On September 20, 2018, FERC partially accepted tariff amendments proposed by the California Independent System Operator Corporation (“CAISO”) aimed at improving the efficiency of its congestion revenue rights (“CRR”) market rules. Specifically, CAISO proposed to decrease the percentage of transmission system capacity available in the annual CRR allocation and auction processes from 75 percent to 65 percent (“Capacity Release Reduction Proposal”). FERC accepted the Capacity Release Reduction Proposal, finding it just and reasonable. CAISO also proposed to eliminate full funding of CRRs and instead scale CRR payouts, on a constraint-by-constraint basis, up to the extent that CAISO collects sufficient revenue through the day-ahead market congestion charges and charges to counterflow CRRs (“Scaling Proposal”). FERC, however, rejected the Scaling Proposal as not just and reasonable.

Under the Capacity Release Reduction Proposal, CAISO explained that, although there would be a reduction in transmission capacity available in the annual CRR auction, there would be an increase in the amount of CRRs available through the monthly allocation and auction where it anticipates being better able to predict transmission availability. CAISO explained that it undertook an analysis, which showed that a 10 percent decrease in available annual capacity reduces transmission infeasibilities that cause revenue insufficiency by 57 percent. Because CAISO’s analysis showed that a 10 percent decrease in available annual capacity would “reduce CRR revenue insufficiencies,” and noting that the proposal was unopposed, FERC accepted the Capacity Release Reduction Proposal.

With respect to the Scaling Proposal, for each hour of the day-ahead market CAISO proposed to compare the congestion revenue and revenue from counterflow CRR holders for each constraint to the payments due to prevailing flow CRR holders for that constraint. CAISO proposed that, when it does not collect sufficient revenue to pay prevailing flow CRRs the full notional value of their implied flow over a constraint in an hour, it would scale the payment to all CRRs that have implied flow in the direction of congestion on that constraint. CAISO stated that the scaling would be in proportion to each CRR’s implied megawatt (“MW”) flow relative to other CRRs’ implied MW flow on that constraint. CAISO further explained that it would scale CRR payments only in the prevailing flow direction in the event of an over-subscribed constraint and not scale payments due from counterflow.

FERC, however, rejected the Scaling Proposal because it was inconsistent with the Commission’s long-held symmetric approach to counterflow and prevailing flow CRRs. FERC stated that it has held that counterflow and prevailing flow CRRs should be netted against one another such that the expected net value of two obligation CRRs of equal MWs from A to B and B to A will be equal to zero. FERC explained that, contrary to this precedent, CAISO’s proposal treats prevailing and counterflow CRRs differently, such that the holder of a prevailing flow CRR from A to B cannot offset that obligation by holding a CRR from B to A. In finding that CAISO’s asymmetric approach is not just and reasonable, FERC stated that CAISO had not demonstrated that the differences between a portfolio approach and a constraint-by-constraint approach justify a departure from symmetric scaling. FERC further found that the Scaling Proposal has several undesirable effects, like reduced transparency (i.e., market participants could face difficulties valuing a counterflow hedge relative to a prevailing flow hedge, since one would be discounted while the other would not), which could discourage market participants from bidding for counterflow CRRs, which could reduce liquidity and could, in turn, exacerbate the CAISO CRR market’s current market efficiency problems, such as the auction revenue shortfall issue. FERC therefore rejected CAISO’s Scaling Proposal, without prejudice to CAISO refiling a proposal that allows “CRR holders to consistently net prevailing and counterflow CRRs against each other as in other ISO and RTO markets.”

A copy of FERC’s order is available here.