2.
Provide your organization's comments on the existing draft principles in the discussion paper, and provide suggestions for any that should be added:
On June 30, 2017, the CAISO published a straw proposal for Commitment Costs and Default Energy Bid Enhancements including design principles to respect while developing the proposals to address Scheduling Coordinators challenges with effectively managing assets, including specifically gas assets.[1] Principles were refined and finalized in the Draft Final Proposal issued in December 2017 for principles under competitive conditions, uncompetitive conditions that apply to mitigation, and uncompetitive conditions that apply to mitigated prices.[2]
The previously identified principles should still be valid and apply to any discussions on gas management. We recommend the CAISO not start from scratch but reaffirm or clarify whether its principles on this topic have evolved in the last five years and if so, which ones and in what way. The CAISO’s principles as of 2019 are:
- Competitive Conditions
- Competition should discipline markets because it limits market power while providing profit maximizing incentives
- Suppliers are incentivized to offer based on asset valuation because market based offers allow suppliers to submit prices at which they are willing to sell energy. Market based offer prices may differ from production cost estimates by including risk margins (could vary by risk tolerance levels), reflecting subsidies or contracts impacts, and reflecting other factors such as preferred use of resources.
- Resources without must-offer-obligations should have the complete flexibility to select when they participate in the market.
- Reduce barriers to entry into the CAISO markets regardless of technology type
- Market-based offers should be subject to “circuit breaker” caps to ensure that potential uncertainty affecting the mitigation test would not result in a significant false negative causing potential adverse market impacts.
- Uncompetitive conditions – mitigation testing
- Market must be protected against market power by testing for insufficient supply without which the market cannot provide competitive incentives.
- Market power mitigation three pivotal supplier test is sufficient because it is a robust design and applies a consistent methodology across the three-part offer.
- Market should only mitigate when a mitigation test shows potential to exercise market power and balance a reasonable output of false positives/false negatives
- Any methodology should consider implementation concerns, such as the need to balance costs against potential benefits and provide sufficient transparency
- Uncompetitive conditions – reference level design
- Market produces efficient dispatch solution and price signals when suppliers offers are reasonable reflections of the suppliers’ cost expectations.
- Suppliers’ offers must only be mitigated to price levels that are a reasonable reflection of suppliers’ cost expectations.
- Suppliers should not be able to value assets based on monetized risks, subsidies, contracts, or other factors including ability to reflect fuel availability in its offers through a risk margin or scarcity value to reflect risks of negative reliability externalities on a routine basis.
- Suppliers should have ability to reflect fuel availability in its offers through a risk margin or scarcity value to reflect risks of negative reliability externalities as an exception so the CAISO and supplier can avoid affecting reliability.[3]
- Gas and non-gas units with unique cost methods should be able to negotiate both commitment cost and energy cost estimate methodologies.
- Gas and non-gas units should be able to provide adjustments to reflect price volatility and if submitted market should validate supplier submitted cost based as reasonable reflections of suppliers’ cost expectations.
- Validation methods should screen against artificial pricing impacts, not suppliers’ ability to predict actual costs. At the time of offer submission, costs should be a reflection of costs expectations; however, actual costs may differ.
- Market should support an ex post cost recovery process when adjusted cost based offers cannot be validated prior to the market run. This ex post process will not be an avenue for recovery for offers with “wrong” cost expectations or validation thresholds (or cost caps) did not effectively capture reasonable adjustments.
[1] Commitment Cost and Default Energy Bid Enhancements, Straw Proposal, June 30, 2017, Section 5, StrawProposal_CommitmentCosts_DefaultEnergyBidEnhancements.pdf (caiso.com).
[2] Commitment Cost and Default Energy Bid Enhancements, Draft Final Proposal, August 23, 2017, Section 6, DraftFinalProposal_CommitmentCosts_DefaultEnergyBidEnhancements.pdf (caiso.com).
[3] In Commitment Costs and Default Energy Bid Enhancements, stakeholders and the CAISO wrestled with a challenging policy topic on how the CAISO markets can aid the gas operators when the gas system issues flow orders (operational flow orders OFO) by which electric generators awards need to respect the operating constraint issued by the gas system operator. This principle reflects the sophistication of the policy discussions as CAISO policy aligned on that resource offers should not incorporate costs of non-compliance for OFO. Reference levels should incorporate the negative externality of violating an OFO which imposes reliability harm onto the gas system. CCDEBE Second Revised Final Proposal cites this challenge on Page 12 and describes how reference level adjustments should appropriately be used only to reflect the risk adder to reflect the need to manage OFO in its mitigated offers on Page 37, http://www.caiso.com/InitiativeDocuments/SecondRevisedDraftFinalProposal-CommitmentCosts-DefaultEnergyBidEnhancements.pdf. For additional background on the problem statement see the CCDEBE issue paper in Section 3.1.3, http://www.caiso.com/InitiativeDocuments/IssuePaper_CommitmentCost_DefaultEnergyBidEnhancements.pdf. Please see page 60 for a discussion in response to stakeholder comments on this issue in the Draft Final Proposal explaining why the CAISO policy is to include the risks only through reference level adjustments, http://www.caiso.com/InitiativeDocuments/DraftFinalProposal_CommitmentCosts_DefaultEnergyBidEnhancements.pdf.
3.
Provide your organization's comments on the existing topics and problem statements in the discussion paper, and provide suggestions for any that should be added:
On November 18, 2016, the CAISO published a 59-page issue paper asking for feedback on whether the problem statement contained in that issue paper was complete and accurate. The background described in detail gas-electric markets and the challenges that gas resources face trying to effectively manage in the day-ahead and real-time markets. For a detailed, largely still up to date description of the issues identified for gas management, please review Commitment Cost and Default Energy Bid Enhancements Issue Paper.[1] CAISO described in detail an important background on gas-electric markets including their misalignments, challenges facing suppliers, and challenges facing gas systems. The background also summarizes some of the gas cost tools the CAISO uses, and additional ones have been added with the portion of CCDEBE that was implemented. The problem statements were further refined as described in the Draft Final Proposal posted on August 23, 2017[2] and streamlined further in the Second Revised Final Proposal[3].
The problem statements identified in the Discussion Paper are largely captured in CCDEBE’s issue paper. CAISO developed that issue paper through interviews and coordination with CAISO gas Scheduling Coordinators and non-CAISO WEIM entities. CCDEBE represents years of discussion on issues across WEIM effectively managing gas assets. The proposed enhancements approved by the Board are designed and were stakeholder through a robust stakeholder process to address many of the concerns raised in the Discussion Paper. We believe it is a problem for the CAISO to hold back market enhancements approved by the Board without explanation that were developed to address these issues. This needs to be addressed so CAISO can implement this project without delaying further with another stakeholder policy effort.
In addition to CCDEBE, we believe that there are many existing procedures and tools that should be providing value to gas resources to manage other challenges through their bids, which we question given the Discussion Paper whether they are being utilized and if not, why these tools are not effective. We believe it is a problem if tools exist and they are either not effective or not desired. This should be understood.
[1] Commitment Cost and Default Energy Bid Enhancements Issue Paper, November 18, 2016, IssuePaper_CommitmentCost_DefaultEnergyBidEnhancements.pdf (caiso.com).
[2] Commitment Cost and Default Energy Bid Enhancements, Draft Final Proposal, August 23, 2017, Section 5, DraftFinalProposal_CommitmentCosts_DefaultEnergyBidEnhancements.pdf (caiso.com).
[3] Commitment Cost and Default Energy Bid Enhancements, Second Revised Final Proposal, March 2, 2018, Section 4, SecondRevisedDraftFinalProposal-CommitmentCosts-DefaultEnergyBidEnhancements.pdf (caiso.com).
5.
Are you interested in presenting your experience or area of expertise? If yes, how does your presentation topic relate to problem statements being discussed?
We are not inclined to offer to present. The below background information should be broadly shared with all WEIM participants whether located inside or outside California. Confirming that these tools are working effectively, being used, and if not yet implemented is done so expeditiously is critical. This first step should occur and then market participants should share whether it addresses their needs, or continues to fall short, after all tools are implemented or pursued after gaining experience.
Bidding Rules Enhancements
CAISO Board of Governors approved Commitment Cost Bidding Improvements at the March 25, 2016 Board of Governors meeting.[1] Select elements from Bidding Rules Enhancements were included in this combined board package along with Commitment Cost Enhancements Phase 3 policy proposal. In Bidding Rules Enhancements, Board approved and CAISO implemented process for fuel region enhancements introduced to address WEIM-wide gas management issues. CAISO implemented changes to “create a more flexible process for scheduling coordinators to request adjustments to the fuel region values for registration in the Master File to better represent resource-specific costs.”[2] Scheduling coordinators can introduce a new resource-specific fuel region by submitting a request to add a new fuel region to Masterfile field. A fuel region will be defined as a unique combination of commodity price, transportation rate, and cap-and-trade credit.
On Page 20, CAISO is referring non-CAISO WEIM entities challenges raised during the stakeholder effort on areas with access to multiple trading hubs to source gas supply and multiple pipelines and rates that occur in the non-CAISO WEIM areas. CAISO stated:
“Through this stakeholder process, it has come to light that some entities may ship its fuel across more than one pipeline company. The ISO finds establishing unique fuel regions based on these companies and allowing the resource to update iteratively would introduce an overly burdensome validation process. The ISO proposes on resource request to define a resource-specific fuel region representing a combined commodity price or combined base gas transportation rate based on a weighted average. Where the combined price or rate is weighted by the percent of volumetric usage25 shipped by each company in the prior month, if available, and averaged to represent a reasonable estimate of resource-specific costs. Anticipating the appropriate weighted average costs is fairly static, ISO propose to limit revisions to weights annually.”[3]
It is my belief that many entities that this rule change to allow asking for a blended fuel region value that represents a weighted average of various pipeline rates and hub indices is not being used to its greatest extent. I hope to see WEIM entities located in areas like this seeking new fuel regions to better reflect their expected costs.
Another important functionality update implemented with Bidding Rules was the ability to re-bid commitment costs (albeit only a single value that applies across the horizon) in real-time if it did not receive a binding day-ahead commitment. It is worth noting that once committed by the real-time market, the ISO has automated bidding rules to ensure the commitment cost bids are locked at the last bid price level used by the market to initiate the commitment and maintained through the resource’s inter-temporal constraint (e.g. minimum run time, minimum on time). We note this additional item for clarity that the re-bidding in real-time is existing functionality and if you have not been committed yet and there is a change in gas prices or risks that it is important to make sure you have updated your commitment cost offers so that any real-time commitment is based on the best available gas market information. This is the intent of this functionality change.
Generally, it would be helpful for CAISO to report on how often these two key gas management procedures implemented under BRE are being used today inside CAISO versus in non-CAISO areas. This will help identify if there is sufficient training for Scheduling Coordinators on these options.
Commitment Cost Enhancements Phase 3
In the Commitment Cost Bidding Improvements Board package, CAISO also brought the Commitment Cost Enhancements Phase 3 proposed changes for a successful board approval. This functionality was implemented but the CAISO has not performed a review on how the Opportunity Cost Calculator (OCC) and its negotiated OC adders are performing to manage uses of gas resources subject to regulatory or design limitations.
Given the concerns raised by the gas resource managers identified in this discussion paper, it indicates to me either entities are not seeking the OCC CAISO added functionality for an Opportunity Cost adder for use limited resources, largely with gas resources in mind subject generally to monthly, annual, or rolling 12-month regulatory imposed use limitations. The OCC adder is needed to reflect the opportunity cost of using a limited use resource sooner than it would be more optimally used to meet the market’s needs. CAISO recognized when launching the new Opportunity Cost Calculator that it would have a learning curve.
CAISO committed in Draft Final Proposal for CCE3 to consider enhancements, stating:
“As the ISO and market participants gain experience with the opportunity cost model and using the opportunity cost as a management tool, the ISO will consider future enhancements to both the policy and model as warranted. Potential future enhancements and considerations include:
- Re-evaluating the frequency of model re-runs based on the time needed for each updated,
- Considering modifications to using 90% of a resource’s limitation in the model, or other ways in which to further enhance the effectiveness of the opportunity cost as a management tool such as possibly including an estimated RA payment, and
- Evaluate how well the opportunity cost model rations starts throughout the year, particularly for use-limited RA resources.
Vistra believes that the existing OCC runs may be inaccurately finding use limitations, that need to be managed by gas resources subject to binding regulatory or design limitations, not binding and producing results that undervalue the actual opportunity costs of its starts, run hours, or energy. Additionally, Vistra believes CAISO negotiated OCC adder process is not effectively allowing for establishing a negotiated OCC when this occurs. CAISO should follow through on its commitment to make OCC model enhancements and to review how use limited gas resources are able to ration their starts today to identify need to update OCC model and negotiated OCC rules and procedures.
Generally, it would be helpful for CAISO to report on the range of OC adders that the OCC is producing and how often an OCC result is found insufficient by the SC where they seek a negotiated OC adder. This will help confirm our theory on the effectiveness of the existing adders, whether calculated or negotiated.
Commitment Cost and Default Energy Bid Enhancements
One of the more recent CAISO efforts that was facilitated specifically to be mindful to include non-CAISO gas management concerns in focus is called Commitment Cost and Default Energy Bid Enhancements. CAISO took pains to clarify its enhancements would apply to all gas resources across the footprint included in WEIM.
CAISO should follow through on its commitment to implement the long overdue commitment cost bidding improvements approved by the Board of Governors on March 22, 2018.[4] The CCDEBE proposals to move to market-based commitment costs subject to caps and dynamic market power mitigation are designed to fulfill a commitment that CAISO Management made on August 29, 2007 to its Board of Governors.[5]
CCDEBE approved items critical to managing gas resources, especially in non-CAISO areas, that have not been implemented or are not being supported are to:
- Replace static commitment cost cap with “market-based” commitment cost bids subject to cap and commitment cost local market power mitigation test. This change was envisioned as addressing a lot of the challenging gas management issues that gas resources face that cannot and should not be coded into an optimization model for energy and ancillary services. The most appropriate way to allow Scheduling Coordinators that operate gas resources to reflect the risks and opportunity costs associated with commitment of their assets including running at Minimum Load is through allowing resources that are not situated with the ability to exercise market power the flexibility to submit market-based commitment cost bids that can reflect their risks and opportunity cost adders. The following Board approved policy changes should be implemented as soon as possible:
- Management proposed to phase in the market-based bids to have the chance to confirm the commitment cost local market power mitigation was working effectively, by initially setting the market-based cap for the first 18 months at 150% of applicable reference level and increase to 300%. CAISO Management proposed to phase in 300% because as stated, “it provides a reasonable range based on historical gas-price volatility to capture costs the vast majority of the time and because it is similar to the bid amounts subject to mitigation under other ISO’s conduct and impact test commitment cost market power mitigation methodologies”.[6]
- Management proposed to phase in the mitigated commitment cost levels while market participants and CAISO gain experience by mitigating to 125% of reference level (same as today’s cap) for first 18 months. After which, mitigated commitment cost would be at 110% of reference level similar to mitigated energy reference level.
- Enhance its minimum load rerate functionality that performs a DEB integration into the Minimum Load Cost Proxy Cost to add a market-based bid ratio so the integrated DEB is scaled based on the ratio of the Minimum Load Market-Based Bid after bid validation to the minimum load cost reference level.
- Adding a new dynamic market power test for commitment costs and proposing specific mitigation rules in light of the large scale bid reform including to mitigate resources within a minimum online constraint, mitigate exceptional dispatches commitment costs, settle exceptional dispatches at commitment cost bids at the time the exceptional dispatch was issued, and settle resources in full ramp at bid used in interval.
- Allow hourly Minimum Load Bids: Hourly Minimum Load Bids is the solution intended to address the gas-electric commodity horizon misalignment because the two different gas day prices could be reflected in different Minimum Load Bids once hourly minimum load is implemented. Gas resources can manage the change in fuel costs in their energy bids today and under a Minimum Load Design it is important to implement this change to give them flexibility to change the fuel cost across hours to address this. Additionally, this enhancement was envisioned addressing periods where the gas system is tighter and a risk adder or opportunity cost for higher (or lower) gas burn levels need reflected in bids in some hours and not others to better manage through periods observing both gas and electric operational issues. It is important to recognize that the ability to bid market-based minimum load costs or request a minimum load reference level adjustment will be essential to ensuring the two different gas day indices can be incorporated up to any commitment cost bid limits whether the cap or if subject to dynamic mitigation.
- Note, once a binding start-up instruction is issued the market will apply re-bidding rules and lock the re-bidding window but under hourly MLC bids will lock to the value by hour instead of a single value. This was existing functionality, and found appropriate to mitigate gaming concerns with hourly minimum load bidding.
- Also includes adding a commitment cost no bid rule will be to settle an interval without commitment cost bids where the resource receives a dispatch instruction at its commitment cost reference levels after minimum load re-rate process to perform a DEB integration with the new ratio of minimum load bid to minimum load reference level scalar into the revised MLC used for settlements.
- Allow reference level adjustments to reflect the risks of incurring a non-compliance charge a basis for requesting a reference level adjustment. These are the hours that a risk margin should be included in the bids to enable the market to better support shifting the merit order to produce a market solution that co-optimizes electric and natural gas constrained conditions. The purpose of this is to operate a market that endeavors to avoid violating constraints on either systems – ideally risk margin should shift merit order so that the penalty is not incurred.[7] Reference level adjustments are to be accepted for “Real-time supply bids reflecting risk margin or scarcity value needed to support reliability on upstream fuel systems only eligible for adjustments in hours after 4PM Pacific under scenarios where gas pipeline instruction has been released or gas system capacity levels are insufficient to deliver fuel supply to avoid violating a gas pipeline instructions”.[8] CAISO Market Instruments BPM Section O.3 states, “The non-compliance charge associated with the specific level of flow order cannot be included in the fuel cost component of a submitted automated or manual Reference Level Change Request. Allowing market participants to recover gas imbalance charges would provide a disincentive for resources to follow gas pipeline instructions.”[9] While actual incurred non-compliance charges cannot be passed through for cost recovery through including in a reference level, the risk of non-compliance charges being incurred is eligible in a refernce level request. There was discussion during the FERC filing on this topic, but the focus was on not paying for actual costs incurred in the after-the-fact cost recovery of any reference level adjustment. The CAISO should confirm that it implemented CCDEBE to allow ex ante reference level adjustements to include the negative externality up to the ex ante verificiation. This BPM language should be clarified to make clear that the risks (negative externality) is appropriate with documentation on request, but the after the fact recovery is ineligible.
We request the CAISO implement its approved bidding rule changes to address the gas management issues raised and explored in CCDEBE as soon as possible. In instances, where CAISO has taken liberties in implementing what was board approved, reference level adjustment appropriate purposes and documentation, the CAISO should expediently revise its BPM to make clear that the approved policies from CCDEBE in the BPM and educate stakeholders on when it is appropriate, and documentation needed, to submit a reference level adjustment based on non-compliance risks consistent with CCDEBE policy and the discussion in the FERC record.
[1] Commitment Cost Bidding Improvements, Board of Governors, March 25, 2016, http://www.caiso.com/Pages/documentsbygroup.aspx?GroupID=4ABEF498-95D6-4EC8-9ACA-978CC8D14237.
[2] Bidding Rules Enhancements Revised Draft Final Proposal, March 22, 2016, Page 19-20, RevisedDraftFinalProposal-BiddingRulesEnhancements-GeneratorCommitmentCostImprovements-redlined.pdf (caiso.com).
[3] Id at Page 20. The ability to seek a new Gas Fuel Region is explained in Market Instruments BPM, Section C.2.1.
[4] Commitment Costs and Default Energy Bid Enhancements Board of Governors Approved Proposal, March 22, 2018, http://www.caiso.com/Pages/documentsbygroup.aspx?GroupID=A856A78D-5C53-4B74-8FD9-06B47BA42FE3.
[5] Decision on Bid Caps for Start-up and Minimum Load Bids under MRTU, September 7, 2007, http://www.caiso.com/Documents/070906DecisiononBidCaps_Start-upandMinimumLoadBidsunderMRTU-Memo.pdf.
[6] Commitment Cost and Default Energy Bid Enhancements Approved Board of Governors Memo, March 22, 2018, Page 5, http://www.caiso.com/Documents/Decision_CCDEBEProposal-Memo-Mar2018.pdf.
[7] See Draft Final Proposal for rationale, Page 60, http://www.caiso.com/InitiativeDocuments/DraftFinalProposal_CommitmentCosts_DefaultEnergyBidEnhancements.pdf.
[8] Second Revised Draft Final Proposal Page 37 for description of when and how negative reliability externality for non-compliance risks is supposed to be allowed.
[9][9] Market Instruments BPM at Page 441.
