Grid Forward: Modernizing and strengthening the Western electric system

Forming a West-wide regional system operator provides the opportunity to optimize and improve the efficiency the electricity system for the entire West.  Proposed changes to the electric system are complex and stakeholder issues diverse.  To increase understanding of the major issues around the formation of a RSO, WCEA has created white papers, graphics and other educational materials.

Background

gridforward-logo2The California Independent System Operator, or CAISO, is an independent, non-profit organization chartered by the State of California that manages approximately 80 percent of the energy flow in California and a smaller portion in Nevada.

An important initiative currently underway considers the addition of PacifiCorp’s six-state utility service area to the CAISO.

PacifiCorp is one of the West’s largest utilities, serving nearly 1.8 million customers in Oregon, Washington, Utah, Idaho, Wyoming and California.

A decision to merge operations with the CAISO by PacifiCorp would allow for a full, day-ahead coordination of the two largest electrical transmission grids in the region and allow customers served by both entities increased access to both clean energy resources and improved system reliability, while lowering overall costs to electricity consumers.

This endeavor would necessitate the transformation of CAISO from a single state ISO into a Western Regional System Operator (RSO), with multi-state operation and governance. While other utilities are considering joining the CAISO, PacifiCorp is the first utility to undertake actions toward entry.

Western Clean Energy Advocates and Western Grid Group developed the following informational briefs to increase the understanding of issues related to a change from the California Independent System Operator (CAISO) governance structure to a new structure for a Regional System Operator (RSO).

New WGG Documents:

Critique of Western Regional System Operator Assumptions and Assertions (October 31, 2016)
Through the many processes working to examine and design different facets of an RSO, stakeholders have adopted many assumptions and have stated many assertions about future operation of an RSO. This paper to evaluate and respond to assertions about SB 350 studies and regionalization.

Amanda Ormond
Western  Grid Group
Bob Johnston
Western Resource Advocates
Cameron Yourkowski
Renewable Northwest Project
Fred Heutte
Northwest Energy Coalition
Jennifer Gardner
Western Resource Advocates
Kate Maracas
Western  Grid Group
Megan O’Reilly
Arc Research and Analysis
Michael O’Boyle
Energy Innovation
Nancy Kelly
Western Resource Advocates
Rebecca Wagner
Energy Foundation Consultant
Ron Lehr
Western Grid Group
Sophie Hayes
Utah Clean Energy

For further information about RTOs and other topics related to the proposed Western Regional System Operator, contact us via contact form below:

Filings and Comments Submitted

  • RSO – Governance to CAISO

    These comments on RSO Governance were submitted to California Independent System Operator (CAISO) on July 7, 2016.

  • Comments filed on the CAISO SB350 Study Results

    June 22, 2016 – Western Grid Group (WGG) and other public interest organizations filed comments on the CAISO SB 350 study results that list 19 categories of unquantified RSO benefits. The comments include benefits that could triple those reported to the California legislature.

  • CAISO – Regional Resource Adequacy Initiative

    Comments on the Straw Proposal for the Regional Resource Adequacy initiative that was posted on February 23, 2016. Joint comments Western Grid Group (WGG), Natural Resources Defense Council (NRDC), and Northwest Energy Coalition (NWEC)

Governance of a new RSO has become one of the most important issues for stakeholder discussion and agreement. Without an understanding of how an RSO will be governed, how a transition will be made to a regional system, and ultimately who and how decisions will be made, states and stakeholders are reluctant to support moving to a regional system. A robust stakeholder engagement process has been initiated and will continue until a proposal is developed.

On June 9, 2016 the CAISO published a Proposed Principles for Governance of a Regional ISO. This document addressed the following issues;

  • Preservation of State Authority
  • Greenhouse Gas Accounting
  • Transmission Owner Withdrawal
  • Initial Board and Transition Period
  • Composition of Regional ISO Board
  • Establishment of a Body of State Regulators
  • Stakeholder Processes and Stakeholder Participation

Stakeholders interested in participating in or following the governance discussion can sign up to receive notifications of developments, meetings and documents here: http://www.caiso.com/Pages/default.aspx

RTO: The Basics

Learn the basics of how a Regional Transmission Operator, or RTO works, and more specifically, how an RTO in the West would strengthen and improve electricity operations in the region.

Table of Contents for this brief:

  • The Basics
  • Functions of an RTO
  • RSO benefits and considerations
  • Addressing Concerns
  • State Regulatory Assessments

Regional Transmission Organizations: The Basics

The Western Interconnection, a physically-joined electricity grid comprised of all or portions of 14 western states, two Canadian provinces, and a small portion of Baja California in Mexico (shown in Figure 1, below), is currently engaged in rigorous efforts to explore a merger of many of its independent electric system balancing areas into a single operational system (usually called an Independent System Operator or Regional Transmission Organization[1], and sometimes referred to informally as an “organized market”).
BASICS-Interconnections-mapThe state of California already has a combined area known as the California Independent System Operator, or CAISO. CAISO works as a combined grid operator for most of the independent electric utility providers within California and a small part of Nevada. An important initiative currently underway considers the addition of PacifiCorp’s six-state utility service area[2] to the CAISO. In order to provide context for the issues, potential benefits, and other considerations related to this initiative, this informational brief is intended to provide a basic understanding of RTOs – how they operate, what they do, and how they manage grid operations and market considerations among multiple generation and transmission providers.

Functions of an RTO

RTOs manage power flows on high voltage transmission systems by directing the flow of power of generating stations within those systems in the most reliable and economically efficient manner. They do so by providing a platform for wholesale energy market transactions, facilitating competition among generators and other resource providers, and ensuring that least-cost resources get dispatched first. They also perform long-term planning to ensure that adequate generation and transmission capacity is available to meet peak demand and emergency conditions.

BASICS-WECC mapPrior to the formation of RTOs, which now comprise roughly 60%[3] of wholesale electricity markets in the U.S., individual electric utilities generally managed the balancing of their own generating resources, transmission line capacity, and variable consumer electricity demand on their own – essentially acting as discrete islands. This “islanding effect” resulted in duplication of utility resources by not allowing sharing of generation and transmission resources over a broader footprint. The Western Interconnection comprises 38 individual “islands”, also known as Balancing Authorities (BAs), each responsible for ensuring that the amount of electricity generation delivered to the grid is equal to the demand for electricity consumption at every moment. See Figure 2.

The sharing of generation and transmission resources across multiple BAs allows for the most efficient and cost-effective utilization of grid resources. For example, at times when electricity demand may be very high in one geographical area, demand may be low and generation resources may be abundant in another (see Figure 3). Moreover, individual electric utilities are likely to have a blend of predictable and dispatchable generating resources, along with variable resources (such as wind and solar), as well as variable consumer electricity demand.

RSO benefits and considerations

Transformation of the CAISO into a multi-state western RSO offers many benefits to electricity consumers through reduced electricity production costs and improved reliability. These cost reductions include the avoidance of building redundant transmission lines and expensive power plants, the benefits of a broader reserve sharing footprint[4], and the reliable and cost-effective integration of renewable energy resources. As the western states increasingly strive to achieve reductions in greenhouse gas emissions, the importance of an RSO – and its ability to provide a platform for effective utilization of the diversity that renewable energy resources allow, becomes vital.

utility A-B-trimmedThe combining of territories across multiple states into a single RSO will yield many benefits, but also gives rise to some complex issues. Some of these include:

  • Preservation of state prerogatives: some state Public Utility Commissions (PUCs) may resist formation of a western RSO based on perceived concerns that an RSO could transfer state control over utility decisions -including investment in utility generation and demand side resource portfolios, to the RSO and to the Federal Energy Regulatory Commission (FERC).
  • Resource Adequacy: Individual states have varying policies and standards regarding the amount of generation capacity that must be reserved for contingency (outage) situations. CAISO currently requires its participating utilities to maintain at least a 15% reserve margin (that is, generation capacity at 15% above overall load forecasts to allow for operating reserves, forecast error, and forced outages). PacifiCorp currently allows for smaller reserve margins, which leads to concerns that “capacity leaning” may occur between states with lower and higher reserve margins.
  • States also have concerns about maintaining control over their siting and routing decisions for transmission lines and power plants.
  • California, which has very stringent air quality and emissions regulations, may fear undercutting of its own climate policies by the addition of states with less restrictive policies. Similarly, states have concerns that they could become subject to another state’s policy.

Addressing Concerns

Senate Bill 350
In October 2015, California Governor Jerry Brown signed into law Senate Bill 350 (SB 350), the Clean Energy and Pollution Reduction Act of 2015. The bill set out ambitious targets for greenhouse gas emission reductions, and increases in both renewable energy production and the use of energy efficiency measures.

SB 350 directed the CAISO to develop a proposal necessary to transition the CAISO into a regional organization and to bring that proposal back for legislative consideration by 2017, when authority for the studies and proposal expires. The bill also directed CAISO to conduct a number of studies aimed at ensuring that the regional RSO results in net benefits to participants. The studies are required to analyze:

Creation and retention of jobs and other benefits to the California economy
Environmental impacts in California and elsewhere
Impacts in disadvantaged communities
Emissions of greenhouse gases and other air pollutants
Reliability and integration of renewable energy resources

 

CAISO Initiatives
CAISO is also conducting multiple initiatives and stakeholder processes aimed at identifying those portions of its current tariff that will need to change in order to function as a multi-state RSO. Planned or active stakeholder initiatives cover the following topics: (i) a new governance structure for the RSO, (ii) regional Resource Adequacy (RA) requirements, (iii) a new Transmission Access Charge (TAC) framework, and (iv) Metering Rules Enhancements. In addition, PacifiCorp and its regulatory bodies in each of its six states are considering cost/benefit assessments of the net impacts of a multi-state RSO. The “Further Reading and Useful Information” section below provides helpful links to information about these activities.

State Regulatory Assessments

In addition to the work directed by the California legislature, the PacifiCorp states of Idaho, Montana, Oregon, Utah, Washington, and Wyoming will engage in their own regulatory review and approval processes of PacifiCorp’s proposed entry to the RSO. Each state regulatory body will assess whether entry into the RSO will be in the best interest of their ratepayers. Studies may include analysis of system reliability, environmental preservation, and other stakeholder interests. State practices, policies, and regulatory frameworks vary on issues such as thresholds for utility asset cost recovery, prudency decisions on asset acquisitions and bilateral energy procurements, and other statutory frameworks that may be different from California’s. An important aspect of the RSO governance proposals currently under consideration is the requirement that state sovereignty be respected in the transition to and operation of a multi-state RSO.

It is important to note that the formation of the Western RSO is following a very different pattern than those used for other RTOs. In other areas of the country RTO development was led by utilities and approved by their regulators. In the West, largely because the CAISO is a creation of the California Legislature, the process had garnered interest from a broad range of elected officials, adding a political element to the discussion. This added level of scrutiny is expected to lengthen and complicate the development of the RSO.

[1]   Independent System Operator (ISO) and Regional Transmission Organization (RTO) are generally considered to be interchangeable phrases.

[2]   PacifiCorp’s service area includes parts of the states of California, Idaho, Oregon, Utah, Washington, and Wyoming.

[3]   Source: Energy Information Administration; see: EIA Independent Statistics and Analysis, April 2011.

[4]   Reserve sharing refers to the need for electric utilities to have sufficient back-up generation resources to provide for outage situations. A broader sharing of reserve, or back-up generation, allows for individual electricity providers to rely on neighboring utilities to provide that back-up service, and thus reduces the ratepayer costs to cover such contingencies.

What is the Western Interconnection?

The Western Interconnection, a physically-joined electricity grid comprised of all or portions of 14 western states, two Canadian provinces, and a small portion of Baja California in Mexico

What is the difference between and RSO, an RTO and the EIM?

RTO (Regional Transmission Organization) is synonymous with RSO (Regional System Operator). This organization has it’s own system of governance that manages grid operations for the participating balancing areas (BA), using the resources throughout the footprint of the RSO.

The EIM (Energy Imbalance Market), is a voluntary market designed to make a broader system (made broader by the participants) more efficient. The EIM allows its participants to voluntarily make available and take advantage of generation resources across its footprint. Grid operation and resource allocation is still determined by the individual Balancing Authorities.

What is a balancing authority?

WECC balancing authorities

WECC balancing authorities

The electrical grid in the Western U.S. is managed by 38 separate balancing authorities, each responsible for keeping energy supply and demand in sync at all times within a defined area. Without an EIM or RSO, only generation resources within each balancing authority area can be used to cover short-term system imbalances.

As stakeholder interests in the RSO are diverse, broad engagement by myriad groups is encouraged so that the resulting product is well supported. Learn more about the fundamental principles of organized electricity markets (RTOs), how the markets function, locational marginal pricing frameworks, and ongoing stakeholder processes via the links below.

The “ABCs of RTOs”, Regulatory Assistance Project, April 2016

Renewable Generation: Providing Balancing Control to the Grid, NREL, September 2013

Senate Bill 350 Studies – Status and Activities, CAISO 2016

Regional Resource Adequacy, CAISO 2016

Regional Transmission Access Charge, CAISO 2016

CAISO Calendar of Activities Related to the Western RSO, CAISO 2016

Lessons Learned,   Natural Resources Defense Council April 2016

Cost and Benefit Considerations

A Western Regional System Operator (RSO) would improve efficiency and lower costs of system operation. This brief outlines the consumer and system costs and benefits from transforming the CAISO from a single state Independent System Operator (ISO) into a RSO.

Table of Contents for this brief:

  • Why a Western RSO is being considered?
  • Components of RSO cost and benefit studies
  • Issues and Background
  • Issues specific to the PacifiCorp states
  • Approaches, methods, information and interpretation options for cost and benefit studies

RSO Costs & Benefits

The California Independent System Operator, or CAISO, is an independent, non-profit organization chartered by the State of California that manages approximately 80 percent of the energy flow in California and a smaller portion in Nevada. An important initiative currently underway considers the addition of PacifiCorp’s six-state utility service area to the CAISO[1]. PacifiCorp is one of the West’s largest utilities, serving nearly 1.8 million customers in Oregon, Washington, Utah, Idaho, Wyoming and California.

COSTS-CAISO-PacifiCorpA decision to merge operations with the CAISO by PacifiCorp would allow for a full, day-ahead coordination of the two largest electrical transmission grids in the region and allow customers served by both entities increased access to both clean energy resources and improved system reliability, while lowering overall costs to electricity consumers. This endeavor would necessitate the transformation of CAISO from a single state ISO into a Western Regional System Operator (RSO), with multi-state operation and governance. While other utilities are considering joining the CAISO, PacifiCorp is the first utility to undertake actions toward entry. This document provides a basic understanding of the costs and benefits of establishing the Western RSO.

This informational brief is provided by the Western Clean Energy Advocates (WCEA), a coalition of over 30 organizations working across the West to accelerate a transition to clean and secure energy resources, while preserving reliability of the Western electricity grid. WCEA invites the participation of clean energy and energy efficiency advocates, environmental organizations, land and wildlife advocates, and others to engage in a clean energy campaign consistent with our Clean Energy Vision.

Why a Western RSO is being considered

Transformation of the current CAISO into a multi-state western RSO offers many benefits to electricity consumers through reduced electricity production costs and improved reliability. These cost reductions include the avoidance of building redundant transmission lines and expensive power plants, the benefits of a broader reserve sharing footprint[2], and the reliable and cost-effective integration of renewable energy resources. As the western states increasingly strive to achieve reductions in greenhouse gas emissions, the importance of a regional RSO – and its ability to provide a platform for effective utilization of the diversity that renewable energy resources allow, becomes vital. The most current wind and solar resources, through advanced inverter technologies, are fully capable of providing grid services that significantly enhance reliability.

Components of RSO cost and benefit studies

For any utility to join an RSO the benefits must exceed the costs of making system modifications, training staff and paying for on-going operation. For example, in preparing for CAISO’s Energy Imbalance Market[3] (EIM) – a market tool typically available in an organized regional market, substantive cost and benefit studies were conducted to estimate its economic feasibility by the Western Electricity Coordinating Council (WECC), the National Renewable Energy Laboratories (NREL), the Northwest Power Pool Market Assessment Committee (NWPP MAC), and a number of utility consultants. The proposed Western RSO would share reserves and integrate renewable resources across a larger geographic region, increasing reliability and efficiency, at a scale well beyond the EIM.

Evaluation of the net value of the EIM included a variety of approaches based on data and information that improved over time. Over the course of several years, study work converged on consensus about analytical methods, data, and outcomes. Almost all the studies found that benefits exceeded costs, and as utilities continued to undertake their own studies, this process resulted in their decisions to join the EIM. Based on experience with the EIM it is anticipated that decisions to join the RSO will require similar cost and benefit studies, again provided from a variety of sources.

Issues and Background

Each PacifiCorp state’s Public Utility Commission (PUC) must have convincing evidence that the benefits of an RSO exceed the costs for their consumers. The consulting firm E3 has produced an initial study of the benefits to PacifiCorp and CAISO customers’ participation in an RSO. Figure 1 summarizes the quantitative benefits; Figure 2 lists the qualitative benefits. The E3 study evaluated only the benefits and not the costs of an RSO.

Additional studies should build consensus on study methods, assumptions, and outcomes.  The CAISO studies mandated by SB 350[4] were constructed to provide a starting point for individual state studies of the benefits and costs of an RSO. To the extent possible, such studies should accurately reflect limitations inherent in the current way the Western grid is operated.

 cost-and-benefits-figure1
Figure 1 – Quantitative Benefits

cost-and-benefits-figure2

Figure 2 – Qualitative Benefits

Issues specific to the PacifiCorp states

Each of the six PacifiCorp states will engage in their own regulatory approvals of PacifiCorp’s proposed entry to the RSO. Each state may conduct their own cost/benefit studies, and will review whether entry into the RSO will be in the best interest of ratepayers, state economies, system reliability, environmental value, and other stakeholder interests. State practices, policies, and regulatory frameworks vary on issues such as thresholds for utility asset cost recovery, prudency decisions on asset acquisitions and bilateral energy procurements, and other statutory frameworks that differ from California’s. An important aspect of the RSO consideration is the maintenance of and respect for state sovereignty as a multi-state RSO is built.

Approaches, methods, information, and interpretation options for cost and benefit studies

  • Option 1: Make no effort to coordinate individual state-level studies among themselves and with SB 350 studies.
  • Option 2: Coordinate assumptions and study methods. The scoping of coordinated studies requires the identification of questions the studies are designed to answer.

Studies related to the RSO proposal need to be well coordinated. This requires:

  • Questions each state will ultimately want to have answered for regulatory decision-making must be identified, along with the necessary data to answer questions posed.
  • Early specification of the base case dispatch against which the RSO dispatch would be compared is essential. Reaching agreement on a base case that accurately reflects current grid operation is the most challenging part of using production cost modeling. For example, without including real world constraints on the assumed coal dispatch (e.g., ramping capability, maximum utilization rates), production cost models may simply dispatch coal over natural gas based on fuel price, resulting in unrealistic amounts of coal being dispatched.
  • Evaluation of future generation mixes that include significantly more wind and solar that is necessary to achieve compliance with state and national greenhouse gas objectives will be necessary.
  • Accurate modeling of the cost of carbon allowances in states that have cap and trade markets must be done.
  • Modeling outputs must answer questions such as wholesale power prices (including transmission congestion costs) in each state or load area. Such outputs must reflect sub-hourly changes in power costs that will become more common as variable generation expands.
  • Maximum available transmission capacity to support exports under business as usual cases should be less than the assumed transfer capacity under the regional operations case, because bilateral markets are unable to utilize the full capacity of the existing transmission due to contractual and operational restrictions.
  • Benefits and costs must be evaluated under different RSO footprints (e.g., current CAISO; CAISO + PAC; CAISO+PAC+NV Energy; +APS, PGE, PSE, and Idaho Power; all EIM participants; and all of the Western Interconnection).
  • Evaluation of benefits over different time periods (e.g., years 1-3, 10 years, 20 years) must be considered.
  • Changes in the dispatch of coal, natural gas and hydro plants, based on outcome of the Clean Power Plan, natural gas price volatility, and climate impacts affecting hydro outputs, load shapes, wind and solar outputs, and shifts in system expansion patterns must be evaluated.
  • Evaluation of GHG emissions with and without an RSO will be necessary.
  • Finally, evaluation of difficult-to-quantify benefits such as reliability impacts of RSO participation, improved real time grid awareness that accompanies market functions, and fast inverter-based reliability services, to the extent possible must also be considered.

Modeling work should provide foundational information for states to evaluate the implications of different policies (e.g., non-participation by Washington State in PAC’s multi-state cost allocation agreement).


[1]      In order to merge with CAISO, PacifiCorp will have to enter into CAISO’s Transmission Control Agreement, thereby becoming a Participating Transmission Owner (PTO). New PTOs will also adopt CAISO’s Transmission Access Charge (TAC), which allows them to recover the cost of ownership, operation, and maintenance for all transmission facilities under CAISO’s operational control.

[2]     Reserve sharing refers to the need for electric utilities to have sufficient back-up generation resources to provide for outage situations. A broader sharing of reserve, or back-up generation, allows for individual electricity providers to reduce the amount of reserves they carry and rely on neighboring utilities to provide that back-up service, when necessary.  Sharing reduces the ratepayer costs by decreasing the need to carry expensive reserves.

[3]   The EIM is a platform for utilities to buy and sell electricity on a five-minute basis to meet the imbalances of their electrical systems.

[4]     California SB 350, passed in September 2015, required CAISO to conduct “one or more studies of the impacts of a regional market……including overall benefits to ratepayers, including the creation or retention of jobs and other benefits to the California economy, environmental impacts in California and elsewhere, impacts in disadvantaged communities, emissions of greenhouse gases and other air pollutants, and reliability and integration of renewable energy resources. The modeling, including all assumptions underlying the modeling, shall be made available for public review.”

Further Reading and Useful Information

Learn more about the fundamental principles of organized electricity markets (RTOs), how the markets function, locational marginal pricing frameworks, and ongoing stakeholder processes and initiatives. Read more via the resource links below, and feel free to contact us for further information.

The “ABCs of RTOs”, Regulatory Assistance Project, April 2016

Senate Bill 350 Studies – Status and Activities, CAISO 2016

Commentary by Governors’ Wind and Solar Coalition, Governors’ Wind & Energy Coalition 2016

Miso 2015 Value Proposition benefits study, Mid Atlantic Independent System Operator, January 2016

SPP Transmission Value Assessment CAISO Calendar of Activities Related to the Western RSO, CAISO 2016

PJM Value Proposition, About the Pennsylvania, New Jersey, Maryland Independent System Operator

 

Governance

Broadly speaking, governance is about control of the future RSO and which entities have decision making authority. This brief provides an overview of the issues being addressed to create a multiple-state organization responsive to state needs.

Table of Contents for this brief:

  • Background
  • Independent Board
  • Key Issues
  • Principles and Strawman Proposals

Governance

This informational brief is one in a series developed by Western Clean Energy Advocates to increase the understanding of issues related to a change from the California Independent System Operator (CAISO) governance structure to a new structure for a Regional System Operator (RSO). This paper describes: the current CAISO system of governance; primary considerations (issues of concern expressed by stakeholders); proposals that have been put forward by different parties; and principles that can guide development of the RSO. This paper only deals with the structure of the entity that has designated decision-making authority.

Creating a new governing body that can be representative of and responsive to a wide variety of interests is challenging. Fortunately, the process will be informed by other similar efforts.

  • There are seven RTOs[1] in existence in the U.S. and many more around the world. These existing structures vary in size and scope and provide a template for development of an RSO in the Western U.S.
  • Over the past three years, a structure of governance has been designed for operation of the regional Energy Imbalance Market (EIM). To develop this new EIM governance framework, the CAISO created an extensive stakeholder process and empaneled a Transitional Committee tasked with developing a new governing structure and a methodology to select its first directors.

governance-figure1-CAISO-utilBackground

The California Legislature authorized the CAISO[2] in 1996. It is a 501(c)(3) non-profit public benefit organization incorporated in 2001 to coordinate operation of the transmission system for entities within California. The following balancing authorities (BAs) are market participants of the CAISO: San Diego Gas and Electric, Southern California Edison, Pacific Gas and Electric and Valley Electric Association – located in Nevada. (see figure 1).

Utilities or Balancing Authorities (BAs) that are in California but not CAISO participants are largely municipal utilities such as Imperial Irrigation District and Los Angeles Department of Water and Power (see figure 2), as well as the federal Western Area Power Administration (WAPA).

The CAISO is responsible for providing power to over 30 million electricity consumers, operating 26,000 miles of transmission, managing the flow of electricity for about 80 percent of California and a small part of Nevada, about 35 percent of all electric load in the Western Interconnection.

governance-figure2-CAISO-non-utilA Board of five governors who are appointed by the Governor of California and confirmed by the California Senate governs the CAISO. Unlike many other ISO or Regional Transmission Operators, the CAISO primarily serves one state and its directors are appointed through a political process.

At the current time PacifiCorp (PAC), a utility that operates in six states,[3] is considering merging its day-ahead market operations with the CAISO. In 2015 PAC began participating with the CAISO in the five-minute energy imbalance market (EIM). The financial and efficiency benefits[4] to PAC from participation in this organized market platform encouraged the utility to study full market integration, which is currently underway.

If PAC or BAs in other states merge systems with CAISO, the CAISO would transform to a multi-state organization. As only California-appointed members currently govern the CAISO, adding BAs from other states would necessitate a change to provide an opportunity for representation from other states participating in the regional market. 

Independent Board

The rules of the Federal Energy Regulatory Commission (FERC) require that RTOs and ISOs have independent boards. In addition, the CAISO is the only RTO in the U.S. whose board members are appointed by the governor and chosen on the basis of sector representation and experience. All RTO/ISO board appointees – including CAISO’s, are financially independent from any market participant, and they are typically chosen for a specific area of expertise (finance, market operation, etc.).

Key Issues

Broadly speaking, governance is about control of the future RSO and which entities have decision making authority. There are a number of considerations to move from a single-state to multiple-state organization.

Loss of Control of Decision-Making Authority

All states involved in the CAISO – PAC merger are concerned with the possibility that a multi-state regional market will mean that authority their state has to make decisions will be changed or lost. This may include decisions by its utilities, utility regulators or utility boards, legislators, or governors. States, generally, have the following concerns about loss of control:

  • Public policy requirements imposed by a legislature, regulatory body or municipal board such as energy efficiency or renewable energy standards, carbon regulations, low-income or disadvantaged community programs, or other directives.

Many states in the West have some form of renewable energy standard.  California and Oregon require their utilities to meet 50 percent renewable energy standards, while other states have much lower, or no goal. States with higher goals are worried about losing the ability to maintain these policies, while states with low or no standards are concerned about becoming subject to goals of another state.

  • Choice of energy resources built or procured to serve utility customers. Through processes such as Integrated Resource Planning or Resource Procurement utilities choose, and regulators or municipal boards approve coal, natural gas, nuclear, renewable, storage and demand side management purchases. Often times these choices are reflective of a state’s native resources.

One of the functions of the RSO is to safeguard reliability. This requires it to be able to ensure that adequate amounts of resources and reserves are available on the system to meet load. The CAISO process to determine resource adequacy is unique. States outside of California need assurance that they will continue to have authority for resources acquired by their utilities and paid for by their customers.

  • Costs of the system and costs imposed on customers. In moving to a regional entity governed by a board, states and state regulators are concerned that costs to operate the system or build new transmission infrastructure will be out of their hands and in the hands of others.

At the current time states approve the rates utilities charge for the operation of a BA. Similarly, while FERC approves the tariff for bulk transmission, state commissions have an opportunity to review and approve the pass-through charges to customers. Developing an RSO requires new transmission tariffs that must be acceptable to state regulators and decision-makers.

The concern over loss of control is not limited to new states that may participate in the RSO. The state of California policy makers who have control of the current single-state system are worried about how moving to a regional system will affect their decision-making authority. All states want to ensure that they will be able to develop their own resource choices or achieve their own public policy goals and not be subject to a public policy requirement or cost imposed by a different state or new RSO authority.

governance-other-isoBuilding a System for Expansion

As referenced above, most of the utilities in the U.S. are part of an organized market. RTOs have formed in different fashions. ISO New England was constituted with six states and the geography of the organization and participating utilities has not changed since inception.  Alternately, the Southwest Power Pool (SPP) started with a limited number of states and utilities and has grown over time.[5]

Discussions on building a Western RSO are currently limited to the CAISO and PAC states. However, CAISO and participating states recognize that additional participants may join the RSO when it is formed. This has been the experience with the CAISO EIM. Therefore, when developing a governance structure consideration must be given to creating a structure that is adaptable and able to accommodate new market entrants.

Creating a transition to a new governance structure

If the RSO is to move forward it will require changes in the current system of regulation and governance. There are many questions that need to be answered in developing an RSO. These include but are not limited to:

  • How large should a governing board be?
  • Will states have an advisory or formal input role to the governing board?
  • How will stakeholders such as state consumer advocates, low-income, labor or other constituencies be able to provide input to the governing board?
  • What expertise is needed on the board?
  • How will the board be chosen?
  • How long will the terms of board members be?
  • Is there any designated period for reviewing of the effectiveness of the board?
  • Is there an appeal process on decisions?

Principles and Strawman Proposals

Creating an RSO will require compromise by all stakeholders to develop the most palatable, acceptable new structure. As an initial effort to scope the issues, several stakeholders have developed principles or governance proposals. The following documents have seeded discussion and consideration of a wide range of issues and structures:

Considerations in Establishing a Western Regional System Operator, Prepared for the Hewlett Foundation, April 2016, Ronald J. Binz

Governance of a Regional ISO, Suggestions for Addressing the Political Dilemma,

California Energy Commission Commissioner Michel Florio

Western ISO Governance Principles – Laura Nelson, Utah Office of Energy Development, April 7, 2016

Public Power Statement of Principles on CAISO Market Expansion, March 2016

 

Stakeholders interested in participating in or following the governance discussion can sign up to receive notifications of developments, meetings and documents here: http://www.caiso.com/Pages/default.aspx

 


[1]      http://www.ferc.gov/industries/electric/indus-act/rto.asp

[2]      Chapter 854, 1996 California Legislative Session http://www.leginfo.ca.gov/pub/95-96/bill/asm/ab_1851-1900/ab_1890_bill_960924_chaptered.html

[3]      PAC has service territory and customers in the states of California, Idaho, Oregon, Utah, Wyoming and Washington.

[4]      The CAISO carefully tracks the EIM for each market participant and reports savings on a quarterly basis. In the most recent report PAC savings were $10.85 million in the first quarter of 2016.  https://www.caiso.com/Documents/ISO_EIM_BenefitsReportQ1_2016.pdf

[5]      SPP has grown “organically.” The RTO started by providing a limited number of services, which have expanded as member utilities requested additional capabilities.

Reading and resources

 

Principles and Strawman Proposals

Creating an RSO will require compromise by all stakeholders to develop the most palatable, acceptable new structure. As an initial effort to scope the issues, several stakeholders have developed principles or governance proposals. The following documents have seeded discussion and consideration of a wide range of issues and structures:

Considerations in Establishing a Western Regional System Operator, Prepared for the Hewlett Foundation, April 2016, Ronald J. Binz

Governance of a Regional ISO, Suggestions for Addressing the Political Dilemma,

California Energy Commission Commissioner Michel Flora

Western ISO Governance Principles – Laura Nelson, Utah Office of Energy Development, April 7, 2016

Public Power Statement of Principles on CAISO Market Expansion, March 2016

Proposed Principles for Governance of a Regional ISO.  On June 9, 2016 the CAISO published this document addressed the following issues;  Preservation of State Authority; Greenhouse Gas Accounting; Transmission Owner Withdrawal; Initial Board and Transition Period; Composition of Regional ISO Board; Establishment of a Body of State Regulators; and Stakeholder Processes and Stakeholder Participation. This document is just a starting point for discussion.

Stakeholders interested in participating in or following the governance discussion can sign up to receive notifications of developments, meetings and documents here: http://www.caiso.com/Pages/default.aspx

Preserving State Prerogatives in a Regional Setting

Formation of a multi-state organization creates concerns that states’ authority to set policy and control resource choices will be changed or lost. This brief addresses how states can maintain primacy.

Table of Contents for this Brief:

  • Background
  • Options for Preserving State Authority
  • Recommended solutions to address concerns regarding state control over utility generation, transmission and demand-side investments
  • Recommended solution to address the California Greenhouse Gas mechanism

 

 Preserving State Policy Prerogatives in a Regional Setting

Transformation of the current CAISO into an RSO offers many benefits to electricity consumers through reduced electricity production costs. These benefits can be gained while preserving existing state control over a utility’s investment in generation, transmission and demand side resource portfolios.

State Public Utility Commissions (PUCs) and their appointed or elected commissioners have statutory or constitutional mandates to protect the public interest by ensuring “just and reasonable rates”, that utility assets are “used and useful”, and that utilities can earn a “fair rate of return” for their investment. State regulators, as well as publicly owned utility authorities serve as arbiters between utilities and customers and are responsible for creating regulation to enforce state-adopted policy.

When a utility considers moving to a regional transmission organization, concerns naturally arise related to the potential transfer of primary control over utility decisions – including investment in utility generation, transmission, and demand side resource portfolios, to an RSO and to the Federal Energy Regulatory Commission (FERC).  State regulators could decide the threat to or perceived loss of state control outweighs the economic and reliability benefits of an RSO. Some states may fear that their policy choices will be subsumed by California policies. Similarly, California may fear undercutting of its climate policies.

Concern about loss of state prerogatives may occur over:

  • Utility investments in generation, transmission, and demand-side measures (also see WCEA’s Resource Adequacy issue brief);
  • Greenhouse gas policies;
  • State determination of siting and routing decisions for new transmission lines; and
  • RSO governance (also see WCEA’s Governance issue brief).

Options for Preserving State Authority

  1. Several options existing for maintaining state control over utility generation, transmission, and demand-side investments —
  • Maintain existing, direct state PUC control over utilities’ generation, transmission, and demand-side investments by not participating in a regional market.
  • Maintain direct PUC control over utility generation and demand-side investments, but use the RSO transmission planning and cost allocation process to make decisions on higher voltage transmission investments (230 or 345 kilovolts and above).
  • Use utility Integrated Resource Planning (IRP) processes to define the generation needs (including flexibility and ramping requirements) of PacifiCorp, current CAISO Participating Transmission Owners, and other utilities that may join the RSO, but seek to establish a regional coordination and consistency review process, and then have the RSO issue Requests for Proposals (RFPs) for resources to meet the RSO footprint-wide needs.
  1. Options Regarding GHG Policies
  • Extend the mechanism used in the Energy Imbalance Market (EIM) on dispatch of generation into California to the RSO day-ahead market. Fossil generation imported into California carries carbon charges that limit or prevent these resources from flowing into the state.
  • Develop RSO processes to enable other PacifiCorp states to join the California cap and trade program, perhaps as a Clean Power Plan (CPP) compliance measure.
  • Develop an effective regional tracking system for carbon emissions so all RSO participant states have access to carbon information for use in policy development or regulatory compliance.

Recommended solutions to address concerns regarding state control over utility generation, transmission and demand-side investments

Moving control to an RSO will require utilities to change their existing operations. One of the benefits of an RSO is to share responsibility for the building of transmission assets that benefit multiple utilities and regions. For that reason an approach of maintaining direct PUC control over utility investments in generation and demand-side investment, but using the RSO transmission planning and cost allocation process to make decisions on higher voltage transmission investments (230 or 345 kilovolts and above) is reasonable.

Continued state PUC control of utility investments through their IRP processes allows states to pursue their desired levels of regulation and their policy frameworks for resource portfolios. Ceding control over the need for high voltage lines to the RSO is a trade-off for states, since regional needs justify these lines and regional cost allocations would pay for them. This option might be most saleable at FERC and is consistent with FERC’s Order 1000 approach for cost allocations that follow benefits: regional transmission benefits should be paid for on a regional basis. States would still have power to veto specific lines through their siting processes, should they wish to do so.

In the ongoing CAISO Transmission Access Charge (TAC) stakeholder process there seems to be a growing consensus toward allocating the costs of existing PacifiCorp lines to PacifiCorp customers and existing CAISO lines to CAISO customers, and to establish an RSO-wide TAC to pay for new transmission lines. Establishing a regional coordination and consistency review process, and having the RSO issue an RFP for transmission resources to meet the RSO footprint-wide needs, is a stretch goal that might emerge in the long term.

Recommended solution to address the California Greenhouse Gas mechanism

States must maintain the ability to make decisions whether to join a cap and trade program. Extending the California cap and trade program to the full RSO footprint could be a non-starter in many PacifiCorp states. However, as all states will be subject to Clean Power Plan regulation, an EPA policy on carbon dioxide emissions from fossil power plants, it makes sense to develop a regional tracking program that can be used throughout the RSO footprint. A tracking program would not change state policy related to carbon emission, but simply provide information.

Further Reading and Information

Role of the StatesNatural Resources Defense Council April 2016

CAISO planning 
https://www.caiso.com/planning/Pages/default.aspx

CAISO transmission planning 
https://www.caiso.com/planning/Pages/TransmissionPlanning/2015-2016TransmissionPlanningProcess.aspx

PacifiCorp Integrated Resource Plan
http://www.pacificorp.com/es/irp.html

LBNL Survey of Western Utility Resource Plans 
https://emp.lbl.gov/sites/all/files/lbnl-6545e.pdf

Resource Adequacy and Reliability

A primary function of a regional transmission organization is planning to ensure that sufficient resources are available to meet regional needs during normal load conditions and unusual events. This issue brief explains the resource adequacy planning process and methods to ensure reliability.

Table of Contents for this Brief:

  • Background
  • Key Issues Associated with Grid Reliability and Resource Adequacy in a Multi-State RSO
  • Approaches and methods for ensuring grid reliability and resource adequacy
  • State Concerns
  • Recommended Solutions & Approaches

Resource Adequacy and Reliability

In order to provide context for the issues, potential benefits, and other considerations of an RSO, it is helpful to have a basic understanding of the proposed Resource Adequacy (RA) framework that will accommodate a multi-state RSO. An RA framework that allows appropriate autonomy among participating states, while avoiding “capacity leaning”[1] will support RSO expansion.

Transformation of the current CAISO into a multi-state Western RSO offers many benefits to electricity consumers through reduced electricity production costs and improved reliability. These cost reductions include the avoidance of building redundant transmission lines and expensive power plants, the benefits of a broader reserve sharing footprint[2], and the reliable and cost-effective integration of renewable energy resources[3].

As the western states increasingly strive to achieve reductions in greenhouse gas emissions, the importance of a regional RSO – and its ability to provide a platform for effective utilization of the diversity that renewable energy resources allow, becomes vital.

Key Issues Associated with Grid Reliability and
Resource Adequacy in a Multi-State RSO

As an RSO expands to a multi-state entity, it must maintain reliability by ensuring that there are adequate resources to meet consumer electricity demand – both in peak demand conditions and in situations involving outages of generation or transmission facilities. In making the determination about whether resources in an RSO’s footprint are adequate, the RSO must simultaneously ensure that some Load Serving Entities (LSEs) do not “lean on the system” at the expense of others. Because new entrants to a Western RSO may have different standards for Planning Reserve Margins (PRMs) than CAISO currently has, the RSO must find a means to respect differing PRMs among new participants, while not allowing those with lower PRMs to lean on neighboring participants with higher reserve margins.

Long-term resource adequacy requires planning and resource acquisition years before resources are operational in order to meet future loads. In shorter time frames, resource adequacy is a function of market operations, requiring reserves of resources to be ready to run across a range of operational time frames and circumstances, including unexpected events that threaten to turn out the lights. See the illustration below, which assumes a 15% reserve margin.

RA-CAISO load info

 

On April 13, 2016, the CAISO issued a Regional Resource Adequacy Revised Straw Proposal, following workshops and  comments from regional stakeholders. CAISO continues to prioritize making minimal changes to their current tariff while still allowing new RSO entrants to use their own resource adequacy processes, based on state-required Integrated Resource Plans and existing reliability standards from the North American Electric Reliability Corporation (NERC) and Western Electricity Coordinating Council (WECC).

Within the revised straw proposal, CAISO proposed utilizing a “zonal approach” to resource adequacy. Specifically, the RSO would establish resource adequacy zones, zonal import limits, and zonal resource adequacy requirements, rather than allocating transfer capability on internally congested lines.

CAISO’s “minimal changes” approach has been supported by some engaged parties, including the clean energy community, so that resource adequacy considerations do not stand in the way of RSO implementation. However, reforms have been recommended in order to push regional resource adequacy toward best practices before RSO expansion “goes live.” Suggested reforms include utilizing probabilistic (rather than deterministic) methods for establishing Maximum Import Capability (MIC), zonal import capability, PRMs, and the capacity contribution for renewable resources.

Other reforms addressing “deliverability” requirements for resources include revising line and path capacity ratings to incorporate dynamic ratings such as the Fast, Adaptable, Scalable Transfer Capability (FASTC) proposed by the WECC Path Operator Task Force. Additionally, the RSO could modify flexible capacity definitions and reduce restrictions on the N-minus-two[4] contingency conditions required for deliverability eligibility and “must take” rules that the CAISO currently uses.

CAISO has accepted comments on its proposal and intends to take its final regional resource adequacy proposal to the CAISO board for approval not earlier than October 2016[5].

Approaches and methods for ensuring
grid reliability and resource adequacy

As the resource mix and grid operations change over time (as a result of development of an RSO or not) it is helpful to understand options to ensure grid reliability and resource adequacy. Possible options including the following:

Grid Reliability:

  • Option 1:  Recognize reliability benefits that improve “real time grid awareness” through normal market operations.  Improved grid awareness can help grid operators prevent electric system disturbances, keep them from escalating, or improve response time to situations as a result of having more, actionable information.
  • Option 2:  Apply “Value of Lost Load” criteria to quantify reliability benefits to focus PUC attention on reliability benefits of an emerging RSO.  Electrical outages can be expensive. Calculating the Value of Lost Load under different scenarios can provide a quantitative assessment of reliability, which is inherently difficult to characterize.
  • Option 3:  State commissions and FERC seek improvements in reliability practices of the CAISO and incorporate those into the RSO.

Resource Adequacy:

  • Option 1: Extend, with minimal conforming amendments, the current CAISO RA framework to PacifiCorp (and any other utility joining the RSO). Under this approach, the State Commissions would set resource adequacy standards for capacity and ramping, utilities and contracted generators would provide the RSO annual and monthly load[6] and generation information, the RSO would determine the “deliverability” of each resource, and the RSO would verify that resources will be available in real-time. Resources counted for RA purposes must make themselves available to the day-ahead and real-time markets.
  • Option 2: Prior to RSO operation (or within a set period of time after the RSO operational date), require the RSO to improve current procedures, including enabling more demand response and distributed energy resources to provide resource adequacy.
  • Option 3: Prior to operation, the RSO would adopt and improve RA process as part of its RA “default” mechanism. Local regulatory authorities could adopt the default procedures or establish their own RA procedures.

State concerns

Regional resource adequacy requirements could impact capacity procurement decisions of load serving entities within participating Western states. CAISO has sought to mitigate this impact with its “minimal changes” approach to regional resource adequacy requirements. However, it is likely that regional resource adequacy requirements will still impact how states conduct their integrated resource planning within an RSO context.

For example, while a Western RSO will likely have the effect of reducing overall capacity requirements for participating utilities, the process utilities use to calculate their planning reserve margins, and the level of these PRMs, will likely change for many RSO participants. Additionally, different utilities currently utilize different approaches to calculating the capacity contribution of renewable resources. A uniform capacity counting method for regional resource adequacy purposes may conflict with a given state’s capacity counting method.

Recommended Solutions & Approaches

To ensure that RSO reliability benefits are recognized, utility regulatory Commissioners and policy makers can review possible reliability benefits that improve “real time grid awareness” through normal market operations. Further, State Commissions can focus attention on the reliability benefits that flow from organized markets, such as those the RSO would operate. Adoption of a “Value of Lost Load Analysis” would require additional study funds, time, and effort. In addition, improvements in reliability practices at FERC, NERC, and WECC will need to be incorporated in RSO operations as they become available.

To ensure resource adequacy requirements are met, the RSO can establish state-of-the-art RA default provisions prior to operation. This method would allow for the option for each local regulatory authority to set its own RA procedures, but would also require CAISO to review its experience with the current RA procedures and make improvements that would become part of the RSO’s default procedures. State Commissions and public power governing bodies could then compare and improve default procedures with other options and decide on appropriate RA procedures for its utility.

 


[1]   Capacity leaning refers to the possibility that various entities participating in the western RSO may have less rigorous reserve margin requirements than others, thereby causing “leaning”, or reliance on others.

[2]   Reserve sharing refers to the need for electric utilities to have sufficient back-up generation resources to provide for outage situations. A broader sharing of reserve, or back-up generation, allows for individual electricity providers to rely on neighboring utilities to provide that back-up service, and thus reduces the ratepayer costs to cover such contingencies.

[3]   The most current wind and solar resources, through advanced inverter technologies, are fully capable of providing grid services that significantly enhance reliability.

[4]        N-minus-2 refers to an outage situation in which a Balancing Authority Area suffers the loss of two generation or transmission resources that are electrically isolated.

[5]        See http://www.caiso.com/Documents/RegionalResourceAdequacy-TransmissionAccessChargeOptions-SchedulesExtended.html for RA schedule.

[6]        The current CAISO procedures are based on load forecasts developed by the California Energy Commission and reserve margins and generation resource mixes specified by the California PUC. For PacifiCorp, the utility would provide the load and resource mixes based on its approved or acknowledged IRP.

Transmission Access Charges

This informational brief provides a basic understanding of the fee that will be charged to transmission users in a regional system, known as a Transmission Access Charge (TAC). A TAC must be designed to avoid cost shifts and inequities as a result of market expansion.

Table of Contents for this Brief:

  • Understanding Transmission Access Charges
  • CAISO TAC Initiative
  • Transitional Issues with TAC

 

Transmission Access Charge

An important initiative currently underway considers the addition of PacifiCorp’s six-state utility service area[1] to the California Independent System Operator’s (CAISO) existing footprint, thereby creating a western Regional System Operator, or RSO. In order to provide context for the issues, potential benefits, and other considerations related to this initiative, this informational brief is intended to provide a basic understanding of the proposed Transmission Access Charge (TAC) that will accommodate a multi-state RSO.

A Transmission Access Charge that avoids cost shifts and is viewed as equitable will support RSO expansion.

Understanding Transmission Access Charges

A Transmission Access Charge (TAC) is a rate charged for each megawatt-hour (MWh) of energy consumed or exported that is used to recover the FERC-approved Transmission Revenue Requirement (TRR) of each Participating Transmission Owner (PTO). The TAC recovers the cost of ownership, operation and maintenance for all transmission facilities under Independent System Operator (ISO) operational control.

CAISO’s TAC rate is a regulated, cost-based rate and one of two FERC rate categories; the other is a Market Based Rate that may be granted to wholesale electricity sellers that can demonstrate mitigation of horizontal and vertical market power. The current TAC is a two-part formula rate. The TRR for facilities 200 kilovolts (kV) and above is recovered through a common rate, while the TRR for facilities less than 200 kV is recovered through PTO-specific rates charged to loads in the PTO territory.

The FERC approved TRR for PTOs considering joining an RSO will likely be either lower or higher than CAISO’s current TAC. Therefore, leaving CAISO’s TAC unchanged would either shift costs to customers of new entrants or to customers in California.

Cost shifts in either direction are likely to become an obstacle to the CAISO becoming a regional organization, and once formed, to its expansion.

To address this issue the CAISO is leading an open stakeholder initiative process on the TAC. The purpose of the TAC initiative is to design a TAC rate that will be viewed as equitable by CAISO participants and potential new entrants.

In designing a regional TAC, issues to be determined include:

  • Principles to be applied;
  • How to allocate the costs of existing and new facilities;
  • Determination of what defines an existing facility versus what defines a new facility;
  • For new facilities, determination of what constitutes a facility eligible for regional cost allocation to all participating areas, versus sub-regional or local cost allocation;
  • Whether the costs for different types of projects (reliability, economic, and public policy) should be allocated differently; and
  • The methodologies that should be applied to allocate the costs of different project types.

CAISO TAC Initiative

CAISO initiated a TAC stakeholder process in the fall of 2015 to identify the issues to be addressed through a TAC initiative and to seek stakeholder input. Since that time CAISO has put forward an issue paper, a straw proposal and a revised straw proposal.  It has conducted multiple public meetings and sought comments on all papers issued.  Comments on the Revised Straw Proposal were received by CAISO on June 10th, and the TAC initiative remains in progress.

Information on the TAC initiative is linked here.

Principles to be applied – Beneficiary Pays

CAISO initially proposed allocating 100% of the costs of new transmission facilities based on the measured benefits to each sub-region whether for reliability projects, projects to achieve lower economic costs, or projects needed to comply with public policies.

The “beneficiary pays” principle was almost universally supported in stakeholder comments. However, the current proposal leaves approval of new transmission and its allocation to a body of state regulators[2] anticipated in a new governance structure.

Allocation of costs of existing transmission

CAISO proposes allocating the costs of existing transmission to the sub-region in which they are located. After expansion, the current CAISO footprint becomes a sub-region and each new PTO becomes a sub-region. The proposal does not anticipate a blending of costs over time. This would be a permanent “license plate” approach, where each sub-region pays its own unique rate.

This approach is supported by comments filed  by public-interest advocates, PacifiCorp, and multiple other parties.

Allocation of costs of new transmission

The current proposal leaves approval of new transmission and its allocation to a body of state regulators anticipated in a new governance structure that has yet to be fully developed or approved.

Determination of Transmission Facilities Eligible for Regional Cost Allocation

CAISO currently proposes the following qualifications for transmission that would be eligible for regional cost allocation. Such transmission facilities must be:

  • Identified through an expanded RSO Transmission Planning Process
  • Greater than 200 kV
  • Connected to or strengthen ties between sub-regions
  • Connected to or strengthen ties between expanded RSO and adjacent Balancing Area Authority (BAA)

CAISO previously proposed a size criterion of 300 kV and greater. 200 kV is consistent with how CAISO currently distinguishes between regional and local facilities.

Transitional Issues with TAC

In the transition to a regional system there is uncertainty about how planned but not yet built transmission lines would be treated. A key concern for stakeholders in all six states is how the four segments of the PacifiCorp Energy Gateway project that are not yet fully permitted and approved could impact transmission costs for California and PacifiCorp customers.

As the TAC initiative is still in process (as of July 2016) those interested in this issue can refer to the documents below and request to be notified of meetings and documents by signing up for CAISO market notices. https://www.caiso.com/informed/Pages/Notifications/MarketNotices/Default.aspx

 


[1]   PacifiCorp’s service area includes the states of California, Idaho, Oregon, Utah, Washington, and Wyoming.

[2] A fundamental concern of regionalization is ensuring states retain primacy over decision making related to generation resource choices and local transmission.  Governance of the RSO may include a Body of State Regulators who have direct decision-making authority.

Market Gaming and Manipulation Concerns

Markets create an opportunity for competition among electricity providers resulting in lower costs for consumers.  Markets can also be manipulated for financial gain. This brief discusses the safeguards in place to monitor and control the RSO energy market.

Table of Contents for this Brief:

  • Understanding Market Gaming and Manipulation
  1. A cautionary tale: the California energy crisis of 2000 – 2001
  2. Preventing market gaming and manipulation
  • Participation in an RSO Mitigates Market Power Concerns
  1. Market Power, a Form of Market Manipulation
  2. Recommended Actions to Address Market Gaming and Manipulation Concerns
  • Conclusions

 

Market Gaming and
Manipulation Concerns

 

Understanding market gaming and manipulation

The Federal Energy Regulatory Commission (FERC) defines market power in energy markets as the ability of any participant with a large market share to affect or manipulate pricing by withholding production from the market, limiting service availability, or reducing purchases.[1] Market manipulation can be difficult to recognize in real time, but audits of bidding behavior after the fact by independent market monitors can reveal fraudulent behavior.

The CAISO currently has in place a Department of Market Monitoring (DMM), staffed by economists, engineers, and data analysis professionals. They have access to all ISO market and operational data and perform tests that can reveal fraud. Despite their efforts, fears about manipulation of organized markets in a multi-state RSO – a fear that has been shaped by experience with the 2000-2001 Western electricity crisis – could potentially be a source of opposition to the formation of an RSO. For some parties, perceptions of market failures in the Energy Imbalance Market (EIM) amplify their concern.

Logo_de_Enron#1. A cautionary tale: the California energy crisis of 2000 – 2001

The California energy crisis of 2000-2001 was a primary example of market manipulation in recent history. That experience took place before several important measures were instituted to prevent a repeat of the events that led up to and followed the crisis. Many accounts indicate that the crisis occurred primarily because supply shortages were caused by physical and economic withholding of generation capacity, natural gas pipeline shutdowns by the Texas-based energy corporation Enron, and state electricity sector restructuring that had capped retail, but could not limit wholesale electricity prices regulated by FERC, then led by regulators not motivated to interfere with the California market.

These events led to a “perfect storm” that caused a ten-fold increase in energy prices, bankruptcy proceedings and near collapse of the state’s two largest utilities (Pacific Gas & Electric and Southern California Edison).  Large-scale rolling blackouts were experienced in California, as well as severe harm to the state’s economy and other states involved with the California market also suffered economic dislocations.

In that 2000-2001 timeframe, California had an installed generating capacity of approximately 45 gigawatts (GW). At the time of the blackouts, demand was just over 60% of that capacity. Nevertheless, energy companies created artificial demand and supply gaps to create perceived shortages in the market. Independent Power Producers (IPPs) such as Mirant, Dynegy, and others also exercised physical withholding of generation by taking power plants offline for maintenance during peak demand periods to increase electricity pricing.

Traders were thus able to sell power at premium prices, sometimes up to a factor of twenty times its normal value. The crisis cost the California state treasury over $46 billion, caused by the need to purchase daily power during the blackouts and to secure long-term contracts to stabilize the state’s energy supply.

#2. Preventing market gaming and manipulation

In the wake of Enron’s and other IPP’s schemes in the CAISO market, the Energy Policy Act of 2005 gave FERC broad authority to prohibit manipulation, and an intentionally broad proscription against all forms of deception, manipulation, deceit and fraud. Both the breadth of Congress’ authorization to FERC and the breadth of the Anti-Manipulation Rule itself are a response to what courts have long recognized: the impossibility of foreseeing myriad means of misconduct in which market participants may engage.

Today’s system for monitoring markets for potential manipulation and imposing measures to stop market manipulation is well established at the CAISO – both in the DMM and its independent Market Surveillance Committee, as well as at FERC. These entities continually monitor market bids and prices that may provide evidence of where prices do not match expected dispatch and congestion costs and identify where there could be flaws in market designs.

When manipulation is discovered, FERC now has the authority to levy $1 million per violation fines and require disgorgement of gains. FERC has the power to, and has exercised these authorities. However, their monitoring and enforcement powers and capabilities may not be well known to parties unfamiliar with organized markets.

Participation in an RSO mitigates market power concerns

#1. Market Power, a form of market manipulation

Market manipulation is related to, but distinguished from market power. Market power is the ability to withhold economical production to achieve higher profits. FERC has checks and balances in place to prevent two types of market power: horizontal and vertical. A seller with horizontal market power may be able to manipulate market prices by withholding its generation, or by profitably bidding into markets at excessively high prices.

A seller with vertical market power has ability to erect barriers to market entry for its competitors by holding ownership of two or more steps in a production and market delivery process. This may include control – or affiliation with — an entity that owns or controls intrastate natural gas transportation, intrastate natural gas storage or distribution facilities; sites for new generation capacity development; and physical coal supply sources and ownership of or control over who may access transportation of coal supplies. Such control or ownership can enable the participant to give preference to itself or its affiliate over competitive firms[2].

FERC considers participation in an organized electricity market (such as CAISO or the proposed Western RSO) to be a means of demonstrating mitigation of horizontal and vertical market power. Participation in organized wholesale markets provides a setting in which market power could be exercised. But it should be kept in mind that market power also exists and can be exercised in bilateral markets. Wholesale markets bring additional measures and means to reveal and correct market power. Constant vigilance is necessary as the incentive to profit by illegal means is an ever-present incentive for some market participants.

#2. Recommended actions to address market gaming and manipulation concerns

FERC and the CAISO should undertake an educational program that explains current market monitoring and enforcement procedures. These procedures could be contrasted with very limited tools available in bilateral markets, such as codes of conduct to separate company transmission and merchant functions and state regulatory audits and enforcement actions.

By inviting parties to pose concerns about areas where RSO markets might be manipulated an opportunity would be created to explain how those concerns would be addressed. As a starting point, FERC and the CAISO should address concerns parties have expressed about:

  • Preferential rate treatment for “no charge” EIM transmission;
  • Transmission access impacts on non-EIM customers;
  • Offers of unused transmission to manipulate capacity release for trading advantage;
  • Parallel external flows have that have negative RSO market impacts; and
  • Market manipulation at interties the ISO and PAC have with other utilities.

Explanations about how such hypothetical RSO market failures would be detected and rectified could follow. These might include attention to the need for the Energy Curtailment Calculator (ECC), a method to attain region-wide, real-time grid and resource transparency and awareness, which could be proposed for implementation with the EIM.  Some observers suggest that running an ECC in parallel with RSO market operations would help to reveal market gaming and manipulation, in addition to ongoing RSO and FERC market monitoring.

The notion is that, in addition to the RSO, a regional congestion management approach is needed that incorporates both RSO and non-RSO operations.  FERC should thoroughly detail how it implements granting and withdrawing authority to sell power at market based rates, since PacifiCorp has been involved recently in several FERC dockets regarding these issues.

Conclusions

In any market there are possibilities, and the profit incentives, for market participants to manipulate the market or market prices for financial gain. As mentioned in this paper, the Enron scandal is the most famous and egregious example. That event brought about fundamental changes in the level of scrutiny on the CAISO and enforcement by CAISO and FERC. While no market monitoring and enforcement program can protect against all forms of manipulation, the CAISO and FERC have put in place significant safeguards in the form of market rules and staff to monitor market activities as well as penalties to deter fraudulent behavior. Expansion to a multi-state RSO will require the close supervision that California currently has in place to prevent new opportunities for market gaming and manipulation.


[1]      See: FERC Guide to Market Oversight – Glossary, updated March 15, 2016

[2]      See: FERC Guidance on Vertical Market Power Representations, June 30, 2015

Seams Issues

Seams issues arise as a result of two or more contiguous wholesale electricity markets having different market rules and procedures.  This issue brief provides information on economic and reliability impacts and inefficiencies caused by seams issues.

Table of Contents for this Brief:

  • Background
  • Understanding Seams Issues
  • Concerns with Seams Issues
  • Opportunities to Manage Seams Issues

 

Seams Issues

An important initiative currently underway considers the addition of PacifiCorp’s six-state utility service area to the existing footprint of the California Independent System Operator (CAISO), thereby creating a western Regional System Operator, or RSO. Transformation of the current, single-state CAISO into an RSO offers many benefits to consumers including the reduction of institutional and transactional inefficiencies, or “seams issues,” that arise when trying to move power from one region to another. Generally, increasing efficiency in the buying and selling of electricity decreases transaction costs. Thus, reducing seams issues increases liquidity in the broader market and improves reliability.

 

Figure 1.

Figure 1.

Understanding “Seams Issues”

The term “seams issues” refers to differences in operations, transmission scheduling, and general market design rules, as well as the cost of transferring power, that arise between two or more of the 38 different individual Balancing Areas[1] (BAs) managing the grid today in the Western Interconnection (see Figure 1).

For example, the CAISO has different transmission scheduling timelines than other BAs, and this can cause transactional inefficiencies when these entities are trying to trade electricity with each other—across their borders, or “seams.”

As another example, the Bonneville Power Administration (BPA) transmission scheduling rules require 15-minute schedules to be submitted up to 20-minutes before real-time. However, the CAISO requires energy bids being delivered over their connections with other markets to be submitted 75-minutes before real-time, thereby eroding the operational benefits of importing energy into the CAISO on a 15-minute basis.[2]

Utilities that are not operating under the same transmission and market rules routinely mitigate the impacts of seams issues through what are called Inter Control Area Operating Agreements (ICAOAs). ICAOAs are in place among most of the 38 different BAs in the Western Interconnection. ICAOAs will continue to be an important part of reducing the impacts of seams issues until such time as there are no seams between BAs, which would be the case if there were a RSO that encompassed all BAs in the Western Interconnection.

In an RSO, the occurrence and impact of seams issues would be reduced because, by definition, the RSO would bring all participating BAs under the same umbrella of transmission scheduling, generation dispatch and market rules. If a neighboring utility joins with the CAISO to create an RSO, the seams issues that exist today between those two entities will dissolve, reducing transactional friction, improving market liquidity and the efficiency of the grid and thereby benefiting consumers. Important issues would still remain regarding Locational Marginal Pricing, Congestion Revenue Rights, and other topics that are currently being addressed under the CAISO’s market expansion stakeholder processes.

One of the difficult-to-quantify benefits of an RSO is improvements to reliability.  Reliability in the Western Interconnection will be enhanced when there are fewer BAs as there will be fewer boundaries (contractual and operational) between BAs and a more fluid system of trading that is not constrained by agreements (e.g., ICAOAs).

 

Concerns with Seams Issues

While a new RSO will eliminate seams for participating BAs, the new RSO could create new seams with different BAs in the West than previously existed. Unless or until all utilities in the Western Interconnection join the new RSO, the existence of seams is inevitable and will need to continue to be managed much the same way these issues are handled today.

Seams issues may be particularly persistent in the Northwest. PacifiCorp’s territory in the Northwest borders with many other utilities. If PacifiCorp were the only utility in the Northwest to join the new RSO, the seams between PacifiCorp and the current CAISO-participating BAs would vanish, but new seams between the expanded RSO footprint and PacifiCorp’s neighbors would arise. New ICAOAs would have to be established in these circumstances.

A reason that utilities may not want to join an RSO is because of concerns about exposure to increased levels of FERC jurisdiction. Consumer-owned utilities and federal Power Marketing Administrations (PMAs) like the Western Area Power Administration (WAPA) and BPA may be reluctant to join an RSO for this reason.[3] If a consumer-owned utility or federal PMA was interested in joining the RSO, the RSO’s tariff could include language that protects existing statutory preferences or limits FERC’s jurisdiction over these new entrants.[4]

 

Opportunities to Manage Seams Issues

The most effective way to resolve seams issues is to join the RSO and/or reduce the number of BAs in the Western Interconnection. However, recognizing that this option may not work for all entities, utilities will have to continue to work together to reduce the impacts of seams issues through ICAOAs or other mechanisms.

The Western Electricity Coordinating Council (WECC) has established a Seams Issues Subcommittee – part of the Market Interface Committee, for parties to work collaboratively to develop enhancements to West-wide market and system operations.  Developed enhancements, or utility agreements will not eliminate seams issues but may reduce institutional and transactional friction, and possibly costs.

The expansion of an RSO has the benefit of reducing seams issues, making the market work more efficiently, and improving reliability. Under circumstances where seams issues persist or new seams issues develop, it is important that information be available and transparent to facilitate solutions that reduce market friction.

 


[1]      For the purpose of this paper we use the terms BA and utilities interchangeably.

[2]      This is true for bilateral imports only, where one BA sells directly to another BA. 15-minute scheduling and dispatch through the CAISO Energy Imbalance Market does not require transmission scheduling at all. Those 15-minutes bids are dispatched based on constant analysis of the transmission capabilities.

[3]      This is a matter of individual utility preference.  Some consumer owned utilities are already sufficiently comfortable joining the CAISO (e.g., Cities of Anaheim, Azusa, Banning, Colton, Pasadena, Riverside and Vernon and Valley Electric Cooperative, and WAPA’s Sierra Nevada Region).

[4]      See amendments to the Southwest Power Pool (SPP) tariff when the WAPA Upper Great Plains Region joined SPP. Those terms include FERC’s limited authority over WAPA’s participation in SPP, addressing WAPA’s status as a federal agency that has certain responsibilities under federal law and WAPA’s contractual responsibilities to its “preference” customers.