Comments of Northern California Power Agency CAISO Load Granularity Refinements Issue Paper. September 20, 2010

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1 651 Commerce Drive Roseville, CA phone (916) fax (916) web Comments of Northern California Power Agency CAISO Load Granularity Refinements Issue Paper September 20, 2010 Northern California Power Agency ("NCPA") provides the following comments on the CAISO's Load Granularity Refinements issues paper dated September 1, The Load Granularity Refinements initiative is very important and could negatively impact many of NCPA's members. NCPA is a nonprofit joint action agency that acts as Scheduling Coordinator and MSS Aggregator for many northern California municipal utilities that will be impacted, and perhaps competitively disadvantaged by this initiative. As described in more detail below, NCPA has concerns with elements of this initiative, and encourages CAISO to carefully review not only the proposed advantages, but also the disadvantages this initiative could create. Wholesale Load Granularity & Retail Rate Policy During the Load Granularity Refinements Stakeholder Meeting held on September 8, 2010, it was clear that a majority of stakeholders either did not support, or had pointed concerns regarding the impact this initiative could have on the wholesale markets in California. In particular, many stakeholders stressed the need to coordinate this effort with the CPUC retail ratemaking process, and feared that the proposed benefits of granular load settlement cannot be realized unless the CPUC rate policies allow sub- LAP prices to be passed onto Investor-owned Utility (IOU) jurisdictional retail customers in each sub-lap without averaging. CAISO seems to recognize this dependency as evidenced by its discussion at the stakeholder meeting, but CAISO barely touches upon this in its issues paper. NCPA is particularly concerned with this issue because if Load Granularity applies only to disparate municipal utilities, while CPUC rate policies fail to require the CPUC jurisdictional IOUs to pass sub-lap specific prices onto retail customers located in the relevant sub LAPs, the result will be a potentially severe competitive disadvantage for municipal utilities embedded within a congested region of an IOU service territory. Municipal utilities tend to be small in size and do not have a customer base spread across multiple pricing regions. A municipal utility located in a constrained region of the grid will be significantly disadvantaged because it will not be able to procure energy to service its load customers in a Page 1 of 8

2 competitive manner as compared to its neighboring IOUs, who are able to average the cost of serving multiple pricing regions. The contention that this pricing structure would create an incentive for affected municipal utilities to build transmission to reduce congestion in the region, and hence reduce the cost of serving its customers, is simply not realistic. No single municipal utility, or even a group of municipal utilities, could realistically construct enough transmission to reduce congestion in a large region such as the Greater Bay Area. The only entity with the capital resources to build sufficient transmission to relieve congestion in a large constrained region such as the Greater Bay Area is the incumbent IOU, in this case PG&E (PG&E is also the entity who made the original decision to serve the Bay Area with local generation, rather than building transmission to relieve the congestion). Certainly an IOU in that position does not have a strong incentive to construct needed transmission so long as it maintains the ability to average costs for all of its customers regardless of their sub-lap prices. Indeed, it would have every incentive to take advantage of the competitive disadvantage created for the municipal utility. In addition, it is neither realistic nor practical to expect that such a disadvantaged municipal utility could utilize demand response to mitigate its exposure to higher prices. Demand response is an important tool in the market, but it cannot be the only answer or even the predominant answer to congestion relief on the scale needed in the Greater Bay Area. Retail and industrial customers are in the business of producing goods and services, and to do so effectively cannot afford to reduce electric consumption to chase price signals with the frequency that is needed. Demand response can be very effective for "shaving" peak demand, but it is not practical to assume that demand response can be used for a majority of time to reduce consumption to mitigate high prices driven by load settlement granularity. In the long term higher prices in specific geographic regions may be harmful to business development and investment, and may even result in businesses and jobs fleeing congested regions to remain competitive with similar business that are located in less congested regions. The CAISO stated that the question of whether or not to increase load granularity is out of scope. NCPA recognizes that CAISO's position is driven by FERC order, but NCPA also recognizes that FERC s directive was provided when no measureable evidence was available to fully understand and evaluate both the benefits and negative impacts that granular load settlement can create. For example, CAISO has stated that the benefits of increased load granularity may included a more efficient market solution, an increased number of CRRs made available to hedge congestion and may incent demand response and investment. Each of these benefits sound promising, but without access to studies that analyze past market results, and without knowing what level of benefits may be Page 2 of 8

3 gained, it would be difficult for FERC, CAISO or stakeholders to truly understand what benefits may result from increased granularity. CAISO is uniquely situated to analyze the pros and cons of this initiative due to its access to sub LAP price information and confidential data. NCPA encourages CAISO to not ignore or discount the direct relationship between this initiative and retail rate policy. For a market design change that will have a significant impact on both the wholesale and retail sides of the business a "build it and they will come" approach is simply not good enough. CAISO must perform robust analysis to measure both the positive and negative impacts of more granular load settlement. If such analysis clearly proves that increased granularity will produce significant benefits for the market, then such information will be informative for stakeholders. If the analysis developed by CAISO does not provide strong evidence of the benefits for increased granularity, CAISO must remain open and be willing to present such evidence to FERC, and communicate the strong opposition voiced by stakeholders, with the objective of seeking to have FERC reconsider the timing of the initiative, or the underlying need for it. Proposed Benefits of Granular Load Settlement During the Load Granularity Refinements stakeholder meeting held on September 8, 2010, the CAISO discussed the following reasons/benefits for exploring this market design change: Provide more spatially accurate price signals to stimulate demand response and investment Enable increased ability for market participants to more precisely hedge against congestion charges Enhance the efficiency of day-ahead solutions by eliminating the large default LAP constraints on load distribution factors Study may prove that increased load granularity may in fact provide the stated benefits, however these benefits will have to be significant to outweigh the multiple concerns voiced by stakeholders. CAISO has the confidential data and pricing information needed to measure the possible benefits, therefore is well suited to perform the studies. CAISO must also explore whether other market enhancements may provide the desired benefits with less impact on stakeholders. NCPA is very interested in reviewing the results of such analysis and provides the following comments that should be considered and factored into any analysis developed by CAISO. A. Increased Demand Response and Investment Page 3 of 8

4 NCPA is not convinced that increasing the granularity of load settlement beyond the existing three default LAPs will encourage either demand response or investment. The CAISO Proxy Demand Resource ("PDR") tariff provisions already enables wholesale load to bid into the market at granular levels down to a single node. Therefore, increasing the granularity of load settlement will likely not further encourage demand response participation because PDR can already settle at a nodal level that is more granular than the default LAP. CAISO also implied that settling load at a more granular level will eliminate concerns with market power and price arbitrage. Realizing that PDR is very new, NCPA lacks sufficient evidence to either prove or discount such concerns, but so far participation in PDR has been very limited, and it would seem that if such price arbitrage was lucrative or enticing, participation in PDR would be more robust. CAISO also seems to imply that exposing load located in congested regions to granular load settlement will incent further participation in demand response. Such concept is based on the assumption that higher costs may encourage consumers to use less, or at least use less during higher priced periods. The assumption may or may not be true, but it seems counterproductive to develop an incentive that is based on increased harm, in the form of higher energy costs, to push consumers to react. It is unjust and discriminatory to attempt to stimulate demand response by exposing some ratepayers, but not others, too higher costs. In the case of retail and industrial customers, if such consumers are exposed to higher prices while their competitors are not, they will be disadvantaged. Lack of equal and fair treatment will likely drive business investment and expansion away from congested regions, rather than encouraging investment. B. Increase the Amount of CRRs Available to Hedge Congestion CAISO claims that settling load at a sub-lap level will increase the amount of CRRs that are available for allocation. Increased feasibility at the sub-lap level would theoretically occur where a single binding constraint that would otherwise reduce the amount of CRRs available at the LAP level will not be binding for all sub-laps. While increasing the granularity of load settlement would likely increase the number of CRRs available to market participants, it is far from clear what amount of CRRs would be made available. Would 5% more CRRs be made available, or 50% more CRRs be made available? Nor has NCPA heard stakeholder concerns that any LSE has been unable to hedge congestion with the current number of CRRs that are released. To better assess this benefit CAISO will need to produce a study that provides evidence of the increased number or percentage of CRRs that would be made available. Page 4 of 8

5 Increasing the number of CRRs may not even be workable. Driven by the need to maintain revenue adequacy in CRR settlements, CAISO has consistently applied a Global Derate Factor ("GDF") to the CRR process to improve its ability to achieve revenue adequacy. In some cases, the GDF applied by the CAISO has been fairly significant (e.g. as much as 20%), and regardless of the increased number of CRRs that might be created by this initiative, such CRRs likely still could not be made available to the market due to revenue adequacy concerns. During the September 8, 2010 stakeholder meeting, CAISO explained that revenue adequacy issues have arisen due to unexpected changes to the network model (e.g. large outages on facilities) that result in discrepancies between the full network model used in the CRR process, and the full network model used in the market run. These types of issues may not be directly caused by the granularity at which load is scheduled and settled, but they will nevertheless impact CRR allocations. Any study performed by the CAISO should provide historical evidence of the use of GDF, and some estimate of how use of GDF will increase or decrease if this initiative is implemented. Otherwise, additional granularity likely remains a solution in search of a problem. C. Improved Day-Ahead Market Solutions CAISO claims that increased granularity will improve the market solutions because the market software will not be inhibited by the need to adjust fixed Load Distribution Factors ("LDF") in lock step. However, the CAISO has provided no evidence of such an efficiency gain, or of what benefits will accrue to the market. During the past year, the CAISO has certainly implied that the markets are operating efficiently. For example, the August 11, 2010, Quarterly Report on Market Issues and Performance stated: The day-ahead integrated forward market has continued to be very stable and competitive, with a very high portion of load and supply being scheduled in the day-ahead market (e.g., typically 95 to 100 percent) Average energy prices in the day-ahead market during each month of the second quarter of 2010 continue to be approximately equal to average benchmark prices estimated under perfectly competitive conditions During the September 2, 2010 Market Performance and Planning Forum, CAISO indicated that starting Trade-Date 7/14/2010, CAISO tightened the IFM MIP Gap tolerance from 0.1% to 0.05%. As a result CAISO observed the following: Page 5 of 8

6 Reduced observations of uneconomic commitment and ramp-rate segment selection More efficient solution by approximately $4,000/day NCPA requests that CAISO quantify actual benefits with studies before embarking on a major market change, with results including: Number of hours during the past year in which the fixed LDFs required adjustment in order to reach an IFM market-clearing solution Measure of increased efficiency o Impact on time of solution o Total reduced cost for the market o Percentage of efficiency gain measured against existing comparative market solutions o Will increased granularity result in offsetting inefficiencies due to load forecasting complications and/or metering deficiencies Without this type of information it will be difficult to determine what level of benefit, in terms of market efficiency, will be gained from this initiative. Unless sufficient evidence is provided that measurable efficiency is gained, CAISO must be open to consider other solutions that may be used to improve efficiency in place of the current initiative. Benchmarking During the September 8, 2010, Load Granularity Refinements Stakeholder Meeting, and in the CAISO Load Granularity Refinements issue paper, CAISO provided load granularity information from other ISO/RTO markets for benchmarking purposes. The information seems to suggest that a majority of the other ISO/RTOs use criteria other than correlated prices to determine load zones; rather many of the load zones established in other ISO/RTO regions are consistent with the service territories of IOUs. This is likely driven by the same wholesale/retail rate policy problem that is at issue in the current initiative. The information collected by CAISO also implies that a majority of the load zones established in other ISO/RTO regions have not changed since their inception. NCPA disagrees with CAISO's statement that CAISO is unique in that CAISO has one state with three huge load zones. Other ISO/RTO regions, including PJM, include load zones that are comparable in size (MW) to the PG&E, SCE and SDG&E default laps. Page 6 of 8

7 NCPA encourages CAISO to do further analysis as to why many of the load zones established in other ISO/RTO are fashioned around existing IOU service territories. NCPA feels that such information would be helpful to CAISO and stakeholders to understand if this design is driven by retail rate policies or other factors. Technical Study & Cost/Benefit Analysis NCPA strongly supports the need to develop technical studies to measure the benefits claimed by CAISO. Studies should include both qualitative and quantitative information to inform stakeholders. During the September 8, 2010, stakeholder meeting CAISO explained that it is not planning to develop a cost/benefit analysis. CAISO claimed that such a study would contain so many assumptions that its usefulness would be limited. While NCPA understands that any study will contain assumptions that will be controversial, an initiative that will significantly impact market participants deserves some level of cost/benefit analysis. This request was echoed by many stakeholders during the stakeholder meeting. To assist CAISO in such effort NCPA will evaluate and estimate both implementation cost and energy costs for its affected members, and will offer this information to CAISO in future comments. NCPA encourages CAISO to request information that it may require to develop a cost/benefit analysis from stakeholders. Implementation Needs & Dependencies Increased load granularity will likely impact both scheduling/settlement systems and processes for both CAISO and market participants. NCPA currently operates as a Load-Following Metered Subsystem Aggregator. NCPA currently schedules its load at a MLAP that consists of a set of LDFs for each member contained within NCPA's load aggregation. These LDFs are used to distribute NCPA's aggregated load schedule to each of its member's nodal load take-out point(s). Regardless of this scheduling/modeling design, NCPA is a Gross Settling MSS; therefore NCPA's loads are settled at the default LAP price. NCPA encourages CAISO to consider these unique practices in its overall design as part of the current initiative. NCPA believes that its current MLAP design is consistent with increased granularity, and the objective of this initiative. NCPA is open to work with CAISO to review this design to determine if any changes are required to make the MLAP compatible with increased granularity. NCPA also schedules multiple ETCs that are modeled and settled at custom LAPS. This design may also be impacted by this initiative. During the September 8, 2010, stakeholder meeting CAISO suggested that the existing custom LAPs may not need to be changed and that the existing custom LAPS may already be consistent with increased granularity. NCPA supports this position, and is willing to work with CAISO Page 7 of 8

8 to further review the existing custom LAP design to ensure such design is consistent with the objectives of increased granularity. Page 8 of 8