6. Authorized Convergence
Bidding Strategies
We authorize the IOUs to participate in convergence bidding under three separate strategies. However, convergence bids under all strategies shall be limited to the nodes or locations where the IOU-owned or IOU-contracted resources or load are physically located. The utilities are not required to use any or all of the three bidding strategies and may apply them flexibly to meet their own circumstances, consistent with the other provisions of this Decision. All costs of such participation shall be recoverable in the individual utility's Energy Resource Recovery Account.
6.1. Convergence Bidding Strategy 1: Generation Performance Risk and Utility
Load Forecast Uncertainty Hedging
PG&E identified two specific justifications for its participation in convergence bidding.41 PG&E proposes that it will submit convergence bids to reduce exposure to Real-Time market risk associated with unplanned generation risk, e.g., to manage risks from unplanned outages. Similarly, PG&E proposes to submit convergence bids to provide opportunities to improve the quality of market dispatches (i.e., lower costs and market efficiencies) for specified generation facilities. PG&E argues that since convergence bidding is new, PG&E's proposal to participate is necessarily limited until PG&E gains experience and monitors the market developments.42
SDG&E similarly proposes that the Commission should allow SDG&E to participate in convergence bidding to mitigate specific day-to-day scheduling practices.43 SDG&E proposes to submit virtual demand bids in the Day-Ahead market for a portion of a unit's expected Day-Ahead market award especially when a generator's performance is uncertain (for example, units returning to service after an extended period). The Day-Ahead virtual demand bid would be offset by a corresponding virtual supply sale in the Real-Time market that would hedge the potential risk of buying back undelivered energy from the unit returning to service.
In addition SDG&E argues that demand forecast uncertainty is an inherent source of financial risk that SDG&E bears in its portfolio.44 SDG&E notes that under CAISO's redesigned markets, load demand can only be bid in the Day-Ahead market, and the residual demand requirements are settled in Real-Time market. Likewise, we recognize that load will not always perform as forecasted.
We recognize that there is always a risk that a generation resource will not perform as scheduled, requiring IOUs to purchase replacement power in the CAISO Real-Time market. IOUs are in the best position to know the extent of that risk and should be able to save ratepayers money through convergence bidding to hedge against generation performance risk.
Therefore, we authorize the IOUs to participate in convergence bidding to manage Real-Time price exposure resulting from unanticipated forced outages, derating of generating units, derating of transmission, or uncertain generation performance for resources scheduled by the IOUs in the CAISO's Day-Ahead Market, and to hedge against load forecast uncertainty, as these strategies address goals that will benefit ratepayers.
We discuss how the IOUs should report compliance on Strategy 1 in the Reporting Section (Section 11) below.
6.2. Convergence Bidding Strategy 2: Renewable Resource Schedule
and Hedging
SDG&E notes that under the new market structure, wind generation suppliers are not required to schedule in the Day-Ahead market through the PIRP.45 SDG&E notes that its power purchase agreements (PPAs) governing the existing operational wind generation require that all wind suppliers participate in PIRP, but do not require that wind suppliers schedule generation in the Day-Ahead market. SDG&E's contracted wind generation is scheduled only into the CAISO Real-Time market based on PIRP protocols and receives the CAISO Real-Time market prices. As a result, there has been no incentive for suppliers to schedule wind into the Day-Ahead market due to forecast uncertainty and the complexity of the settlement process to account for Day-Ahead supply awards and actual delivery variances.
SDG&E requests authority to submit virtual supply bids in the Day-Ahead market up to, but not exceeding, the amount of the Day-Ahead forecast of wind generation in the Day-Ahead market, and then to buy it back in the Real-Time market. This would offset or hedge the financial exposure for the underlying Real-Time market sale of scheduled physical wind generation.
We agree that this is an appropriate use for convergence bidding. We authorize the IOUs to use convergence bidding to hedge all their intermittent generation forecasted schedules.
6.3. Convergence Bidding Strategy 3:
Defensive Bidding Against Market Dynamics
Both SCE and SDG&E have proposed using convergence bidding to defend against either overt market manipulation or aberrant market behaviors due to market failures, both of which could be detrimental to ratepayer interests.
SDG&E notes that convergence bidding will open new trading opportunities to existing and new market participants.46 SDG&E suggests that convergence bidding will be actively pursued by many market participants and may result in potentially harmful outcomes for SDG&E ratepayers. SDG&E argues, by means of an example, that since convergence and physical bids will compete head-to-head in CAISO's Day-Ahead market, virtual supply bids could displace physical resources in the Day-Ahead market, and potentially impact CAISO's power flow solution leading to pricing node (Pnode) -specific price divergence.47 Unlike the convergence bidding Strategies 1 and 2 described above that can be more specifically described upfront, SDG&E argues that defensive convergence bidding on a day-by-day is not possible until a market anomaly is clearly identified.
SDG&E describes several steps for defensive price arbitrage, including reporting to the CAISO if market manipulation is detected.48 SDG&E offers to monitor market prices to determine whether Pnode prices within its portfolio appear reasonable or exhibit anomalous behavior. SDG&E suggests that if such price distortions are identified, SDG&E could implement defensive price arbitrage convergence bidding to mitigate such distortions.
This activity would be applied at Pnodes within SDG&E's Default Load Aggregation Point (DLAP) or at those nodes that correlate to resources in SDG&E's portfolio. SDG&E does not propose to pursue convergence bidding at other Pnodes within the CAISO system, but represents that it would report such anomalies to the CAISO if detected. SDG&E would establish a quantity limit for this application of convergence bidding at each Pnode corresponding to its perceived exposure.
For tracking purposes, SDG&E would track its defensive convergence bidding activity gain/loss on a weekly basis. SDG&E would report these results to the Commission on a calendar quarter basis in its QCR. If incurred losses exceed $.001/kWh multiplied by its ERRA bundled load forecast for any calendar month, SDG&E would suspend its defensive convergence bidding until a corrective plan was discussed with the PRG.
Similarly, SCE proposes locational volume limits and locational standards.49 SCE proposes to submit convergence bids at locations where SCE does not have physical supply, load or transmission exposure but where prices in such locations are highly correlated with the prices at the actual location of SCE's physical supply, load or transmission exposure. In addition SCE suggests that its convergence bidding locations would include, but not necessarily be limited to: (1) nodes from which SCE schedules and settles physical load; (2) 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); (3) nodes that are identified in SCE's CRRs; (4) nodes that are price-correlated to those nodes in which SCE has physical load or resources; and (5) nodes where prices can impact SCE's demand costs and supply revenues.50
While there may be instances when IOUs may have to engage in convergence bidding in order to defensively bid against potential price manipulation or other market dynamics, we expect that the IOUs would promptly report to CAISO's Department of Market Monitoring (DMM) on suspected market manipulation. However, we do not expect IOUs to take on the market policing role through convergence bidding.
Nevertheless, IOUs as market participants may have the opportunity to make quick bidding decisions to reduce the negative impacts of market manipulation or other market dynamics to the benefit of ratepayers. It would be imprudent to prevent IOUs from utilizing such a defensive convergence bidding strategy to mitigate real harms.
We will authorize IOUs to utilize Strategy 3 to provide defensive bidding. We require that any such defensive convergence bidding activities must be reported on a case-by-case basis within the reports described in Section 11 herein with actual market data showing how engaging in convergence bidding by the IOU was intended to protected ratepayers.
We emphasize that defensive convergence bidding reporting must contain actual market and settlement data, and not just hypothetical scenarios. The IOU must report how it employed convergence bidding strategies specifically to protect the IOU and its ratepayers from unusual price spikes or other avoidable risks at identified locations. This information will be used for future review of convergence bidding authority, and will not be used for post-hoc reasonableness reviews of IOU bidding activities.
We discuss how the IOUs should report compliance with Strategy 3 under the Reporting Section (Section 11).
41 PG&E August 16, 2010 Proposal at 4.
42 Ibid.
43 SDG&E August 16, 2010 Proposal at 5.
44 SDG&E August 16, 2010 Proposal at 8.
45 SDG&E August 16, 2010 Proposal at 5.
46 SDG&E August 16, 2010 Comments at 9
47 SDG&E August 16, 2010 Comments at 9.
48 SDG&E August 16, 2010 Proposal at 10.
49 SCE August 12, 2010 Proposal at 8.
50 SCE August 12, 2010 at 8-9.
