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FERC Opens Probe of Manipulation of California Bid Cost Recovery Mechanism
August 19, 2011
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FERC has opened a non-public, formal investigation regarding energy market manipulation that may have occurred in connection with certain bidding practices which artificially increased payments under the bid cost recovery mechanism in the California ISO (ER11-3856).
FERC also adopted a second series of tariff changes, including mitigation of exceptional dispatch, to combat the practices, after bidders altered their strategy in response to an initial series of changes approved in May meant to limit the exploitive behavior.
Specifically, pursuant to Federal Power Act sections 201, 307, and 309 (as amended by the Energy Policy Act of 2005) and Part 1b of the Commission's regulations, FERC authorized its Office of Enforcement to conduct a non-public, formal investigation, with subpoena authority, regarding violations of the Commission's regulations, including section 1c.2, prohibition of electric energy market manipulation, that may have occurred in connection with, or related to, the subject bidding practices related to the CAISO bid cost recovery mechanism.
Originally, in March 2011, CAISO filed tariff changes to address bidding practices which resulted in an under-accounting of integrated forward market (IFM) revenues, and thus resulted in over-payment of bid cost recovery to resources scheduled in the day-ahead market (see 3/22).
Shortly after CAISO filed these changes, CAISO reported that certain of the same resources employed a similar bid strategy to artificially increase bid cost recovery payments, or position their resources to benefit from secondary bidding strategies, and benefit from payments for exceptional dispatches
CAISO observed certain resources submit, in the day-ahead market, a schedule including negative energy bids (base negative bid) near or at the bid floor in certain hours. Then in subsequent hours, the resources submitted day-ahead energy bids at or near the bid cap of $1000/MW. By bidding in this way, the resources appear to the system to be economical, even when they have very high registered minimum load costs and their schedule includes several intervals in which the resource bid all their energy at or near the $1000/MW bid cap (far above other resources being committed in that hour).
In the real-time market, CAISO stated that the resources increased day-ahead negative energy bids to values near, but above, the expected LMP resulting in a so called "buy-back" of its energy. This "buy-back" ensured dispatch at or near minimum load in the real-time market. Once the resource is committed by the CAISO market, it is guaranteed recovery of its high registered minimum load costs.
Furthermore, under the existing tariff, when real-time dispatch is below the day-ahead schedule, the application of the metered energy adjustment factor to negative energy bid costs inflates bid cost recovery payments. When a resource submits positive energy bid costs, if a resource delivers less energy in real-time than it was scheduled to deliver in the day-ahead market, the metered energy adjustment factor reduces the amount of energy bid costs eligible for bid cost recovery because less energy was delivered than scheduled.
However, when the metered energy adjustment factor is applied to negative bid costs, negative costs are discounted. CAISO noted that a negative bid cost is essentially an indication of a willingness to pay the market to produce energy. Thus, the exclusion of negative bid costs in the bid cost recovery settlement calculation makes the resource's costs appear greater and results in the inflation of bid cost recovery payments overall.
This base negative bidding strategy supported additional inter-day and intra-day bidding strategies which resulted in over-payment of bid cost recovery payments.
Furthermore, CAISO observed resources with ancillary services awards and residual unit commitment capacity obligations submitting real-time energy bids to buy-back their energy schedule down to minimum load. This bidding behavior positioned the resources in real-time such that the ancillary services awards or residual unit commitment capacity was no longer accessible in the real-time market without the issuance of an exceptional dispatch, under which CAISO must pay the resource's energy bid price even if that price is near the $1,000/MW bid cap.
Due to such behavior, in just five days, during a total of 24 hours, $3.6 million of exceptional dispatch costs were incurred involving inaccessible ancillary services awards and residual unit commitment capacity.
To limit the profitability of the base negative bidding strategy, FERC adopted CAISO's proposal that the metered energy adjustment factor shall not apply to negatively priced bids when calculating bid costs for energy scheduled in the day-ahead market. With this change, the bid cost recovery calculation will account for the full value of negative bid costs even if the resource delivers less energy in real-time than it was scheduled to deliver in the day-ahead market.
FERC will also allow CAISO to mitigate bids when CAISO exceptionally dispatches a resource to make ancillary services awards or residual unit commitment capacity obligations accessible. In doing so, the Commission rejected NRG Energy's argument that a compliance filing should further limit CAISO's sought mitigation authority.
"We find that resources that are awarded ancillary services or residual unit commitment capacity prior to the real-time market have the potential to exercise market power by bidding in such a way as to ensure they receive very high prices for exceptional dispatch awards. CAISO has also shown that resources can predict with a high degree of certainty that if they employ certain bidding strategies, they will be exceptionally dispatched. These examples of market power are appropriately mitigated by CAISO's proposal. Moreover, we find the proposal is just and reasonable because the exceptionally dispatched unit will be paid the higher of the market clearing price or default energy bid. We also find that the mitigation measures are narrowly defined, and we reject NRG's contention that CAISO should submit a compliance filing further limiting when mitigation can occur," FERC said.
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