On September 30, 2019, FERC accepted in part and rejected in part, the California Independent System Operator’s (“CAISO”) July 2, 2019 proposed revisions (“July 2 Filing”)  to its open access transmission tariff (“Tariff”) to include three unrelated mitigation measures designed to facilitate the participation of fast-ramping hydroelectric resources in the western energy imbalance market (“EIM”). FERC accepted two aspects of CAISO’s proposal related to the mitigation timing (the “Mitigation Timing” proposal and a hydro default energy bid (“DEB”) proposal, referred to as the “Hydro DEB” proposal), but rejected CAISO’s proposal to allow an EIM entity balancing authority area (“BAA”) in the real-time market to limit dispatch of incremental net exports under certain conditions (the “Net Export Limit” proposal).

CAISO filed the Tariff revisions proposed in the July 2 Filing pursuant to Federal Power Act section 205 to improve the local market power mitigation process and cost-based bids used for mitigating such resources. Under the Mitigation Timing proposal, CAISO proposed to modify the current market rules pursuant to which CAISO mitigates a resource in all subsequent market intervals for the balance of the hour when local market power mitigation is triggered in the 15-minute market interval. CAISO explained that under these rules, EIM resources could be forced to sell energy for transfers out of their BAA at mitigated prices in market intervals where no market power was detected. To address this concern, CAISO proposed to eliminate the current rules for balance-of-the-hour mitigation to limit the instances where CAISO dispatches resources at mitigated bid prices when local market power mitigation is not actually triggered. FERC found that the Mitigation Timing proposal will improve the accuracy of CAISO’s market power mitigation and was a just and reasonable improvement to CAISO’s existing market rules, and therefore accepted CAISO Mitigation Timing proposal.

CAISO offered its Hydro DEB proposal to implement a new DEB option that would apply to all hydroelectric resources with storage capability that participate in the CAISO day-ahead and real-time markets or the EIM. This proposal was intended to address the concern that CAISO’s existing DEB calculation methodology does not accurately reflect actual opportunity costs of such resources. FERC approved CAISO’s Hydro DEB proposal, finding that it represents a transparent alternative to the existing negotiated DEB option that will allow hydroelectric resources with storage to reflect their opportunity costs in their DEBs, and ensure hydroelectric resources are dispatched when they are most needed.

Although FERC accepted two of CAISO’s proposals, as described above, it rejected CAISO’s Net Export proposal. Through this proposal, CAISO proposed to limit incremental net exports from an EIM entity BAA area in market intervals when its participating resources’ bids are mitigated, while recognizing the amount of energy the exporting BAA was required to offer to the EIM. CAISO explained that the Net Export Limit proposal was intended to address situations where the CAISO market dispatches an EIM entity BAA to export energy only because the market mitigated its participating resources’ bids. CAISO further argued that its proposal is needed to address the unique situation faced by hydroelectric resources with storage capability that are dispatched at DEBs that they believe do not reflect their true opportunity costs. In the September 30 Order, FERC rejected CAISO’s Net Export limit proposal, finding that CAISO had not demonstrated that it was just and reasonable. Specifically, FERC found that the Net Export Limit proposal was inconsistent with the market power mitigation framework in the EIM, was not an “appropriately calibrated solution” to address CAISO’s concerns, and could weaken CAISO’s market power mitigation process. On the latter point, FERC found that the proposal could undermine CAISO’s independent operation of the EIM by allowing EIM entities discretion over which constraints are applied to them. Regarding CAISO’s concern about hydro resources, FERC found that the Hydro DEB proposal that FERC accepted would address CAISO’s concerns without the drawbacks of the Net Export Limit.

The FERC-accepted portions of CAISO’s Tariff revisions will go into effect on October 14, 2019. FERC directed CAISO to notify it of the actual effective date of the Tariff revisions within five business days of their implementation.

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