FERC Conditionally Accepts CAISO and PacifiCorp Proposals to Implement a Regional Energy Imbalance Market in Western States

by Latham & Watkins LLP

On June 19, 2014, the Federal Energy Regulatory Commission (“FERC” or “Commission”) conditionally accepted revisions to the California Independent System Operator Corporation’s (“CAISO”) FERC Electric Tariff to implement the CAISO’s proposed Energy Imbalance Market (“EIM”) that will allow neighboring balancing area authorities (“BAAs”) in the western states to participate in the imbalance energy portion of the CAISO’s real-time market.  Energy imbalance services have long been required as an “ancillary service” under FERC’s open access regulations and pro forma open access transmission tariff (“OATT”).  In its proposal, the CAISO noted that the EIM was effectively an expansion of its existing real-time energy market allowing to take part in the EIM alongside entities already transacting within the CAISO.  PacifiCorp’s two BAAs will be the first to participate in the EIM, and in a concurrent order, FERC also conditionally accepted in large part corresponding revisions to PacifiCorp’s OATT.  NV Energy has also entered into an implementation agreement with the CAISO to join the EIM.  Although several market participants protested various aspects of the CAISO’s proposed design of the EIM, most of it was approved by FERC.  The CAISO plans to start the new EIM on October 1, 2014.    

The EIM will be built upon the CAISO’s existing real-time market and will allow participants to buy and sell five-minute real-time energy to meet energy imbalance needs.  Participation by BAAs in the EIM is voluntary, as is participation by entities within BAAs that agree to participate in the EIM, and the CAISO will not assume operational control over the transmission facilities of a BAA as a result of its participation in the EIM. 

As more renewable generation is expected to come online in the western states in coming years due to state renewable portfolio standards and recent federal proposals such as the Environmental Protection Agency’s (“EPA”) Clean Power Plan, the EIM is potentially a way to facilitate greater coordination among BAAs in the western states and improve their abilities to integrate and dispatch renewable generation. 

Economic benefits are also expected to be achieved.  A study conducted by Energy and Environmental Economics, Inc. (“E3”) on behalf of the CAISO and PacifiCorp (the “E3 Study”) projected annual economic benefits associated with the EIM of up to $129 million.  Specifically, the E3 Study identified the following four principal economic benefits:

  • Interregional dispatch savings associated with efficiencies from PacifiCorp’s adoption of the CAISO’s five-minute dispatch system;
  • Intraregional dispatch savings associated with generators in PacifiCorp’s two BAAs being dispatched more efficiently by the CAISO’s automated system;
  • Reduced flexibility reserves associated with aggregating CAISO’s and PacifiCorp’s load, wind and solar variability, as well as forecast errors; and
  • Reduced renewable energy curtailment because the EIM will allow for the export or reduced import of renewable generation when it would otherwise be curtailed.

In addition, in a study issued last year, FERC Staff identified reliability benefits associated with the EIM, such as faster delivery of replacement generation after the end of contingency reserve sharing assistance and better integration of diverse renewable resources.

The EIM also addresses compliance costs associated with California’s greenhouse gas (“GHG”) cap and trade regulations under AB 32 and may provide states with some guidance as to how existing power plants might be able to incorporate compliance costs under EPA’s proposed Clean Power Plan.  Resources serving load in California will incur compliance costs associated with the California Air Resources Board’s (“CARB’s”) GHG cap and trade program, and the CAISO’s proposal will allow participating resources to submit a separate bid component, or bid adder, with their energy bids to cover those compliance costs.  The CAISO’s proposal also is designed so that compliance costs under CARB’s cap and trade program will not be considered when dispatching generation attributable to load outside California, which is intended to have the effect of assuring that locational prices outside the CAISO BAA will not be impacted by cap and trade compliance costs in California.  However, the CAISO will always consider the bid adder for resources located in California, regardless of where their energy is dispatched.  Bids (including the bid adder) will also be subject to the CAISO’s $1,000/MWh energy bid cap.

For those resources that do not wish to serve load in California and incur associated compliance costs under CARB’s cap and trade program, the CAISO proposed that such resources could submit a high bid adder that would make it highly unlikely that the resource would be dispatched to serve load in California.  Commenters raised questions as to the effectiveness of this measure for resources located outside of California that do not wish to be dispatched to serve load in California, and FERC accordingly required CAISO to submit a compliance filing one year from the start date of the EIM that would propose to adopt a “flag” mechanism currently under development by the CAISO in conjunction with requiring the bid adder be cost-based.  This mechanism would allow resources to flag their bid such that they would simply be precluded from ever being dispatched to serve load in California.  Still, FERC Commissioner Tony Clark, while concurring with the Commission’s decision to approve the EIM, cautioned during discussion of the order at the Commission’s public meeting that GHG regulation by individual states may have impacts on broader regional electricity markets, namely, by potentially restraining what might otherwise be broader participation in regional energy markets in the absence of an individual state’s GHG regulation. 

To address concerns regarding the possibility of market manipulation with respect to the bid adder, at least prior to the bid adder becoming cost-based, resources will only be allowed to submit their bid adder once a day (rather than hourly).  FERC also accepted the CAISO’s proposal to have its Department of Market Monitoring provide market monitoring services for the entire EIM. 

While FERC conditionally accepted most of PacifiCorp’s proposed revisions to its OATT to participate in the EIM, FERC rejected PacifiCorp’s proposal to require that participating resources in the EIM in PacifiCorp’s two BAAs pay for transmission service to participate in the EIM in addition to any transmission rates that they would regularly pay as a transmission customer under PacifiCorp’s OATT.  FERC found that requiring resources to purchase additional transmission service constituted double recovery of transmission costs and ordered PacifiCorp to remove its proposed additional transmission charge for EIM transactions.  In contrast, FERC accepted the CAISO’s proposal to assess transmission charges only in the BAA where the imbalance energy sinks, thus avoiding “pancaked” charges.    

FERC directed the CAISO to make certain changes to its proposed EIM in a compliance filing due on July 21; however, the modifications ordered by FERC are limited and would appear likely to pave the way for the CAISO’s proposal to become effective on September 23, 2014, so that the EIM can begin operations on its proposed “go live” date of October 1, 2014.  NV Energy plans to join the EIM approximately one year later in October 2015.      

Written by:

Latham & Watkins LLP

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