8. Stop Loss Limit

As previously noted, the primary goal of convergence bidding should not be to realize speculative profits or risks, but rather, to manage price risk so as to promote stability in retail ratepayers' electricity rates, and to protect ratepayers against excessive costs.

8.1. Parties' Position

SDG&E states that for defensive price arbitrage, SDG&E will develop a metric that will include magnitude, frequency and persistence that gives rise to price distortion. SDG&E will mitigate such price arbitrage, report price anomalies to CAISO, establish a quantity limit for convergence bidding at each Pnode, and will track gain/loss on a weekly basis and report result to the Commission on a calendar quarter. SDG&E proposes that if SDG&E determines that if it has incurred losses exceeding $.001/kWh of its ERRA-bundled load forecast for any calendar month attributable to its defensive convergence bidding strategy, then the activity would be suspended until results and a corrective plan were discussed with the PRG.⁵⁶

As noted in Section 5.2 above, SCE proposes to convene a PRG and Energy Division staff meeting within two weeks of the date when the rolling 90-day net loss exceeded the $10 million trigger.⁵⁷ SCE believes that the consultation with the PRG and Energy Division staff will ensure that SCE discusses its convergence bidding results and potential modifications to its strategies going forward. SCE believes that the $10 million trigger (with a maximum annual amount of potential net losses SCE could incur up to $40 million a year) is designed to be high enough to avoid the need for frequent PRG and Energy Division staff consultations outside of normally scheduled meetings.⁵⁸

DRA asserts that SCE requests too broad of authority and SCE's proposal would allow it to participate in convergence bidding just like other market participants, subject only to a limitation if it loses a certain dollar limit.⁵⁹ DRA believes this latitude cannot afford ratepayers adequate protection. DRA further requests that the Commission should not grant authority for convergence bidding to the IOUs until California has had some experience with convergence bidding implementation. DRA, however, recommends SDG&E's monthly loss limit of $.001/kWh can be proportionately applied to the three IOUs.⁶⁰

While PG&E proposes regular meetings with its PRG, PG&E's proposal does not address loss limits as explicitly as the SDG&E and SCE proposals. Reid argues that the PG&E proposal's main problem is that it does not address a limit on ratepayer losses and limits meeting with the PRG only on a quarterly basis.⁶¹ Reid contends that SCE and SDG&E have more complete convergence bidding loss limit proposals. Reid, however, argues that the SCE's loss limitation proposal does not adequately protect ratepayers from adverse circumstances.⁶² According to Reid, PG&E and SCE should have a net rate recovery (total losses - total gains) $10 million for the calendar quarter and $5 million for SDG&E.

TURN argues that SCE's $40 million annual net loss trigger can be applied to PG&E and SDG&E, and further that the SCE trigger net loss amount is less than SDG&E's proposed $.001/kWh times the ERRA-bundled load monthly forecast.⁶³

8.2. Discussion

The Commission expects the IOUs will use converge bidding as a risk mitigation tool and that losses attributable to convergence bidding will be minimal. However, to ensure ratepayer protection, we will place an absolute limit on the amount of loses an IOU can incur from convergence bidding. Once this limit has been reached, an IOU's authority to participate in convergence bidding will be suspended subject to further Commission review.

We utilize SCE's proposed loss notification methodology to generate annual net loss limits. We recognize that the SCE methodology to arrive at $10 million/quarter net loss leaves out many variables. For example, the historic Day-Ahead and Real-Time price difference SCE uses does not take into account that with the implementation of convergence bidding, the absolute difference between CAISO's Day-Ahead and Real-Time prices may be lower. Similarly, in SCE's calculation, by taking the absolute difference between Day-Ahead and Real-Time, SCE assumes it will lose money in every single transaction for an entire period.

The SCE analysis presents what appears to be a worst case scenario. The Commission must consider the missing variables noted above in making a determination of the appropriate level at which to set a loss limit. As such, using SCE's methodology would set this limit unnecessarily high. Using the SCE analysis as a base, then adjusting for the missing variables, we place a limit for SCE's annual net loss to $20 million, PG&E's to $20 million and SDG&E's to $5 million as part of the interim authority provided at this time. Once these limits are reached in any rolling 365 day period, an IOU's authority to participate in convergence bidding is suspended, and subject to PRG review. The IOU must then file a Tier 3 Advice Letter requesting authority to resume participation in the convergence bidding market. The Advice Letter must contain, at a minimum: 1) an explanation for why the IOU exceeded the stop-loss limit, 2) an explanation of what actions or changes to its bidding activity the IOU will implement to ensure that future convergence bidding will not continue to lose ratepayer funds, and 3) an explanation for why the IOU's authority to engage in convergence bidding should be reinstated, in light of the specific facts of the IOU's convergence bidding history and remedial activities to protect ratepayer fund. Unless and until the Commission approves the Advice Letter, with or without conditions, the IOUs shall have no authority to engage in Convergence Bidding regardless of how long the Commission takes to issue a ruling on the Advice Letter. Therefore, the proposed limits grant great latitude to the IOUs to participate in convergence bidding as long as they do not incur significant losses.

We believe this stop loss mechanism is consistent with a prudent IOU risk hedging plan and will provide protection for ratepayers. This stop loss provision is consistent with the use of convergence bidding for hedging to protect ratepayers against excessive loss.

⁵⁶ SDG&E August 16, 2010 Proposal at 10.

⁵⁷ SCE August 12, 2010 Proposal at 11.

⁵⁸ SCE originally proposed a PRG notification trigger of $10 million in net losses for any rolling 90-day period. SCE explained that this $10 million trigger value is "designed to be high enough to avoid the need for frequent PRG consultation outside of normal scheduled meetings, while still representing less than a fraction of 1.0% of SCE's overall annual procurement costs." (SCE Proposal filed August 12, 2010, page 11) SCE's proposed rolling 90-day $10 million trigger threshold amounts to approximately $40 million in annual net losses ($10 million for each 3-month period in a year) SCE could incur before notification is required.