Calif. PUC Draft Would Set Rules for Utility Convergence Bidding Participation

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November 16, 2010

The California PUC has issued a proposed decision (Rulemaking 10-05-006) which would adopt upfront standards 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 is currently scheduled to commence in February of 2011.

The draft decision would grant each IOU interim authority to participate in convergence bidding in the CAISO markets until a subsequent decision supersedes or modifies such authority, or until an annual stop loss limit is reached.

The interim authority would be 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 draft states.

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 draft says.

The proposed order would impose an annual stop loss limit on the utilities' participation.  The stop loss limits would 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 would be suspended.

Although the decision discusses concerns regarding utility affiliates in relation to IOU convergence bidding activity, the draft would only require each 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 Department of Market Monitoring 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.

The draft declines to adopt a ratepayer-shareholder risk and reward sharing mechanism for IOU convergence bidding activities.

   
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