ALJ/VSK/avs Date of Issuance 12/21/2010

Decision 10-12-034 December 16, 2010

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Integrate and Refine Procurement Policies and Consider Long-Term Procurement Plans.

Rulemaking 10-05-006 (Filed May 6, 2010)

DECISION AUTHORIZING INVESTOR OWNED UTILITIES TO PARTICIPATE IN CONVERGENCE BIDDING IN THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR ELECTRICITY MARKETS

TABLE OF CONTENTS

Title Page

DECISION AUTHORIZING INVESTOR OWNED UTILITIES TO PARTICIPATE IN CONVERGENCE BIDDING IN THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR ELECTRICITY MARKETS 2

1. Summary 2

2. Theory of Convergence Bidding in Multi-Settlement
Electricity Markets 3

3. Background 5

3.1. FERC Order to Implement Convergence Bidding 5

3.2. Record of the Proceeding 6

3.3. No Need for Evidentiary Hearings 8

4. Whether to Allow IOU Participation in Convergence Bidding 9

4.1. Parties Position 10

4.2. Discussion 12

5. IOU Convergence Biding Proposals 13

5.1. PG&E's Proposal 13

5.2. SCE's Proposal 14

5.3. SDG&E's Proposal 15

5.4. Parties' Position on IOU Proposals 16

5.4.1. TURN 16

5.4.2. DRA 17

5.4.3. Reid 19

5.4.4. Pacific Environment 19

5.5. Discussion 20

6. Authorized Convergence Bidding Strategies 21

6.1. Convergence Bidding Strategy 1: Generation Performance Risk and Utility Load Forecast Uncertainty Hedging 21

6.1.1. Parties' Position 21

6.1.2. Discussion 22

6.2. Convergence Bidding Strategy 2: Renewable
Resource Schedule and Hedging 23

6.2.1. Parties' Position 23

6.2.2. Discussion 24

6.3. Convergence Bidding Strategy 3: Defensive
Bidding Against Market Dynamics 24

6.3.1. Parties' Position 24

6.3.2. Discussion 26

7. Convergence Bidding Risk and Reward Sharing 27

Title Page

7.1. Parties' Position 28

7.2. Discussion 29

8. Stop Loss Limit 30

8.1. Parties' Position 30

8.2. Discussion 32

9. Uniform versus Utility-specific Upfront Standards 34

9.1. Parties' Position 34

9.2. Discussion 35

10. Affiliate Rules 36

10.1. Parties' Position 36

10.2. Discussion 37

11. Reporting and Process Requirements 40

11.1. Parties' Position 40

11.2. Discussion 41

11.2.1. Reporting Schedule 41

11.2.2. Reporting Requirements 42

11.2.3. Reporting Template 43

12. Comments on the Proposed Decision 43

13. Assignment of Proceeding 44

Findings of Fact 44

Conclusions of Law 45

ORDER 49

DECISION AUTHORIZING INVESTOR OWNED UTILITIES TO PARTICIPATE IN CONVERGENCE BIDDING IN THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR ELECTRICITY MARKETS

1. Summary

In this decision, we adopt upfront standards¹ for investor owned utilities (IOUs), Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), and Southern California Edison (SCE), to participate in convergence bidding (also known as "virtual bidding") in markets operated by the California Independent System Operator (CAISO). Convergence bidding currently is scheduled to commence in February of 2011.²

This decision grants each IOU interim authority to participate in convergence bidding in the CAISO markets until a subsequent decision in this or its successor proceeding supersedes or modifies this authority, or until an annual stop loss limit is reached.

This interim authority is subject to a uniform set of three authorized bidding strategies for all IOUs. Uniform rules will provide broad consistency among the IOUs where applicable. Each IOU will have the discretion to allocate their bidding activities among these three bidding strategy categories.

The first convergence bidding strategy allows IOUs to use convergence bids to hedge risks associated with generation outage and load uncertainty. The second convergence bidding strategy allows IOUs to use convergence bids to hedge against uncertainty regarding renewable generation scheduling. The third category allows the IOUs to guard against market manipulation that can impact wholesale electricity prices. These three strategies allow the IOUs to take measures that will benefit ratepayers by mitigating market price volatility and improving the pricing of renewable resources in the CAISO's day-ahead market.

The Commission will impose an annual stop loss limit. The stop loss limits will be $20 million for PG&E, $20 million for SCE, and $5 million for SDG&E. Once an IOU reaches this threshold, its authorization to engage in convergence bidding is suspended, subject to the rules described herein.

In addition, this decision considers whether the utility affiliate rules adequately protect ratepayers in relation to IOU convergence bidding activity. We also decline to adopt a ratepayer-shareholder risk and reward sharing mechanism for IOU convergence bidding activities.

Finally, we identify metrics and IOU reporting requirements by which the Commission and non-market participants can evaluate the effects of convergence bidding. This reporting is required because we are only granting interim authority for IOU participation in convergence bidding. These reports will provide the Commission with the information necessary to make any changes to IOU convergence bidding authority in any subsequent decision extending or modifying such authority.

¹ Pursuant to Assembly Bill 57 (Stats. 2002, ch. 835), codified as Pub. Util. Code § 454.5, by approving procurement plans, the Commission establishes "upfront standards" for the IOUs' procurement activities and cost recovery. This obviates the need for after-the-fact reasonableness review by the Commission of the resulting utility procurement decisions that are consistent with the approved plans.

² Cal. Indep. Sys. Operator Corp., 130 FERC ¶ 61,122, at P 24 (2010) (Convergence

Bidding Design Order).