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Cal-ISO defends plan to limit some congestion hedging, rein in speculation

Washington β€” The California Independent System Operator is defending its plan to limit financial speculation related to congestion revenue rights, arguing that market participants will still have ample opportunities to hedge congestion costs.

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"Given the significant ratepayer losses under the current rules, it is entirely reasonable for the CAISO to recalibrate its CRR release processes in a manner expected to reduce such shortfalls," the grid operator said Friday in a filing to the US Federal Energy Regulatory Commission.

In April, Cal-ISO proposed (ER18-1344) to make a pair of changes to improve its CRR auctions. The purpose of CRRs is to allow load-serving entities and suppliers to hedge congestion costs incurred in the day-ahead market.

The first change would improve CRR modeling by requiring transmission owners to submit an annual plan for upcoming transmission outages that could affect power flows in the day-ahead market. The second change aims to reduce financial speculation by discontinuing CRRs that are not linked to pathways that are used for delivery of supply. The change would mean that Cal-ISO would no longer auction CRRs for supply-to-supply points, load-to-supply points, or load-to-load points.

The second proposed change drew the most scrutiny. For example, the Financial Marketers Coalition said the proposal to eliminate non-delivery CRRs would exacerbate the auction revenue shortfall by reducing competition for and pricing of CRRs. The Western Power Trading Forum opposed the plan, saying it would limit participant flexibility without addressing the underlying problem.


But Cal-ISO on Friday said the proposal still provides ample opportunities to hedge congestion costs resulting from delivery of power. "Commenters who argue that open access requires that the CAISO continue to auction CRR source-sink pairs that are primarily associated with financial speculation are wrong," the grid operator said.

Cal-ISO said any benefit of these non-delivery CRRs is outweighed by the revenue shortfall they cause. More than 80% of the windfall profits from auctioned CRRs are from non-delivery source and sink pairs, the grid operator argued.

Reducing the number of source and sink pairs will increase competition and auction revenues for CRRs, the ISO argued. "This will decrease the difference between the auction revenues and the payments to the CRRs, decreasing auction revenue shortfall," the grid operator told FERC.


Commenters who claim that the plan will decrease competition are mischaracterizing the Cal-ISO's analysis, the grid operator said. Cal-ISO simulated a past auction to highlight the impact non-delivery CRRs have had in past auctions, the grid operator said. The simulation "was not intended to be an absolute prediction of future results because it did not include the effects of future changes in bidding behavior," the grid operator said.

And commenters who say the proposal will limit market participant flexibility are ignoring the need to balance the interests of load-serving entities and other users of the grid, Cal-ISO said. "To maintain this balance, the released CRRs must not impose excessive costs on load-serving entities and ultimately end-use customers," Cal-ISO said.

--Kate Winston,

--Edited by Mark Watson,