Comments of Powerex Corp. on Intertie Deviation Draft Final Proposal. Submitted by Company Date Submitted

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1 Cmments f Pwerex Crp. n Intertie Deviatin Draft Final Prpsal Submitted by Cmpany Date Submitted Mike Benn Pwerex Crp. January 8, 2019 Pwerex appreciates the pprtunity t submit cmments n CAISO s Draft Final Prpsal n Intertie Deviatin Settlements. In the Draft Final Prpsal, CAISO explains that the failure f intertie resurces t deliver in accrdance with their market awards can create peratinal challenges fr CAISO peratrs and result in high prices, manual prcesses, and sub-ptimal market slutins. 1 Fr that reasn, CAISO states that it is prpsing t implement a new under/ver delivery charge t incentivize delivery f awarded energy n interties t imprve peratinal awareness and grid reliability. 2 Pwerex appreciates CAISO s recgnitin f sme f the challenges psed t the CAISO markets by intertie delivery failures. As discussed further belw, Pwerex als appreciates CAISO s effrts t craft measures t imprve the incentive t deliver energy in accrdance with market awards, particularly intertie awards assciated with speculative supply, while als mitigating the risk f penalizing unavidable delivery failures that are beynd the fresight and cntrl f Scheduling Crdinatrs. Pwerex further appreciates the additinal transparency CAISO has prvided int intertie delivery failure ccurrences, particularly during stressed grid cnditins, and urges CAISO t cntinue t prvide similar data ging frward. Hwever, the current prpsal falls shrt f prviding a cmprehensive slutin. As Pwerex explained in detail in its earlier cmments in this stakehlder prcess: [T]he Issue Paper is far t narrw in its framing f the issues, its examinatin f the underlying causes and cnsequences, and its cnsideratin f ptential slutins. In particular, the Issue Paper fails t distinguish between the unavidable, randm intertie delivery failures that all BAAs experience in the rdinary curse f scheduling interchange transactins and the systemic intertie delivery failures that the CAISO BAA rutinely faces as a result f CAISO s permissive market rules. These market rules enable marketers and/r financial participants t rutinely submit physical intertie ffers that they may chse nt t deliver n, if and when they are dispatched and/r when they d nt have any physical supply in the first place. 3 Early in this prceeding, CAISO staff made clear that it wuld nt braden the scpe f this prceeding t cnsider measures t ensure that intertie ffers represent firm cmmitments 1 Draft Final Prpsal at 4. 2 Id. 3 Cmments f Pwerex Crp. n Intertie Deviatin Settlement Issue Paper (Sept. 5, 2018), available at: 1

2 backed by physical supply and transmissin and wuld slely fcus this prceeding n imprving the incentives assciated with the delivery f intertie awards in its real-time market. In particular, CAISO staff make clear that this stakehlder prcess wuld nt recnsider: 1. CAISO s lng-standing energy-nly framewrk, which des nt distinguish between supply based n whether it represents a firm cmmitment r nt and instead permits unit cntingent, nn-firm and speculative supply at intertie lcatins t be c-mingled and c-ptimized with firm intertie supply in bth its day-ahead and real-time markets; and 2. CAISO s lng-standing apprach f nt requiring day-ahead e-tags t supprt dayahead physical energy awards. Pwerex cntinues t disagree with the limited scpe f this stakehlder prcess. Thus, while Pwerex supprts the Draft Final Prpsal as a near-term imprvement ver the status qu, Pwerex believes that merely increasing the financial cnsequences fr nn-delivery f intertie awards will nt prevent market participants frm submitting speculative supply ffers r frm delivering unit cntingent r nn-firm energy supply t fulfill their market awards, and hence it will nt eliminate the challenges assciated with intertie delivery failures. Pwerex als believes that CAISO s existing energy nly framewrk has the ptential t be a barrier t the further expansin f the CAISO markets, and that merely increasing the financial incentives t deliver n market awards falls shrt f the steps that will be necessary t enable an Enhanced Day Ahead Market ( EDAM ) in the west. Pwerex believes the upcming EDAM stakehlder prcess is the apprpriate venue t thrughly discuss day-ahead market design changes and enhancements necessary fr an EDAM. Nevertheless, Pwerex believes it is imprtant t highlight the implicatins f the issues raised, and decisins made, in this stakehlder prcess that have the ptential t pse challenges t the successful develpment and expansin f an EDAM. I. CAISO s Prpsals Represent A Material Imprvement Over Existing Market Rules Althugh Pwerex cntinues t have cncerns abut the limited scpe f this prceeding, Pwerex recgnizes that the prpsals utlined in the Draft Final Prpsal represent a material imprvement ver the existing intertie decline charge, which has been shwn t be ineffective in deterring intertie delivery failures. In particular, Pwerex believes that CAISO s prpsal has the ptential t reduce reliability risks, increase the accuracy f CAISO s cmmitment prcesses and pricing, and reduce CAISO s reliance n ut-f-market dispatch and peratr interventins. By increasing the financial cnsequences f nn-delivery, CAISO s prpsal will increase the incentive fr entities t submit ffers that reflect the quantity f energy that they are cnfident they will be capable f btaining and delivering; additinally, the prpsal will create strnger incentives fr entities t actually deliver energy in accrdance with their intertie awards. Imprtantly, such an apprach will nt prevent suppliers frm submitting speculative supply ffers and waiting until after they receive a CAISO award befre attempting t prcure the physical supply and transmissin necessary t fulfill their delivery bligatin. Hwever, Pwerex is ptimistic that CAISO s prpsed mdificatins will increase the risk t market participants f 2

3 ffering speculative supply, and hence will likely reduce the frequency and magnitude f intertie delivery failures experienced by the CAISO grid. Pwerex als believes that the mdificatins made in respnse t stakehlder cncerns in this prceeding will increase the effectiveness f CAISO s prpsed under/ver-delivery charge. Fr instance, Pwerex believes that CAISO s decisin t base the calculatin f the under/verdelivery charge n the higher f the FMM r RTD price will help reduce the ptential that incentives t deliver in accrdance with CAISO energy awards culd actually be weakened due t CAISO peratr actins t maintain reliability during stressed market cnditins. Pwerex als supprts CAISO s prpsal t nt permit Scheduling Crdinatrs t submit e-tags that exceed their final market awards. CAISO s prpsal als appears t include measures that will help mitigate the ptential fr the current market framewrk t undermine the accuracy f the EIM resurce sufficiency test. Under the existing apprach, all CAISO final hurly intertie awards at T-40 are assumed t be physically delivered when, in fact, sme prtin may nt be. This currently enables the CAISO uniquely amng EIM entities t include supply frm third-party sellers that may be speculative r therwise nt firm in the EIM resurce sufficiency evaluatin fr its BAA. This can lead t the CAISO BAA errneusly appearing t be resurce sufficient, but then relying n the rest f the EIM fr additinal capacity and/r flexibility when this supply fails t physically deliver accrding t its award. The Draft Final Prpsal wuld appear t imprve the accuracy f the EIM resurce sufficiency assessment, as hurly blck resurces that are nt e-tagged by T-40 will n lnger be assumed t be delivered. As CAISO explains, this will help ensure that intertie schedules that are cunted tward the resurce sufficiency test have tagged and available transmissin and a supply surce. 4 Fr the freging reasns, Pwerex supprts CAISO mving frward with implementatin f the prpsals utlined in the Draft Final Prpsal. II. CAISO s Imprved Intertie Perfrmance Incentives, While Prviding Near Term Reliability Benefits, D Nt Address CAISO s Energy-Only Paradigm Which Presents Distinct Challenges T The Develpment And Expansin Of An EDAM While CAISO s prpsal represents a material imprvement ver the status qu, it will leave in place CAISO s energy nly day-ahead market design. Ultimately, Pwerex believes that the grwing challenges that CAISO has experienced with intertie delivery failures can be traced t fundamental differences between CAISO s energy nly framewrk and the well-established bilateral framewrk fr trading pwer in the west. The key characteristics f these differing appraches are as fllws: CAISO s energy-nly day-ahead market design: Supply f firm energy is c-mingled and c-ptimized with unit-cntingent energy, nn-firm energy and purely speculative supply ffers in the CAISO s dispatch, price 4 Draft Final Prpsal at 39. 3

4 frmatin and settlement prcesses (i.e., all types f intertie supply receive settlement as an energy nly prduct). Out-f-market tls and interventins are used t firm up r backfill the anticipated prtin f intertie awards that are nt firm supply, and are at increased risk f nn-delivery. These ut-f-market actins include CAISO s day-ahead residual unit cmmitment prcess, exceptinal dispatch prcesses, and upward adjustments t the lad frecast in the CAISO BAA t increase real-time dispatches f internal generatin, intertie bids, and imprts (including thrugh the CAISO Energy Imbalance Market) t backfill intertie delivery failures. Western bilateral markets: Outside f the CAISO BAA, day-ahead and real-time physical bilateral transactins are generally fr WSPP Schedule C Firm Energy, which is firm energy and will be delivered absent very limited, defined circumstances (e.g., transmissin curtailments and reliability emergencies in the surce BAA). In these transactins, energy, and the capacity attributes f the specific underlying supply resurce, is bundled with sufficient balancing capacity in the surce BAA t ensure delivery fr the delivery perid. Sellers seeking t supply nn-firm energy, unit-cntingent energy, r ther less firm prducts must d s explicitly and ften at a significant discunt frm the price f firm energy sld under WSPP Schedule C. Pwerex believes that a cntinuatin f the CAISO s current energy nly apprach cupled with cntinued ut-f-market energy and capacity prcurements and assciated side payments may impse a significant risk t the develpment and expansin f an EDAM. In cmparisn t the firm energy framewrk that exists in the rest f the west, this apprach increases reliability risks, while undermining dispatch efficiency and depressing market clearing prices. Imprtantly, hwever, Pwerex believes the differences between the CAISO s energy nly apprach t dispatch, price frmatin and settlement and the rest f the west s firm energy paradigm can be vercme, and d nt present an insurmuntable barrier t an EDAM. Indeed, Pwerex believes the explratin f an EDAM presents an pprtunity t better align the definitin, price frmatin and settlement f energy and bundled capacity attributes in the CAISO s rganized markets with the markets in the rest f the west. It is with that cncept in mind that Pwerex ntes the CAISO s Intertie Deviatin prpsal is an interim step and will need further wrk within the EDAM discussin t bring it int alignment with the framewrk established within the EDAM prcess Pwerex lks frward t wrking cllabratively with CAISO and stakehlders in the frthcming EDAM stakehlder prcess (as well as in the current Day-Ahead Market Enhancements stakehlder prcess) t examine appraches that (1) enable brad participatin by all suppliers and resurce types, while (2) ensuring that CAISO s dispatch, price frmatin and settlements 4

5 prcesses efficiently and equitably recgnize the energy and capacity attributes f varius types f energy supply. 5