On August 31, 2016, FERC conditionally approved Arizona Public Service Company’s (“APS”) request to amend its market-based rate tariff to facilitate APS’ participation in the western Energy Imbalance Market (“EIM”) administered by the California Independent System Operator Corporation (“CAISO”). Another western utility, Puget Sound Energy (“PSE”) is also expected to join the EIM. With respect to its market-based rate authorization to participate in the EIM, PSE filed a Non-Material Change in Status on March 9 in Docket ER10-2374-010. FERC has not yet acted on this submittal. On October 1, 2016, APS and PSE are expected to begin participating in the EIM alongside existing members—PacifiCorp, and NV Energy—to form a six-balancing authority area EIM footprint. 

As FERC explained in its order, the EIM is a market that facilitates the real-time economic dispatch of electric energy resources inside and outside CAISO’s footprint. Because most of the non-CAISO utilities in the West are vertically integrated, FERC has been concerned with such utilities exerting market power upon joining the EIM, particularly inside their home balancing area. Previously FERC has allowed PacifiCorp and NV Energy to participate in the EIM only by using mitigated, cost-based “Default Energy Bids” as determined by the CAISO Tariff.

In April 2016, APS submitted its own request to utilize market-based rates in the EIM, and included a market power analysis. In its filing, APS argued that even if had the ability to exercise market power in its own territory, CAISO’s market power mitigation measures, along with other planned market enhancements, would be sufficient to offset this ability. APS also proposed an alternative bidding methodology based on its own incremental costs, arguing that CAISO’s Default Energy Bid would not allow it to fully recover its costs at all times, especially those associated with fluctuating gas prices.

In its order, FERC largely rejected the arguments raised by APS, and will require APS to bid at the Default Energy Bid instead of at market-based rates. First, FERC expressed concern that CAISO market power mitigation measures would be insufficient in guarding against a generator’s physical withholding of resources to drive up market prices, and second, FERC noted that CAISO may currently lack the data necessary to address certain transmission constraints. FERC also rejected the alternate, cost-based bid methodology proposed by APS on the grounds that mitigation in the EIM should be consistent with the methodologies incorporated under the CAISO Tariff, which, FERC stated, already allow utilities to recover various costs.

Thus, as with PacifiCorp and NV Energy, FERC concluded it was necessary to similarly require APS to limit its EIM bids to the Default Energy Bid price, instead of participating at market-based rates. In so doing, FERC acknowledged the difficulty for utilities in forecasting their ability to exert market power prior to joining the EIM, and stated that, once a utility has been an EIM participant for at least a year, FERC would consider additional ex post market power analyses to determine whether to lift that utility’s market power mitigation restrictions. FERC ordered APS to submit a compliance filing within 30 days, reflecting the required modifications.

A copy of FERC’s Order can be found here.