The “root cause” of problems stemming from decremental bids for imbalance energy in California’s energy market is poor market design, FERC Commissioner William Massey said last Wednesday. At the Commission’s latest agenda meeting, he urged the California Independent System Operator (Cal-ISO) to tackle the decremental bid issue in a comprehensive market redesign proposal, which the grid operator has to file this spring at FERC.

FERC last week rejected a complaint filed by the California Electricity Oversight Board (CEOB) asking the Commission to consider placing limits on power suppliers’ decremental bids for imbalance energy.

The CEOB in January asked FERC to take immediate action to stem what the board said were efforts by generators to exercise market power through the execution of anti-competitive price bids for decremental energy in the real-time energy market overseen by Cal-ISO.

The CEOB said that generators are exploiting a gap in FERC’s price mitigation strategies for California. The Williams Companies, however, argued that the costs resulting from negative decremental bids are “largely inconsequential” and that they “certainly do not support an allegation of market power.”

FERC staff concluded that it would be premature to act on the complaint given the comprehensive market redesign proposal that Cal-ISO needs to file at FERC by May 1.

“My understanding of this problem is that it results in large part from an inadequate market design,” Massey said. “The root of the problem is scheduling more generation in a specific location than is physically feasible, given grid constraints.”

Massey argued that the problem of negative decremental bids could be solved “with a good solid market design such as that recommended in our recent standard market design paper.” The Commission issued the standard market design paper earlier this month. Massey went on to say that “I do think that this is a problem that has to be addressed.”

Although FERC is dismissing the CEOB’s complaint, that “doesn’t mean in my view that we don’t see a problem,” Massey added. More broadly, Massey strongly encouraged the Cal-ISO “to file a market design that not only works, but one that is largely consistent with our working paper on standard market design.”

In a separate but related order, the Commission on Wednesday also addressed a set of proposed changes Cal-ISO wants to make to its tariff.

Among other things, the grid operator proposed a change to its intra-zonal congestion management model that would limit generators’ schedules in the forward market when the ISO determines that congestion will occur. Cal-ISO also proposed a change in the calculation of the target price for incremental and decremental imbalance energy bids.

The Commission shot down these proposed changes “as inappropriate, piecemeal changes to the market design,” a FERC staffer pointed out. The order indicated that the market problems that these proposals are intended to address should be included in Cal-ISO’s comprehensive market redesign that it is required to file in May.

Meanwhile, even with clear signals from federal regulators that this year’s mantra is that “it’s the market design, stupid,” Cal-ISO on Wednesday was still a long way from completing its market design makeover for its real-time, load-balancing market, according to a source close to the grid operator.

The revised market design, which has been getting a lot of feedback from stakeholders, is still “very fluid,” according to the Cal-ISO source, but the grid operator’s officials hope to have “a lot more of it nailed down” by April 9 when the Cal-ISO oversight board looks at the initial drafts of what the agency eventually files with FERC on May 1.

However, Cal-ISO will not have the full-blown new design even on the later date. It’s expecting to file its plans for only part of the design, stressing future market and congestion management but holding off on new tariffs for FERC approval, the Cal-ISO source said.

As for Massey’s urging the grid operator to follow the Commission’s SMD approach, Cal-ISO is expected to follow the design standards as closely as possible, but not 100%, according to the source. “It will be as close to FERC’s design standard as possible without hurting California consumers.”

Cal-ISO operations continue to run on a non-crisis-management basis, smoothly transitioning into spring with abundant supplies, contrasted to a year ago, the source said.

However, weather and other factors still could have an impact this summer, and Cal-ISO won’t make its official assessment of the upcoming statewide power supply situation until April 24, less than a week before its new market design plan, or at least part of one, will be filed with FERC.

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