On October 26, 2012, FERC accepted two related tariff amendments that give the California Independent System Operator Corporation’s (“CAISO”) more authority to reduce payments to generators that are subject to non-market “exceptional dispatch.”  The CAISO made the amendments over concerns that certain suppliers could exercise market power by bidding in a way that makes them more likely to be exceptionally dispatched, earning higher revenues than the market would have provided otherwise.

In the CAISO market, the “exceptional dispatch” mechanism is a tool that allows CAISO to manually direct units to commit or dispatch resources based upon reliability needs.  When CAISO determines that additional resources are needed to maintain reliable grid operations that were not predicted within the 60-minute timeframe by its modeling software, CAISO will manually direct a unit within its balancing authority to either (1) start-up and operate at a minimum level or (2) run at a level above its current operating level. 

Under the revised tariff, CAISO will be able to mitigate payments to units when they are exceptionally dispatched to their “minimum dispatchable level,” or the level at which they would be available to respond to further reliability-related dispatch instructions.  When exceptionally dispatched to minimum dispatchable level, a resource will no longer be able to set the market-clearing price.  The CAISO also revised its rules to stem increasing imbalance energy charges being incurred as a result of exceptional dispatches.  Under the old rules, a generator could earn its bid price for residual imbalance energy associated with its ramping under an exceptional dispatch, even if the exceptional dispatch payments were mitigated.  The amended rules will reduce imbalance payments to generators subject to exceptional dispatch whose bids far exceed their costs.

In an August 28 filing, CAISO stated that it had observed specific bidding practices by a market participant designed to increase the probability that resources would be exceptionally dispatched to meet reliability needs.  CAISO claimed in its proposal that this strategy resulted in the market participant being paid at or near the price cap levels of $1,000 per MWh.  CAISO further stated that it had observed this bidding strategy six times from June to August 2012, resulting in CAISO paying the market participant $2.8 million more than it would have if the proposed mitigation measures for exceptional dispatch were already in place. 

In its order, FERC held that CAISO proved that its proposed mitigation measures were needed to prevent the opportunity for market manipulation.  Specifically, FERC noted that the same 10 units accounted for 95 percent of CAISO’s exceptional dispatches.  As such, CAISO’s proposed mitigating measures were found to be necessary to ensure competitive practices and prices within the market.  FERC also noted that CAISO’s extensive use of the exceptional dispatch method and the limitations of its market modeling software – which may not capture all ramping constraints beyond the 60-minute time horizon –  presented the opportunity for market manipulation to occur, and warranted the grant of exceptional dispatch mitigation authority. 

While approving the revisions, FERC cautioned CAISO about the extensive use of exceptional dispatches to meet reliability needs and the reliance on out-of-market solutions.  FERC noted that exceptional dispatches were designed to be used in cases only of genuine emergency, and the overuse of such out-of-market tactics can result in the artificial suppression of actual market prices.  As such, FERC directed CAISO to file a report describing the measures taken to reduce the reliance on the use of exceptional dispatch within 12 months after the issuance of FERC’s order.

Lastly, FERC reiterated its prior authorization for FERC’s Office of Enforcement to conduct a formal, non-pubic investigation, with subpoena authority into the bidding practices that CAISO described in its August filing.  Going forward, the Office of Enforcement will determine if the bidding practices described by CAISO violated any FERC orders, rules, or regulations. 

A copy of FERC’s order is available here.