On June 29, 2018, FERC approved the California Independent System Operator, Inc.’s (“CAISO”) revisions to its congestion revenue rights (“CRR”) auction intended to address the shortfall between CRR auction revenues and amounts owed by CAISO to holders of auctioned CRRs. Specifically, CAISO proposed to (1) require CAISO transmission owners to submit all known transmission maintenance outages for the next year by July 1, rather than October 15; and (2) limit the allowable source and sink pairs eligible for the CRR auction to pairs associated with supply delivery and to exclude non-delivery CRR pairs.

CRRs entitle their holders to receive a payment from CAISO – or require their holders to pay CAISO – depending on the relative amount of congestion between a “sink” node and a “source” node in the day-ahead market. In its filing, CAISO explained that market participants can purchase CRRs at auction to hedge against transmission congestion costs. In addition, CAISO distributes CRRs to load-serving entities through an allocation process. CAISO explained that it maintains a CRR balancing account comprised of day-ahead market congestion rent and CRR auction revenues, which CAISO uses to fund payouts to CRR holders. Further, CAISO explained that if the funds in the balancing account are insufficient to fully fund CRRs, CAISO allocates the shortfall to measured demand. Similarly, CAISO explained that it allocates any excess funds in the balancing account to measured demand.

According to CAISO, in recent years, there has been a shortfall between the amount of CRR auction revenues and payouts to holders of auctioned CRRs. Specifically, CAISO stated that, since 2014, CRRs have been underfunded by $99.5 million per year on average. Under its analysis, CAISO found that this shortfall was in part due to a lack of timely reported transmission outage data, such that major transmission outages that impacted congestion in the day-ahead market were not reflected in the CRR auction model. As a result, CAISO stated that the CRR auction model showed a less congested transmission system than the actual day-ahead conditions. Moreover, CAISO found that a large part of the auction revenue shortfall resulted from source and sink CRR pairs that do not align with typical delivery paths.

Thus, in its filing, CAISO proposed two key changes to its CRR auction. First, CAISO proposed a requirement that CAISO transmission owners submit all known and planned transmission maintenance outages potentially affecting the CRR model for the following year by July 1, rather than October 15, which would align the annual CRR allocation and auction process and improve the CRR model. Second, CAISO proposed, a path pairing restriction, which would limit source and sink pairs to pairs (1) from a generator bus to either a load aggregation point, a trading hub, or an intertie; (2) from a trading hub to either a load aggregation point or an intertie; and (3) from an intertie to either a load aggregation point or a trading hub. CAISO argued that these pairings would align CRRs with their primary purpose of hedging congestion costs associated with delivering supply.

FERC approved CAISO’s proposal as just and reasonable and not unduly discriminatory or preferential. First, FERC found that CAISO’s proposed annual outage reporting requirements will better align CAISO’s CRR auction model with its day-ahead models. In doing so, FERC found that the new reporting requirements will increase transparency and improve liquidity by encouraging more participation in CRR auctions. In addition, FERC found that the outage reporting proposal will reduce overselling of CRR capacity, which will make it less likely that CAISO will need to use uplift from ratepayers or auction revenues to fully fund CRR payouts. Second, FERC found that CAISO’s elimination of non-delivery source and sink pairs will remove a bulk of the auction revenue shortfall. FERC also stated that CRRs will continue to provide a congestion hedging function by allowing CRRs to function as a financial equivalent of firm transmission service and that, by removing non-delivery pair CRRs from the auction, more capacity will be available to hedge the delivery of generation to load. While FERC acknowledged that non-delivery pairs can be used in effective hedges, it found that the benefit of the proposal’s remedy to the revenue shortfall outweighed the modest potential loss in hedging opportunity.

A copy of FERC’s order is available here.