7. Convergence Bidding Risk
and Reward Sharing
As the Commission has authorized the IOUs to participate in convergence bidding at the CAISO, we must now also determine the appropriate allocation of potential costs and benefits associated with convergence bidding.
7.1. Parties' Position
In response to the July 1, 2010 Ruling, all three IOUs and TURN asserted that a shareholder-ratepayer incentive mechanism is not viable and would create perverse incentives or conflicts of interest.51
PG&E argues that all benefits of convergence bidding should flow to ratepayers and thus shareholders will not be included in the benefits or risks.52 Mixing ratepayer and shareholder benefits and risk will complicate separating out benefits to ratepayers or shareholders. Cost savings can occur due to convergence bidding settlements as well as broader impacts to an IOU portfolio. PG&E believes that estimating portfolio savings will be complex and would require counterfactual assumptions that will likely be disputed.
SCE contends that convergence bidding is not different from other procurement and hedging activities the IOUs currently engage in on behalf of customers under AB 57 procurement plans.53 SCE opposes a shareholder-ratepayer incentive mechanism. SCE believes that an incentive mechanism for shareholders would render the entire concept of IOU participation in convergence bidding infeasible.
Moreover, SCE argues that a shareholder incentive mechanism for convergence bidding without a broader incentive mechanism that also captures all of the IOUs' other procurement and hedging activities pursuant to AB 57 procurement plans would create an inherent conflict between the IOUs' incentive to benefit their customers via all procurement activities versus their incentive to benefit their shareholders through convergence bidding.
Additionally, SCE argues that the Commission has already considered and rejected a portfolio-based shareholder incentive mechanism in the context of AB 57 procurement plans for the IOUs in D.06-02-032. According to SCE, an incentive mechanism that does not appropriately balance risk and rewards would violate AB 57, and the Commission should authorize IOU participation in convergence bidding only on behalf of the ratepayers.
SDG&E also discourages the adoption of a shareholder-ratepayer incentive mechanism for convergence bidding based on a potential conflict of interest.54 SDG&E argues that any such incentive mechanism should address all aspects of portfolio management to ensure shareholder and ratepayer interests are completely aligned.
CARE contends that only IOU shareholders and not ratepayers should bear the cost of participation in the first two years, arguing that this is similar to a situation where new traders participate in on-line trades and make 30-day hypothetical trades as a trial version.55
7.2. Discussion
Because our authorization of IOU convergence bidding activities is intended for the benefit of ratepayers, ratepayers shall receive all of the benefits and pay all of the costs of such activities. Such costs shall be recoverable in the IOU's Energy Resource Recovery Account.
Furthermore, no party has provided a compelling rationale for allocating benefits or risks to shareholders. Neither has any party provided a mechanism that would share such risks and rewards between shareholders and ratepayers that would not inappropriately introduce incentives that would pit shareholder interests against ratepayer interests.
However, as described below, we place significant limitations on IOU convergence bidding activities, a stop loss limit that would suspend authorization in cases of excessive losses, and reporting requirements on the IOUs, all to minimize ratepayer risk.
51 PG&E July 19, 2010 Response at 5, SCE July 19, 2010 Response at 14, SDG&E July 19, 2010 Response at 7, TURN July 30, 2010 Comments at 2.
52 PG&E July 19, 2010 Response at 5.
53 SCE July 19, 2010 Response at 14.
54 SDG&E July 19, 2010 Response at 7.
55 CARE July 19, 2010 Response at 3.
