and other stakeholders to ensure a successful launch, and a timely resolution of any 17

20 issues that are subsequently identified. As discussed in the body of these comments, there are several critical issues notably the need for regional market power test and mitigation beginning at go-live, restrictions on the Bid Adder to prevent abuse and unjust enrichment, and a recommendation to design a solution to address virtual bid uplifts within one year after launch as well as other more minor concerns (set out in Appendix B), that SCE urges the Commission to address in its order on the CAISO s Filing. SCE is confident that, with the changes we have proposed, the EIM initiative will be beneficial for all participants and ratepayers. For all of the foregoing reasons, SCE respectfully requests that the Commission grant SCE s Motion to Intervene and make it a party in this proceeding. SCE also requests that the Commission approve the CAISO s filing in its entirety, except for the changes noted above. Respectfully submitted, ANNA VALDBERG GARY CHEN ERIN K. MOORE By: Erin K. Moore Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626) Facsimile: (626) erin.moore@sce.com Dated: March 31,

21 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing MOTION TO INTERVENE AND COMMENTS OF SOUTHERN CALIFORNIA EDISON COMPANY ON CAISO AMENDMENT TO IMPLEMENT AN ENERGY IMBALANCE MARKET upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Rosemead, California, this 31 st day of March, Case Analyst SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626)

22 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION ) ) ) DOCKET NO. ER APPENDIX A

23 APPENDIX A

24 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION ) ) ) DOCKET NO. ER AFFIDAVIT OF KAREN KOYANO ON BEHALF OF SOUTHERN CALIFORNIA EDISON COMPANY I, Karen Koyano, declare and state: I. INTRODUCTION 1. My name is Karen Koyano. I am the Manager of Market Analysis at Southern California Edison Company ( SCE or Applicant ). My business address is 2244 Walnut Grove Ave., Rosemead, CA I received a Bachelor s Degree in Mechanical Engineering from California State University, Long Beach, and a Master s Degree in Applied Statistics from the University of California, Santa Barbara. In my current position, I am responsible for monitoring the CAISO s energy markets for the benefit of SCE ratepayers and identifying anomalous results inconsistent with reasonable and efficient energy markets. Prior to my employment at SCE, I was a Senior Manager at the California Power Exchange from I have previously submitted testimony before the Federal 1

25 Energy Regulatory Commission ( FERC or the Commission ) in Docket Nos. EL00-95 and ER II. SUMMARY 2. The purpose of my affidavit is to document the assumptions and sources of data used in the calculation of the HHI contained in this concurrent filing. 3. I calculated that the Herfindahl-Hirschman Index (HHI) of the PacifiCorp Balancing Authority area as over 6,000 in PacEast and over 8,400 in PacWest. SCE notes that values above 2,500 are typically viewed as regions which are highly concentrated. 4. The HHI is calculated as the sum of the squares of the percentages of each participants installed capacity in the Balancing Authority area to the total size of the market. For example, assume there are 5 participants who control 300 MW, 250 MW, 200 MW, 150 MW, and 100 MW in the BAA. Therefore, each participant s market share would be 30%, 25%, 20%, 15%, and10%, respectively. The HHI would be calculated as follows: HHI = (30) 2 + (25) 2 + (20) 2 + (15) 2 + (10) 2 = 2,250 The U.S. Department of Justice considers a market with a result of less than 1,500 to be a competitive marketplace; a result of 1,500-2,500 to be a moderately concentrated marketplace; and a result greater than 2,500 to be a highly 2

26 concentrated marketplace. 1 A score of 10,000 represents a complete monopoly (i.e. a market share of 100% would be a HHI =100 2 = 10,000). In the hypothetical case above, since the HHI is in the range of 1,500-2,500, the region would be considered moderately concentrated. 5. Shown below are FERC s required market share screens from PacifiCorp s Triennial Market Power Update, dated June 28, 2013 for the PACE Balancing Authority Area and the PACW Balancing Authority Area. Values from this table were used to calculate the HHI values. PacifiCorp Triennial Market Power Update, Docket ER , dated June 28, Attachment C: Affidavit of Rodney Frame 1 U.S. Department of Justice and Federal Trade Commission, "Horizontal Merger Guidelines", dated August 19, 2010, Section

27 4

28 5

29 6. Using PacifiCorp s Installed Capacity (Row A) and Non-Affiliate Installed Capacity (Row L) from PacifiCorp s Triennial Market Power Update, the calculation of HHI is shown below: Installed Capacity (MW) Installed Capacity (%) Minimum HHI Winter Spring Summer Fall Winter Spring Summer Fall Winter Spring Summer Fall PacifiCorp East PacifiCorp 6,323 6,335 6,193 6,292 78% 78% 78% 78% 6,040 6,021 6,071 6,140 Others 1,813 1,829 1,755 1,738 22% 22% 22% 22% Total 8,136 8,164 7,948 8, % 100% 100% 100% PacifiCorp West PacifiCorp 2,801 2,868 2,610 2,601 93% 92% 92% 93% 8,619 8,482 8,458 8,672 Others % 8% 8% 7% Total 3,017 3,114 2,838 2, % 100% 100% 100% PacifiCorp East and West combined PacifiCorp 9,124 9,203 8,803 8,893 82% 82% 82% 82% 6,692 6,659 6,661 6,752 Others 2,029 2,075 1,983 1,930 18% 18% 18% 18% Total 11,153 11,278 10,786 10, % 100% 100% 100% 7. The HHIs for PacifiCorp East and PacifiCorp West were greater than 6,000 which reflect that these BAAs are highly concentrated. The calculation of these HHI values factored only nameplate capacity in the Balancing Authority area as the basis of the calculation. 8. Not included in the HHI calculation are long-term purchases, long-term sales, planned outages, imports, exports, or load. Assuming the net of these extra additions and subtractions to the installed capacity result in a net supply to the BAA, the inclusion of these values would only increase the HHI. 9. The Minimum HHI s shown above are only a partial calculation of HHI as it shows only PacifiCorp s contribution to the HHI value. An accurate calculation is 6

30 not possible since the available data is insufficient to determine the number of other entities in the BAA and their market share which is reflected in Row L from the Triennial market power screens. However, adding the installed capacity percentage for the other entities in the BAA would only increase the total HHI and result in an even more concentrated marketplace. With a HHI greater than 6,000 considering PacifiCorp alone, further accuracy of the HHI calculation is meaningless when a highly concentrated marketplace exists over 2,500. I declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed March 31, 2014 at Rosemead, California. Karen Koyano 7

31 8

32 9

33 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION ) ) ) DOCKET NO. ER APPENDIX B

34 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION ) ) ) DOCKET NO. ER APPENDIX B OF SOUTHERN CALIFORNIA EDISON COMPANY: SECONDARY ISSUES THAT CAN BE RESOLVED OR MONITORED AFTER IMPLEMENTATION In addition to the major issues discussed in the main body of SCE s Comments, SCE has identified several secondary issues, the resolution of which would benefit the EIM design, but which are less crucial for initial startup, and thus can be deferred if necessary. These issues are addressed in more detail herein. 1. The Current Proposal for Transmission Cost Recovery Should be Temporary In Section of the proposed CAISO Tariff, energy that is transferred to the EIM Entity Area is not considered a Wheeling Out, nor is it a retail load of a CAISO Participating Transmission Owner, so it is not subject to the transmission access charges as prescribed in Section 26. As a result, any energy produced in the CAISO and transferred to the EIM Entity does not pay for CAISO transmission. Section 29.26(b) of the proposed CAISO Tariff requires reciprocal treatment, in that the EIM Transmission providers will not impose a separate charge for EIM Transfers flowing to the CAISO. During the stakeholder process, the CAISO stated this was a temporary provision during 1

35 the first year of operations and would be replaced later with a new mechanism. With the understanding this was a temporary transmission cost recovery proposal, SCE did not object. The interpretation of reciprocal treatment will be determined by each EIM Entity. PacifiCorp requires EIM Resources to purchase transmission to support of EIM sales. Contrary to the CAISO s assessment,1 SCE concludes that EIM resources will likely include transmission costs in their EIM energy bids, especially if they use PacifiCorp s option to purchase non-firm transmission service on an after-the-fact-basis. The impact of the difference between CAISO and PacifiCorp implementation of transmission costs is that California load will pay for PacifiCorp transmission (in order to receive power from PacifiCorp), but PacifiCorp load will not pay for CAISO transmission when is receives power from the CAISO. This is an unequal treatment that should not continue long term. SCE recommends the Commission require the CAISO to establish a process to create a more balanced transmission rate recovery between the CAISO and EIM Entities and return to the Commission with a compliance filing on this issue within one year. 2. Allocation of Flexible Constraint Costs The CAISO procures Flexible Ramping Constraint (FRC) to meet the variations in load and variable energy resources (VERs) such as wind and solar. The EIM proposal calculates the FRC costs separately for the CAISO balancing authority area and each EIM Entity. 2 Currently, the CAISO allocates the Flexible Ramping Constraint Costs with 25% assigned to Supply Deviations and 75% to Measured Demand. 3 The EIM proposal continues to allocate and recover these costs in the same manner to both supply and 1 CAISO Filing, p Proposed tariff Current CAISO Tariff

36 demand for load and resources located in the CAISO balancing authority. 4 However, the CAISO will assign the EIM Entity s Flexible Ramping Constraint Costs to the respective EIM Entity Scheduling Coordinator and leave it up to the discretion of each EIM Entity to develop a methodology to recover the cost. Allowing the EIM Entity to develop a different allocation method creates several problems. For example, PacifiCorp in its filed draft of tariffs to support EIM proposes to allocate this cost entirely to Measured Demand. 5 This is improper for two reasons. First, from a cost causation principle, it ignores the role of generators, especially VERs, which contribute additional flexibility costs to maintain system reliability. By ignoring costs causation principles, it removes the incentive for EIM participating generators to minimize negative supply deviations. Second, by not allocating these costs to supply, EIM participating generators are treated differently than generators located in the CAISO balancing authority area, which violates the principle of similar treatment to all participants in the Real Time Markets. SCE strongly supports a single set of market rule where possible. Similar treatment within the market helps ensure consistent incentives for all market participants. It reduces the likelihood of unintended consequences and limits parties ability to exploit different rules sets within the same market. It also eases the administrative process of ensuring that rules, and the interaction of rules, continues to produce just and reasonable results. As the EIM expands, allowing more and more unique rules within each new footprint will create unnecessary complications, and could potentially result in an unworkable end-state. SCE notes that unlike typical uplifts, here the CAISO has a method to charge for a specific product, and SCE believes product charges should be consistent throughout the entire CAISO real-time market (that is parties in both 4 Proposed tariff (a). 5 See PacifiCorp Filing at pp , and proposed tariff Attachment T,