13. Assignment of Proceeding

President Michael R. Peevey is the assigned Commissioner and Victoria S. Kolakowski and Peter V. Allen are the assigned ALJs in these proceedings.

1. FERC directed CAISO to file a tariff to authorize convergence bidding in the CAISO Day-Ahead and Real-Time energy markets. CAISO filed such a tariff modification in June 2010, which has been conditionally accepted by FERC. Convergence bidding activities in the CAISO Day-Ahead and Real-Time energy markets is expected to begin as early as February, 2011.

2. FERC believes that convergence bidding will improve market performance by adding liquidity, increasing the numbers of offers in the Day-Ahead market and minimize the exercise of market power.

3. 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.

4. IOU submission of virtual supply bids in the Day-Ahead market up to, but not exceeding, the amount of the Day-Ahead forecast of intermittent generation in the Day-Ahead market, followed by buying it back in the Real-Time market, would offset or hedge the financial exposure for the underlying Real-Time market sale of scheduled physical intermittent generation.

5. IOUs proposed several defensive convergence bidding strategies to protect against potential price manipulation or other market dynamics.

6. Market manipulation is monitored by the CAISO's DMM, but 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.

7. Convergence bidding can lead to significant financial gains and losses for ratepayers.

1. The Commission should authorize IOU participation in convergence bidding based upon a uniform set of rules limiting convergence bidding to three specified bidding strategies to be applied by each IOU flexibly to its own circumstances, and subject to stop-loss limit s and reporting requirements to minimize ratepayer exposure to financial risk. The IOUs should not be required to engage in convergence bidding or to use all three strategies.

2. The Commission should 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 pursue objectives that will benefit ratepayers.

3. IOUs should be authorized to submit convergence supply bids in the Day-Ahead market up to, but not exceeding, the amount of the Day-Ahead forecast of intermittent generation in the Day-Ahead market, followed by buying it back through the convergence sale in the Real-Time market.

4. It is prudent to allow IOUs to utilize defensive convergence bidding strategies to mitigate real harms from market manipulation or other unintended market dynamics.

5. IOUs should report the use of defensive convergence bidding on a case-by-case basis using actual market and settlement data, and not just hypothetical scenarios, showing how engaging in convergence bidding by the IOU protected ratepayers. An IOU should report if and how it employed convergence bidding strategies to protect ratepayers from unusual price spikes or other avoidable risks at identified locations. This information should be used for future review of convergence bidding authority, and not for post-hoc reasonableness reviews of IOU bidding activities.

6. Because Commission authorization of IOU convergence bidding activities is intended for the benefit of ratepayers, ratepayers should 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.

7. The Commission should place an absolute stop loss limit on the amount of loss an IOU can incur from participation in convergence bidding. Such stop loss limits should operate on a rolling 365 day basis, and exceeding the limit should suspend IOU authorization to participate in convergence bidding until the IOU files a Tier 3 Advice Letter and gains Commission approval to resume convergence bidding.

8. 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 funds.

9. The appropriate stop loss limits are $20 million for SCE and PG&E and $5 million for SDG&E.

10. It is appropriate to require that an IOU, 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.

11. It is reasonable to direct the IOUs to provide a set of information for each calendar month, no later than two weeks days from the end of each month to the Energy Division. The IOUs shall provide this information monthly for a period of one year after the CAISO convergence bidding market becomes active. At the end of one year, absent further direction from the Commission, this information shall be reported in the QCR filings beginning with the Q1 2012 filings and presented to the PRGs on a quarterly basis.

At a minimum, the IOUs shall include in their monthly reports:

1) A list of each cleared convergence bid, containing the hour, location, volume, and justification for the transaction;

2) A list of the Day-Ahead and Hour Ahead prices corresponding with each convergence bid;

3) For each day the gains or losses, in dollars, as a result of convergence bidding;

4) For that month, and any past months during the calendar year in which convergence bids were transacted, a monthly total of volume, gains or losses (in dollars), the number of times each strategy was employed, and the number of bids conducted outside of that IOU's service territory;

5) The approved convergence bidding strategies utilized during that time period; and

6) Qualitative analysis of convergence bidding impacts upon other related products, such as CRRs; and

7) A list of any affiliates who have or are registered with the CAISO to participate in convergence bidding.

12. It is reasonable to direct each IOU to provide to PRG participants review of its convergence bidding strategies, performance, and market analysis in the quarterly PRG meetings, beginning with the first quarter in which convergence bidding activities commence.

13. It is reasonable to direct the IOUs to use a common template when reporting the summary of convergence bids for each month. The Energy Division should develop the reporting template, with inputs from all parties, and to modify it as appropriate.

14. Application 10-05-006 should remain open.

ORDER

IT IS ORDERED that:

1. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison are authorized to participate in convergence bidding in the California Independent System Operator's Day-Ahead and Real-Time energy markets based upon a uniform set of rules limiting convergence bidding to three specified bidding strategies set forth in this decision, and subject to stop loss limits and reporting requirements. 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.

2. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison are authorized to participate in convergence bidding in the California Independent System Operator's Day-Ahead and Real-Time energy markets 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 California Independent System Operator's Day-Ahead Market.

3. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison are authorized to submit virtual supply bids in the California Independent System Operator's Day-Ahead market up to, but not exceeding, the amount of the Day-Ahead forecast of intermittent generation in the Day-Ahead market, followed by buying it back through the convergence sale in the CAISO Real-Time market.

4. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison are authorized to participate in defensive convergence bidding in the California Independent System Operator's Day-Ahead and Real-Time energy markets to mitigate real harms from market manipulation or other unintended market dynamics. Any investor owned utility using defensive convergence bidding must report such use on a case-by-case basis with actual market and settlement data, and not just hypothetical scenarios showing how engaging in convergence bidding by the investor owned utilities protected ratepayers. Each investor owned utility must report if and how it employed convergence bidding strategies intended to protect the investor owned utility's ratepayers from avoidable risks at identified locations. This information will be used for future review of convergence bidding authority and not for post-hoc reasonableness reviews of utility bidding activities.

5. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison shall, within one business day of its receipt of notice, provide written notice to the Commission's Executive Director, the Director of Energy Division and the General Counsel of: 1) notice from the California Independent System Operator or its Department of Market Monitoring that the investor owned utilities or its scheduling coordinator is the subject of an investigation pursuant to the California Independent System Operator Tariff, including Section 37.8.4; 2) notice from the California Independent System Operator that the conduct of the investor owned utilities or its scheduling coordinator conduct has been referred to the Federal Energy Regulatory Commission by the California Independent System Operator pursuant to the California Independent System Operator Tariff, including Section 37.8.2; or 3) notice from the California Independent System Operator that the investor owned utilities or its scheduling coordinator's convergence bidding trading has been suspended or limited by the California Independent System Operator.

6. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison convergence bidding in the California Independent System Operator's Day-Ahead and Real-Time energy markets shall be subject to an absolute stop loss limit on the amount of loss an investor owned utilities can incur from convergence bidding activities in the California Independent System Operator's Day-Ahead and Real-Time energy markets. Such stop loss limits shall operate on a rolling 365 day basis, and exceeding the limit will suspend investor owned utilities authorization to participate in convergence bidding until the investor owned utility files a Tier 3 Advice Letter and gains Commission approval to resume convergence bidding. The Advice Letter must contain, at a minimum: 1) an explanation for why the investor-owned utilities exceeded the stop-loss limit, 2) an explanation of what actions or changes to its bidding activity the investor-owned utilities will implement to ensure that future convergence bidding will not continue to lose ratepayer funds, and 3) an explanation for why the investor-owned utilities' authority to engage in convergence bidding should be reinstated, in light of the specific facts of the investor owned utility's convergence bidding history and remedial activities to protect ratepayer funds. Unless and until the Commission approves the Advice Letter with or without conditions, the investor-owned utility shall have no authority to engage in convergence bidding regardless of how long the Commission takes to issue a ruling on the Advice Letter. The stop loss limits are $20 million for Southern California Edison, $20 million for Pacific Gas and Electric Company and $5 million for San Diego Gas & Electric Company.

7. The investor owned utilities Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison shall provide a set of information regarding convergence bidding activities in the California Independent System Operator's Day-Ahead and Real-Time energy markets for each calendar month, no later than two weeks days from the end of each month to the Energy Division. At a minimum, the IOUs shall include in their monthly reports:

1) A list of each cleared convergence bid, containing the hour, location, volume, and justification for the transaction;

2) A list of the Day-Ahead and Hour Ahead prices corresponding with each convergence bid;

3) For each day the gains or losses, in dollars, as a result of convergence bidding;

4) For that month, and any past months during the calendar year in which convergence bids were transacted, a monthly total of volume, gains or losses (in dollars), the number of times each strategy was employed, and the number of bids conducted outside of that IOU's service territory;

5) The approved convergence bidding strategies utilized during that time period; and

6) Qualitative analysis of convergence bidding impacts upon other related products, such as CRRs; and

7) A list of any affiliates who have or are registered with the CAISO to participate in convergence bidding.

Each investor owned utility shall provide this information monthly for a period of one year after the California Independent System Operator convergence bidding market becomes active. At the end of one year, absent further direction from the Commission, this information shall be reported in the Quarterly Compliance Report filings beginning with the Q1 2012 filings and presented to the Procurement Review Groups on a quarterly basis.

8. Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison shall provide to their Procurement Review Group participants review of their convergence bidding strategies, performance, and market analysis in the quarterly PRG meetings, beginning with the first quarter in which convergence bidding activities commence.

9. Pacific Gas and Electric Company, San Diego Gas & Electric Company and Southern California Edison shall use a common template when reporting the summary of convergence bids for each month made in the California Independent System Operator's Day-Ahead and Real-Time energy markets. The Energy Division shall develop the reporting template, with inputs from all parties, and to modify it as appropriate.

10. Rulemaking 10-05-006 remains open.

This order is effective today.

Dated December 16, 2010, at San Francisco, California.

Commissioners

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