10. Affiliate Rules
10.1. Parties' Position
The July 1, 2010 ALJ Ruling requested responses to questions regarding the impact of IOU affiliate convergence bidding.
PG&E recommends that the Commission require disclosure of affiliate positions, audit rights and conduct periodic assessments to assure IOU convergence bidding does not unduly benefit IOU affiliates.69 SCE argues that the Commission has adequate protections in place to ensure that IOU participation in convergence bidding does not benefit the IOU affiliates, because IOUs remain subject to Rule VI.A of the Commission's Affiliate Transactions Rules. SCE argues that IOU participation in the convergence bidding market, like any other procurement activities, must be conducted consistent with the Affiliate Rules. SCE further argues that under SCE's Proposal, the Commission will have the ability to review SCE's convergence bidding transactions as part of the QCR Advice Letter review process to determine the underlying rationale why various convergence bids were submitted and also determine whether SCE's convergence bidding transactions were consistent with the upfront standards adopted by the Commission.70
Similarly, SDG&E argues that the current Commission rules regarding affiliate compliance should be sufficient to isolate regulated IOU convergence bidding activities from unregulated affiliate activities.71
10.2. Discussion
The Commission's Affiliate Transaction Rules apply to convergence bidding activities and any related resource procurement activities.72 In particular, the IOUs, their holding companies and their affiliates are reminded to observe the rules regarding: nondiscrimination; restriction of the provision of information, services, facilities, capacity or supply; recordkeeping; and reporting. (See, e.g., Rules III. B.2, III.E.4, IV.B, and V.E.)73 Moreover, upon the creation of a new affiliate, the IOU must immediately notify the Commission and post notice on its electronic bulletin board; within 60 days, the IOU must file an Advice Letter with Energy Division stating whether the affiliate is subject to the Affiliate Transaction Rules, the purpose and activities of the affiliate, and a compliance plan.74
We have two major concerns that may arise with affiliates and IOU convergence bidding activities.
First, convergence bidding might be used to alter the value of CRRs. For example, an IOU's convergence bidding positions in the Day-Ahead market could lose money, but its affiliate, owning CRRs, would profit because the IOU's bidding creates higher congestion costs resulting in higher CRR revenues.
An IOU may lose money taking virtual positions at adjacent nodes A and B. However, these virtual trades can be structured to create price divergence between A and B, creating revenues for the holder of related CRRs that would more than offset the losses from the virtual trades. In order to address this problem, if a market participant incurs losses from convergence bidding while earning significant profits from CRRs, under the CRR "claw back" rule, the CAISO will "claw back" or adjust the market participant's CRR profits.
However, under the proposed tariff when an IOU's convergence bidding benefits its affiliate, the CAISO is not authorized to "claw back" the profit. In that case, the CAISO's DMM can refer this activity to FERC for further investigation (this is discussed further below).
This could result in a loss of IOU ratepayer funds to the benefit of an affiliate, which would potentially benefit IOU shareholders.
Second, convergence bidding could be used to cause the selection of an affiliate's non-Resource Adequacy (RA) generation unit in the CAISO's Residual Unit Commitment (RUC) process under circumstances where the unit would not otherwise be selected.75 An IOU or its affiliate could submit convergence bids in the Day-Ahead market in order to support clearing a higher megawatt (MW) of virtual supply for the sole purpose of having the affiliate's units selected in the RUC process. RUC is a reliability function for committing resources and procuring capacity not reflected in the Day-Ahead Schedule (as Energy or Ancillary Services capacity). In the RUC selection process, the CAISO will replace the required MW of cleared virtual supply with a physical resource. Manipulation can occur when an IOU's convergence bidding causes the CAISO to select an IOU-affiliate, non-RA, generation units in the RUC process. In those situations CAISO's DMM will mitigate market power arising from convergence bidding.76 DMM's monitoring and mitigation program includes a review of various market participants including their affiliates' behavior in the CAISO market. If any market manipulation is detected then the DMM will refer the market participants and the affiliate to the FERC for further investigation.
Therefore, as part of our granting interim authority over IOU participation in convergence bidding, we require all IOUs, within one business day of its receipt of notice, to provide written notice to the Commission's Executive Director, the Director of Energy Division and the General Counsel of: (1) notice from the CAISO or DMM that the IOU or its scheduling coordinator is the subject of an investigation pursuant to the CAISO Tariff, including Section 37.8.4; (2) notice from the CAISO that the conduct of the IOU or its scheduling coordinator conduct has been referred to FERC by the CAISO pursuant to the CAISO Tariff, including Section 37.8.2; or (3) notice from the CAISO that the IOU or its scheduling coordinator's convergence bidding trading has been suspended or limited by the CAISO.
69 PG&E July 19, 2010 Response at 10.
70 SCE July19, 2010 Response at 23.
71 SDG&E July 19, 2010 Response at 10.
72 See D.06-12-029 and Appendix A-3.
73 Id., Appendix A-3, at 5-7, 9 & 12.
74 Id., Rule VI.B. at 18.
75 Resource Adequacy generators must bid into the CAISO's RUC market with a bid of zero.
76 CAISO Tariff Section 37.7 (Prohibition on Market Manipulation).
