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Cal-ISO market monitor calls for scrapping congestion revenue right auction

The California Independent System Operator's congestion revenue right auction process is leading to major losses for ratepayers and should be revamped, according to the grid operator's market monitor.

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ISO transmission ratepayers lost $520 million in the CRR auction from 2012 through 2015, according to a white paper the ISO's Department of Market Monitoring issued Monday.

CRRs are financial instruments available through allocation, auction and a secondary registration system that enable their holders to manage changes in congestion costs based on locational marginal pricing.

Under the auction process, CRR buyers pay ratepayers the auction revenues while the ratepayers then pay the buyers the day-ahead prices for the forward contracts, the DMM said.



In a sign that the CRR auction is not a well-functioning competitive market, for every dollar ratepayers paid to entities buying CRRs in the auction, ratepayers received 46 cents in auction revenues, according to the white paper. "This consistent underpricing of CRRs calls into question a fundamental assumption of the CRR auction design that competition will drive auction prices to equal the CRR's expected value," the white paper said.

The CRR auction creates opportunities for financial entities to buy the rights at prices systematically lower than the payments ratepayers are obligated to pay the auction participants, according to the DMM.

Most payments from ratepayers appear to go to purely financial entities seeking to profit from participation in the auction, rather than suppliers that may be seeking to hedge risks related to day-ahead market schedules.

In the four years DMM analyzed, power marketers earned $237 million in profits from the CRR auctions while financial entities earned $213 million and generators earned $73 million. Load-serving entities lost $27 million, the white paper says.

Other grid operators have CRR forward contract auctions with high profits, according to the DMM. For example, non-load-serving entities financial transmission rights profits were more than $1 billion in the PJM Interconnection from 2012 through 2015, the white paper says.

One of the reasons CRR auctions aren't competitive is because CRRs are inconsistently defined products in the auction and day-ahead market, the white paper says.

"Because the day-ahead market network model is not and cannot be known when the auction is run, it is uncertain what transmission constraint prices the CRR will settle on in the day-ahead market," the white paper said.

The DMM contends that "paying CRRs at the full day-ahead market congestion price differences between the source and sink nodes is like allowing buyers to purchase regular gasoline now to sell at premium prices later." Instead of holding CRR auctions, the ISO and stakeholders should consider a system where CRRs or similar price swaps would be traded between willing buyers and sellers through a market based only on bids and offers, the DMM said.

Price swaps could be traded through a bilateral or exchange market, according to the DMM. Unlike a CRR forward contract, a price swap would be consistently defined in the forward market and day-ahead market, the DMM said. But the DMM said there is no clear rationale for the ISO to offer forward price swaps. Even so, policy makers may find benefits to having the ISO provide a market for price swaps, the market monitor said.

"Financial swap exchange markets external to the ISO or facilitated by the ISO would result in markets connecting willing buyers and sellers," the DMM said in the white paper. "A market based only on trades between willing participants would also greatly reduce the potential for large wealth transfers from ratepayers to other participants."

--Ethan Howland, newsdesk@spglobal.com

--Edited by Valarie Jackson, valarie.jackson@spglobal.com