On November 20, 2009, the California Independent System Operator Corporation (“CAISO”) filed its Convergence Bidding Design Policy (“Conceptual Filing”) to the Federal Energy Regulatory Commission (“FERC” or the “Commission”).  Convergence bidding allows for the submission of bids to buy or sell electricity in the day–ahead market that will not be consumed or produced by the bidder in real time.  Instead, these “virtual” transactions enable market participants to either buy or sell electricity in the day-ahead market and then undertake the opposing obligation to sell or buy the same amount of electricity in real time. On February 18, 2010, FERC approved a majority of the Conceptual Filing.  While the Conceptual Filing did not contain tariff sheets to implement convergence bidding, FERC asked CAISO to submit a section 205 tariff filing that would do so, and to file monthly status updates until convergence bidding is implemented. 
FERC approved the following design elements in principle in CAISO’s Conceptual Filing:

• Scheduling coordinators, acting on behalf of entities in convergence bidding entity agreements, will be able to submit convergence bids at all internal pricing nodes, including aggregated pricing nodes, and at the interties;
• The existing local market power mitigation and reliability requirements process will continue to be applied and the CAISO Department of Market Monitoring will closely monitor convergence bidding;
• The ability of CAISO to suspend convergence bidding for a single entity or the market as a whole at any or all nodes in the event that convergence bidding: (1) detrimentally affects grid or market operations; (2) contributes to an unwarranted divergence between prices in the integrated forward market and real-time market; or (3) otherwise distorts competitive market outcomes;
• A settlement rule will be applied to deter adverse incentives to engage in strategic convergence bidding;
• Each convergence bidding entity must either be a scheduling coordinator or use a scheduling coordinator to submit convergence bids; CAISO will administer a registration process;
• Costs attributable to convergence bidding will be allocated to scheduling coordinators through special transaction charges, uplift charges and grid management charges; and
• A dynamic credit checking policy will be implemented to ensure the creditworthiness of convergence bidding entities.

In its order, FERC approved in principle most of the design elements in the Conceptual Filing.  FERC did however, order the following modifications:

• FERC encouraged CAISO to provide additional information regarding proposed rules in connection with implementing convergence bidding on a nodal level;
• FERC rejected the two year period that CAISO proposed for the phase-in of unlimited convergence bidding, but stated that CAISO may propose a much shorter time period for position limits, if deemed necessary;
• FERC rejected CAISO’s plan for 36 month position limits at interties, but again, allowed CAISO to propose a significantly short time period for the position limits;
• FERC ordered that CAISO’s proposed authority to suspend convergence bidding must be granted subject to clearly defined tariff provisions which state the instances where this will take place;
• FERC found that acceptance of CAISO’s proposed charges for convergence bidding is subject to a section 205 filing demonstrating that the level of charges and tariff provisions are just and reasonable; and
• FERC will require additional support in CAISO’s section 205 filing to find out whether or not proposed allocation of uplift costs to convergence bidders are just and reasonable.

FERC also granted CAISO’s Motion for Extension of Time to implement convergence bidding until February 1, 2011 and ordered that CAISO file monthly status updates with the Commission beginning April 1, 2010 regarding progress toward implementation of convergence bidding.  Finally, FERC denied a request to hold a technical conference on remaining convergence bidding issues.

FERC’s full order is available at www.ferc.gov under Docket Nos. ER10-300-000 and ER06-615-000.