CAISO's market monitor says offers above $1,000/MWh price cap lack justification

The California ISO's independent market monitor is warning the Federal Energy Regulatory Commission that electricity sellers have failed to justify offers exceeding a $1,000/MWh soft price cap during recent extreme heatwaves.

And the state's two largest electric utilities are urging the agency to reject offers above that cap based on 90-day price indexes, arguing that such a window is too broad for sales made over a narrow period of time under severe conditions.

The offers at issue were submitted in mid-August 2020 when CAISO was forced to implement rotating power outages due to an unexpected loss in generating capacity and again in June 2021 amid sweltering temperatures in the U.S. West.

CAISO's market rules allow electricity sellers' offers to exceed a $1,000/MWh soft cap so long as they are cost-based and subject to a $2,000/MWh hard cap for the purpose of calculating clearing prices. The Western Electricity Coordinating Council., or WECC, similarly uses a $1,000/MWh soft cap, and offers above that cap are subject to justification and refund.

CAISO's energy prices and the bilateral energy prices in the WECC typically move together, with CAISO's prices reflecting the added costs of transmission congestion and the state's cap-and-trade program for greenhouse gas emissions.

In June, FERC issued guidance in response to cost justification filings (ER21-40, et al.) from 21 power sellers whose sales in August 2020 exceeded $1,000/MWh as agency staff continue to review those offers on a case-by-case basis.

The cost justification filings are redacted in connection with requests for privileged and confidential treatment.

FERC's guidance addressed three frameworks for sales above the price cap: a production cost-based framework, an index-based framework, and an opportunity cost-based framework.

With regard to index-based offers, FERC said cost justifications for those types of sales must show the appropriateness of a selected price index as representative of the seller's market opportunities at the time of the sale.

However, CAISO's independent market monitor told FERC on Aug. 9 that some entities with sales above the $1,000/MWh soft cap in August 2020 and June 2021 have not submitted cost justifications even though they set "important" price indexes used in other cost justifications.

"Access to the justification for all sales over the soft cap is needed in order to accurately assess the competitiveness and liquidity of Western energy markets under tight supply conditions," the market monitor said.

Moreover, the market monitor noted that "many sellers" failed to identify the actual source of power that was ultimately delivered to back their sales. Access to that type of data is important because it may be needed to identify wash trades, cross-market manipulation or other manipulative strategies, the market monitor said.

Edison International subsidiary Southern California Edison Co. and PG&E Corp. subsidiary Pacific Gas and Electric Co. also filed over two dozen joint protests from Aug. 6-9 in related cost justification proceedings (ER21-2464, et al.).

In doing so, the utilities argued that FERC must reject cost justifications in which sellers have attempted to justify transactions using the index-based framework over a 90-day index liquidity period.

"While data from a longer 90-day period may be relevant to general index liquidity, it does not establish index liquidity at the specific time of the transactions when prices exceeded the bid cap," the companies said. "Using averaged data over a longer time period, such as 90 days, can mask liquidity and pricing aberrations on specific days when demand is uncharacteristically high and market power abuse may be prevalent."