5. IOU Convergence Biding Proposals

PG&E, SDG&E and SCE submitted different bidding proposals on how they intend to participate in convergence bidding. We discuss the IOUs' proposals below.

5.1. PG&E's Proposal

PG&E believes that IOU participation in convergence bidding should reduce exposure to Real-Time market risk associated with unplanned generation outages, and allow improved market dispatches of PG&E's generation facilities.²⁸

PG&E's convergence bidding proposal includes five elements:

1) A convergence bidding strategy to hedge against Real-Time market risks;

2) Meetings with its Procurement Review Group (PRG) to review convergence bidding activities quarterly;

3) A quarterly compliance report to record costs and revenues related to convergence bidding in Energy Resource Recovery Account (ERRA);

4) Inclusion of the approved convergence bidding proposal in PG&E's conformed 2006 LTPP until a 2010 LTPP is adopted; and

5) Emergency convergence bidding authority where PG&E will notify PRG and Energy Division staff about sudden changes in circumstances resulting in extreme adverse consequences. In such a case PG&E would file a Tier 1 Advice Letter seeking authority for convergence bidding strategies.²⁹

5.2. SCE's Proposal

SCE asserts that the CAISO's Market Surveillance Committee has stated that active participation by the IOUs will improve the convergence bidding process, and not having the IOUs participate can reduce the benefit of convergence bidding.³⁰ Additionally, SCE contends that convergence bidding will help IOUs: a) manage customers' risks associated with load and supply uncertainty; b) "move" the pricing of transactions between Day-Ahead and Real-Time markets to benefit customers; c) better hedge against congestion charges by moving the settlement price of a Congestion Revenue Right (CRR) from the Day-Ahead to the Real-Time market; and d) reduce customer risks associated with the convergence bidding activities of other market participants.³¹

SCE's convergence bidding proposal thus contains the following standards:

1) Volume limits of how many megawatts (amount redacted in the public version) of convergence bids it can submit to be demonstrated in the quarterly compliance report (QCR);

2) Locational volume limits based on but not limited to:

a) nodes from which SCE schedules and settles physical load;

b) nodes from which SCE schedules and settles supply resources (including SCE-owned resources, resources under contract with SCE, and the California Department of Water Resources contracts allocated to SCE's customers);

c) nodes that are identified in SCE's CRRs;

d) nodes that are price-correlated to those nodes in which SCE has physical load or resources; and

e) nodes where prices can impact SCE's demand costs and supply revenues.

3) PRG consultation, QCR and convene with the PRG and Energy Division when net loss from convergence bidding exceed $10 million during any rolling 90-day period.³²

5.3. SDG&E's Proposal

SDG&E argues that convergence bidding will allow SDG&E to shift generation schedules from the Real-Time to the Day-Ahead market, mitigate Day-Ahead award obligation on units returning to service under Day-Ahead awards, lower exposure to Real-Time prices, mitigate load forecast uncertainty, and provide defensive price arbitrage.³³ SDG&E contends that ratepayers would benefit from convergence bidding through cost reductions or operational risk mitigation. SDG&E further contends that the benefits of convergence bidding may be difficult to measure since convergence awards not only generate their own profits or loss but also impact aggregate market clearing prices that may impact part of the portfolio.

SDG&E thus proposes that convergence bidding will provide:

1) Operational enhancements such as;

a) virtual sale in the Day Ahead market of SDG&E's wind generation., SDG&E's wind generation suppliers are not required under CAISO's Participating Intermittent Resource Program (PIRP) protocol or their power purchase agreements (PPAs) with SDG&E to schedule generation in the Day Ahead market;

b) mitigation Day-Ahead awards of generation returning to service after an extended period of shutdown; and

c) mitigation of bundled load forecast uncertainty.

2) Defensive price arbitrage to mitigate harmful effects as price anomalies are identified on a day-to-day basis.

5.4. Parties' Position on IOU Proposals

5.4.1. TURN

TURN supports giving broad authority to all three IOUs as requested by SCE.³⁴ TURN argues that IOUs are bundled customers' only defense against gaming strategies of "convergence players" whose goal is to profit from convergence actions.³⁵

TURN asserts that each IOU should have the flexibility to engage or not engage in convergence bidding without fear or retrospective reasonableness review or other cost disallowance. After some experience is gained, TURN suggests the Commission can impose appropriate restrictions or require IOUs to pursue certain beneficial convergence bidding strategies. As a second best strategy, TURN also supports PGE's proposal to allow the filing of a Tier 1 Advice Letter to provide greater convergence bidding authority.

TURN adds that if the Commission is unwilling to grant its recommendations, then TURN would support as an alternative the Commission's granting the IOUs relatively broad authority to pursue any specific strategies that the IOUs have proposed. However, TURN believes that the list of strategies proposed by the IOUs is too short and omits a number of potentially beneficial strategies that could reduce customer costs or risks.

5.4.2. DRA

DRA contends that SCE's proposal requests too broad an authority and that SCE only gives examples of the kinds of transactions it would engage in without explaining how each strategy serves its ratepayers.³⁶ DRA requests that the Commission exercise some restraint in granting convergence bidding authority to the IOUs until California has had some experience with convergence bidding implementation. DRA believes that the Commission should direct SCE to adopt a model similar to that of PG&E and SDG&E, including showing of what kinds of bids SCE expects to engage in, conditions when such bids would be submitted, and a description of the strategies that support each bid type.

DRA opposes PG&E's proposal that convergence bidding authority be approved through a Tier 1 Advice Letter process when PG&E needs to respond quickly to sudden changes in market conditions that could result in "extremely adverse consequences" for ratepayers.³⁷ DRA further argues that the Tier 1 Advice Letter process is inconsistent with AB 57 upfront reasonableness standards. DRA contends that the Commission has stated that IOUs may not use Tier 1 Advice Letters to implement controversial matters, and PGE's recommendations for Tier 1 Advice Letter use exceeds the authority the Commission can grant under the law.

DRA further claims that even if the Commission were to find another vehicle consistent with its law to grant PG&E this expedited authority, such authority would still be inconsistent with AB 57's requirements that the Commission approve upfront standards for the IOU procurement decisions to avoid after-the-fact reasonableness review.

DRA notes that each IOU is requesting different authority for convergence bidding participation, and there is no evidence available that explains why one convergence bidding strategy is reasonable for one IOU and not for others.³⁸

DRA suggests that each IOU's convergence bidding application should have application name, description, and bid type, conditions when bids are submitted, bid location, bid quantity, bid price, and frequency. Additionally DRA suggests there should be monthly reporting and monthly loss limits similar to SDG&E's proposal (as discussed under Stop Loss Limit Section 8.1), and a Tier 3 Advice Letter process to change convergence bidding authority as necessary.³⁹

5.4.3. Reid

Reid argues that the ratepayers can only be protected by the IOU participation in convergence bidding trading.⁴⁰ Reid believes that the major problem with the PG&E proposal is that it does not address a limit on ratepayer losses. Further, Reid contends that PG&E does not elaborate on how PG&E will determine a change is sudden for Tier 1 Advice Letter filing status.

Reid believes that the SCE has a more complete convergence bidding proposal than do the other IOUs. Reid proposes that each IOU meet with its PRG every two weeks for the first six months of market operation. However Reid sees SCE's net loss limitation proposal as inadequate in protecting ratepayers from adverse circumstances. Reid suggests that PG&E and SCE should have a net rate recovery (total losses - total gains) of $10 million for the calendar quarter and SDG&E for $5 million.

Reid supports SDG&E's proposal of using convergence bidding for specific purposes. However, Reid points out that SDG&E's proposal does not mention transactional limits or clarify defensive price arbitrage. Reid also adds that SDG&E's proposal does not explain how "monitoring methods" and "metrics" should be developed or approved.

5.4.4. Pacific Environment

PE recommends that the IOU data be made available to the public and not just the PRG, as proposed by the IOUs. PE also requests that the Commission re-evaluate the limitations of IOU involvement in the convergence bidding market through a public stakeholder process.

5.5. Discussion

We believe that the strategies described by the IOUs may lower risks and benefit ratepayers in some situations. Therefore, as part of the IOUs interim authority to participate in convergence bidding we approve three specific bidding strategies based upon the different IOU proposals, along with uniform reporting requirements. Together, these three strategies will allow each IOU to engage in convergence bidding to meet its individual ratepayer needs while operating within a common bidding and reporting framework governing all three IOUs. However, we conclude that no single party's proposal adequately addresses the AB 57 upfront standards required for the IOUs to participate in convergence bidding. While PG&E and SDG&E seek narrower authorization of IOU-specific strategies, SCE proposes a broad authorization with certain limitations on how it would participate in convergence bidding.

In terms of the specific IOU proposals, we agree that PG&E's proposed convergence bidding strategy can provide a hedge against Real-Time market risks and can lower wholesale costs to the benefit of ratepayers, yet we reject PG&E proposed emergency convergence bidding authority via a Tier 1 Advice Letter process. We agree with DRA that use of a Tier 1 Advice Letter is inconsistent with the AB 57 upfront standards.

Similarly, while we agree with the convergence bidding application SDG&E proposes, we do not agree with SDG&E's proposed suspension of convergence bidding when losses from defensive convergence bidding exceeds $.001/kilowatt-hour (kWh) of its ERRA bundled load forecast for any calendar month.

As will be discussed later, we find that SCE's proposal to convene a PRG meeting when net loss reaches $10 million does not put a sufficient stop to potential loss to ratepayers resulting from IOU convergence bidding positions. We agree with DRA and Reid that some form of net loss limit will protect ratepayers from potentially unlimited financial harm that can result from convergence bidding. Stop loss limits are discussed in Section 8.