4. Whether to Allow IOU Participation
in Convergence Bidding
We must first address the threshold question of whether to allow IOU to engage in convergence bidding activities in CAISO's electricity markets. We face a range of options, from not authorizing IOU participation, to authorizing full and unrestricted IOU participation in convergence bidding. An authorization of any pass-through of losses to ratepayers requires the establishment of upfront procurement standards, assessment of this new market's effect on the IOUs' overall procurement risk management, and determination of an appropriate allocation of risks and rewards between ratepayers and shareholders.
4.1. Parties Position
CAISO, PG&E, Reid, SCE, SDG&E, and TURN agree that the IOUs should be allowed to participate in convergence bidding.16
CAISO believes that allowing IOUs to participate will help achieve the market benefits of convergence bidding by providing greater liquidity and increasing market efficiencies.17 CAISO also states that not allowing the IOUs to participate "will require other market participants to take the positions necessary to converge prices and to counteract potential gaming strategies that may be exercised by suppliers."18
PG&E believes that "utility participation in convergence bidding would benefit ratepayers through lower CAISO market risks and lower procurement costs..."19 SCE also believes that IOUs should be allowed to participate in convergence bidding as part of their AB 57 procurement plans.20 SCE argues that "[i]f IOUs are not permitted to participate in convergence bidding, then their customers may potentially face higher costs and risks, including higher costs and risks attributable to the convergence bidding activities of other market participants."21 Similarly, SDG&E believes that "[i]f IOUs are prohibited from participating in [convergence bidding], IOUs have a competitive disadvantage to other market participants, who would be able to benefit from [convergence bidding]."22
On whether the IOUs should be authorized to participate in convergence bidding, TURN submits that "IOUs must be granted such authorization."23 While TURN has significant concerns about the entire concept of allowing convergence bidding in CAISO markets, TURN believes that "[a]bsent IOU participation, there is a very real risk that other parties may attempt to use [convergence] bidding to manipulate the market to the disadvantage of consumers."24
DRA believes that the Commission should weigh potential benefits against risks, consider whether adequate safeguards will be in place by FERC approval of the CAISO's proposal, and consider whether IOU upfront standards will adequately protect ratepayers.25 DRA further requests that the Commission authorize IOU convergence bidding participation on an interim basis only with an assessment after one year.26 After a year, the Commission would assess whether benefits outweigh costs to IOU ratepayers by convergence bidding participation, relative success and failure of IOU bidding strategies, and whether to extend or modify upfront standards authorized initially. DRA requests that such assessment should not focus on the reasonableness of past bids but whether prospective changes should be made to upfront standards.
PE recommends that procedural protections and a comprehensive convergence bidding impact study are needed, and that the Commission should not authorize IOU participation in the CAISO convergence bidding market before the potential impact has been thoroughly evaluated.27 PE further suggests that the comprehensive studies should be conducted through a Commission-led stakeholder process that addresses both the intended and unintended consequence of individual convergence bidding strategies and impact on renewable and conventional market.
4.2. Discussion
We conclude that precluding the IOUs from participating in convergence bidding would prevent them from achieving potential benefits for ratepayers. Therefore we grant each IOU interim authority to participate in convergence bidding in the CAISO markets until a subsequent decision in this or its successor proceeding supersedes or modifies this authority. This interim authority is not unlimited in its scope; we will allow the IOUs to participate in convergence subject to the limitations and clarifications made herein.
We recognize that the outcome of IOU participation in convergence bidding activities is uncertain. However, the authority granted through this decision is only interim authority, and will continue to be reviewed. The ultimate scope of IOU authority, whether in this proceeding or a subsequent proceeding, may increase or decrease the authority granted here based on the experience gained during this interim period. Ultimately, the efficacy of individual convergence bids will be based on cleared prices in CAISO's Day-Ahead and Real-Time markets. An after-the-fact assessment of IOU convergence bidding performance may not always reveal whether the hedges were prudent at the time they were executed. Accordingly, our authorization is based upon upfront standards and not post-hoc reasonableness reviews.
16 CAISO July 19th 2010 Comments at 1; PG&E July 19th 2010 Response at 2; SCE July 19th 2010 Response at 3; SDG&E July 19th 2010 Response at 2; and TURN July 30th 2010 Response at 1.
17 CAISO July 19th 2010 Comments at 1-2.
18 Id. at 2.
19 PG&E July 19th 2010 Response at 2.
20 SCE July 19th 2010 Response at 2.
21 Id. at 3.
22 SDG&E July 19th 2010 Response at 4-6.
23 TURN July 30th 2010 Comments at 1.
24 Id. at 1.
25 DRA July 30th 2010 Comments at 2.
26 DRA August 30, 2010 Comments at 6.
27 PE July 30th 2010 Comments at 1.
