On June 18, 2020, FERC denied rehearing, but granted partial clarification, of a 2019 order addressing certain market power mitigation reforms proposed by the California Independent System Operator Corporation (“CAISO”). In particular, FERC again rejected CAISO’s “Net Export Limit” proposal to enhance local market power mitigation in the western energy imbalance market (“EIM”). As FERC reiterated in its order, the Net Export Limit proposal could allow EIM resource owners to limit dispatch during periods of market power mitigation, resulting in unjust and unreasonable market outcomes.
As relevant to this order, CAISO imposes various mitigation measures when market conditions are uncompetitive, such as when certain areas are transmission-constrained thereby putting sellers located within such areas in a position to artificially raise prices above marginal costs due to lack of competitive alternatives. In July 2019, CAISO filed various proposals to enhance its market power mitigation processes, including the Net Export Limit proposal. As CAISO explained, under current market mitigation rules, increased exports out of (or decreased imports into) a constrained EIM entity Balancing Authority Area (“BAA”) can instigate power exports at mitigated bid prices (i.e. below marginal costs) and in quantities greater than required by the EIM. Because EIM participation is voluntary, these cost impacts effectively incentivize EIM entities to reduce energy offers and/or transmission available to support EIM transfers, which is overall adverse to the efficient functioning of the EIM market. To address this issue, CAISO proposed the Net Export Limit as an optional feature for EIM entities to limit additional dispatch of resources when their respective BAA is subject to bid mitigation. In a September 2019 order, FERC accepted some of CAISO’s market power mitigation proposals, but rejected the Net Export Limit proposal, finding that, among other things, the proposal could incentivize inefficient and uneconomic scheduling and bidding if EIM entities could game their bids to trigger the Net Export Limit as a binding constraint and receive resulting congestion revenues. In response, CAISO requested reconsideration or clarification regarding FERC’s rejection of the Net Export Limit proposal, as well as various other aspects of the September 2019 order. (See October 9, 2019 edition of the WER).
On rehearing, among other arguments, CAISO asserted that various findings underpinning FERC’s rejection of the Net Export Limit proposal were unsubstantiated. CAISO specifically asserted that the Net Export Limit would encourage suppliers to offer greater levels of supply into the EIM, and that FERC had failed to justify how the proposal would lead to inefficient and uneconomic scheduling and bidding. FERC disagreed on both counts. According to FERC, the Net Export Limit proposal could result in unjust and unreasonable market outcomes, as demonstrated through various examples. For instance, FERC reasoned, if bids in an exporting BAA were mitigated, then by volunteering for a Net Export Limit, the exporting BAA EIM entity could effectively raise the locational marginal prices (“LMP”) in an importing BAA, thereby receiving both congestion revenues and higher energy prices generally from the importing BAA. In other words, the exporting EIM entity would be able to create artificial constraints, which raises prices for load and generation for the importing BAA, as well as generates congestion payments payable to the exporting EIM entity. In FERC’s view, the possibility that the Net Export Limit may increase EIM participation did not render the proposal just and reasonable, as resource owners still retained discretion to limit dispatch during periods of market power mitigation.
Notwithstanding that FERC denied CAISO’s rehearing request, the Commission granted CAISO’s motion for clarification on the issue of whether load in a market power mitigated BAA can be served by unmitigated bids. FERC clarified it did not intend to conclude that unmitigated bids would be effective in determining the LMP to serve load in an import-constrained BAA subject to local market power mitigation. However, FERC noted, the Net Export Limit would unfairly allow an EIM entity to cap its net transfers, resulting in supply restrictions that impact dispatches between BAAs.
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