[Federal Register Volume 71, Number 24 (Monday, February 6, 2006)]
[Notices]
[Pages 6063-6068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1090]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. ER06-354-000; EL06-44-000]


Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead 
Brownell, and Suedeen G. Kelly; California Independent System Operator; 
Order Accepting and Modifying Tariff Filing and Instituting a Section 
206 Proceeding

Issued January 13, 2006.
    1. On December 21, 2005, the California Independent System Operator 
Corporation (CAISO) filed a tariff amendment (Amendment No. 73) 
proposing to change its current ``soft'' $250/MWh bid cap for real-time 
energy bids and adjustment bids to a ``hard'' $400/MWh bid cap, 
effective January 1, 2006 or as soon thereafter as possible. The CAISO 
asked the Commission to review its application on an expedited basis 
with a shortened comment period. In this order, the Commission accepts 
with modification, as described below, the CAISO's proposed tariff 
amendment, effective upon issuance of this order.
    2. To remove any opportunity for market distortions created by the 
Commission's approval of an increase in the CAISO bid cap, we will 
institute, under section 206 of the Federal Power Act (FPA),\1\ an 
investigation into the price cap in the WECC outside the CAISO. We also 
institute a section 206 investigation into the CAISO ancillary service 
capacity bid cap, in order to consider whether any incentives that 
distort a supplier's choice between offering energy or ancillary 
services will result from the rise in gas prices and the increase in 
the CAISO energy bid cap. We hereby establish a refund effective date 
pursuant to the provisions of section 206.
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    \1\ 16 U.S.C. 824e (2000).
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Background

The CAISO's Filing

    3. The CAISO filed Amendment No. 73 requesting that the Commission 
accept its tariff revision altering the CAISO's current bid cap. 
Section 28 of the CAISO tariff establishes a bid cap that sets a limit 
on the level of bids submitted for the CAISO's energy and ancillary 
service capacity markets. According to the CAISO, this bid cap also 
applies to adjustment bids used in the day-ahead and hour-ahead 
congestion management markets. Amendment No. 73 proposes to modify 
section 28.1.2 to replace the current

[[Page 6064]]

``soft'' bid cap \2\ of $250/MWh for real-time energy bids and 
adjustment bids with a ``hard'' bid cap of $400/MWh.\3\ The CAISO 
states that its proposal to change its bid cap from ``soft'' to 
``hard'' is consistent with the Commission's directive that it change 
its bid cap to a ``hard'' cap when it implements the Market Redesign 
and Technology Upgrade (MRTU).\4\ It does not propose to change the bid 
cap for ancillary services markets from the current ``soft'' $250/MWh 
cap.
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    \2\ Section 28.1.1 of the CAISO's tariff currently permits 
market participants to submit bids above the cap, but any accepted 
bids above the cap are not eligible to set the market clearing price 
and are subject to cost justification and refund. A ``soft'' cap is 
one where market participants may submit bids above the bid cap with 
adequate justification, but without setting the market clearing 
price.
    \3\ A ``hard'' cap is one where market participants' bids are 
not permitted to exceed the cap, regardless of the seller's costs.
    \4\ California Independent System Operator Corp., 112 FERC ] 
61,013 at P 104 (2005) (July 2005 Order), reh'g pending.
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    4. The CAISO states that on November 9, 2005, in response to a 
request from its Department of Market Monitoring (DMM), the CAISO's 
Market Surveillance Committee (MSC) \5\ recommended that the bid cap on 
the real-time energy market be increased prior to this winter, because 
``the likelihood of substantially higher natural gas prices during the 
winter of [2006] is sufficiently high to justify raising the bid cap at 
this time'' in order to avoid ``the risk of generation unit-level 
variable costs approaching or rising above the [current $250/MWh] cap 
level.'' The MSC recommended a new level of $400/MWh, based on its 
analysis of average values of Henry Hub futures prices for the upcoming 
winter.\6\ The CAISO further notes that the DMM prepared a memorandum 
supporting the MSC's recommendation, citing changed market conditions 
and the significant benefits to the California energy markets that 
would result from raising the real-time energy bid cap under current 
market conditions.\7\ The CAISO asserts that the DMM further 
recommended that the bid cap for adjustment bids used in day-ahead and 
hour-ahead congestion management markets be increased to $400/MWh, with 
the bid cap for ancillary services remaining at $250/MWh.\8\
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    \5\ The CAISO's Web site notes that the MSC is an independent 
advisory group of industry experts who can suggest changes in rules 
and protocols to the CAISO Governing Board, MSC Description, 
available at http://www.caiso.com/docs/2005/10/04/200510041051301081.html (last visited Jan. 9, 2006).
    \6\ See Raising the Level of the Bid Cap on the Real-Time Energy 
Market in California, Market Surveillance Committee, Nov. 9, 2005 
(MSC Recommendation Paper). According to the CAISO, the MSC also 
notes that gaining some experience with the current market design 
and a higher bid cap would be a preferred strategy for transitioning 
in the future to a $500/MWh bid cap. MSC Recommendation Paper at 5-
6.
    \7\ See Memorandum of Keith Casey, Department of Market 
Monitoring, Dec. 9, 2005 (DMM Memorandum). According to the CAISO, 
the DMM Memorandum enumerates a number of reasons for raising the 
bid cap, including: (1) Promoting reliability by providing greater 
fixed-cost recovery for generating units during high demand periods 
when supply margins are tight and prices are at or near the bid cap; 
(2) providing greater incentives for load-servicing entities (LSEs) 
to continue to minimize their spot market exposure for signing 
additional long-term power contracts; (3) providing greater 
incentives for generation owners to maintain their units at a high 
level of availability; (4) providing greater incentives for further 
development of demand response programs such as real-time pricing; 
(5) if gas prices escalate over the winter months, a higher bid cap 
will not discourage suppliers from selling into the California real-
time energy markets since such suppliers would be assured of bid 
cost recovery for accepted bids above $250/WMh; and (6) providing a 
measured transition to the $500/MWh energy bid cap scheduled to be 
implemented with the CAISO's new market design in 2007.
    \8\ The CAISO Amendment No. 73 Filing, Dec. 21, 2005 (citing DMM 
Memorandum at 5) (The CAISO Amendment No. 73 Filing).
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    5. The CAISO requested that, pursuant to section 35.11 of the 
Commission's regulations,\9\ the Commission waive its notice 
requirements for Amendment No. 73. The CAISO states that good cause 
exists for this waiver because acceptance of a January 1, 2006 
effective date will permit the California energy markets to realize the 
benefits described above as quickly as possible to address the 
substantial increase in natural gas prices that may potentially occur 
in the winter 2006. It also states that the January 1 date will assist 
in implementation of the bid-cap change in the CAISO settlements 
process and will permit interested stakeholders time to comment on this 
proposal on an expedited basis.
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    \9\ 18 CFR 35.11 (2005).
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    6. The CAISO requested expedited tariff revision procedures under 
the Commission's Expedited Tariff Revisions Guidance Order.\10\ It 
asserts that Amendment No. 73 satisfies the requirements of the 
Expedited Tariff Revisions Guidance Order because the amendment is 
intended to remedy the risk that the CAISO real-time energy market may 
not be able to attract sufficient supply bids to maintain system 
reliability, particularly from resources outside of the CAISO Control 
Area due to significant increases in variable operation costs. The 
CAISO states that it has posted the filing on its website and sent an 
email notification to each market participant as is required by the 
Expedited Tariff Revisions Guidance Order.
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    \10\ Guidance Order on Expedited Tariff Revisions for Regional 
Transmission Organizations and Independent System Operators, 111 
FERC ] 61,009 (2005).
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    7. Finally, the CAISO requested a shortened comment period of 
December 28, 2005 for Amendment No. 73. It states that this shorter 
comment period will allow the Commission to issue an order prior to the 
requested January 1, 2006 effective date.

Bid Cap Background

    8. In a July 2002 Order,\11\ the Commission established a bid cap 
of $250/MWh for the California real-time energy and ancillary services 
markets, to become effective on October 1, 2002, as recommended by the 
CAISO's MSC. The Commission also applied this bid cap to day-ahead 
markets when implemented by the CAISO. The July 2002 Order also imposed 
a price cap of $250/MWh for all spot market sales in the Western 
Electricity Coordinating Council (WECC), beginning October 1, 2002.\12\
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    \11\ California Independent System Operator Corp., 100 FERC ] 
61,060 (July 2002 Order), order on reh'g, 101 FERC ] 61,061 (2002).
    \12\ Id. The Commission extended the October 1, 2002 deadline to 
October 30, 2002 in a subsequent order. California Independent 
System Operator Corp., 100 FERC ] 61,351 (2002).
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    9. On October 11, 2002, the Commission issued an order on rehearing 
and compliance filing.\13\ The October 2002 Order clarified that 
sellers may continue to submit bids above the bid cap with the 
understanding that such bids cannot set the market clearing price and 
that these bids above the cap will be subject to justification and 
refund.\14\
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    \13\ California Independent System Operator Corp., 101 FERC ] 
61,061 (2002) (October 2002 Order).
    \14\ Id. at P 17.
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    10. On July 1, 2005, the Commission issued an order finding that 
the bid cap for California market energy bids should be increased to a 
hard $500/MWh cap on day one of MRTU implementation.\15\ The July 2005 
Order reaffirmed that the bid cap for ancillary services and Residual 
Unit Commitment (RUC) availability should remain at $250/MWh.\16\
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    \15\ July 2005 Order, 112 FERC ] 61,013 at P 104.
    \16\ Id. at 111 (reaffirming the Commission's October 2003 and 
June 2004 orders which determined that the bid caps for ancillary 
services and RUC availability should be $250/MWh. See California 
Independent System Operator Corp., 105 FERC ] 61,140, reh'g denied, 
105 FERC ] 61,278 (2003); California Independent System Operator 
Corp., 107 FERC ] 61,274, order on reh'g, 108 FERC ] 61,254 (2004)).
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Notice of Filing and Responsive Pleadings

    11. Notice of the CAISO's December 21, 2005 filing was published in 
the Federal Register, 71 Fed. Reg. 98 (2006), with interventions and 
protests due on

[[Page 6065]]

or before January 3, 2006. Southern California Edison Company (SCE), 
Sacramento Municipal Utility District (SMUD), the Northern California 
Power Agency (NCPA), Modesto Irrigation District (MID), the Mirant 
Parties,\17\ and the California Department of Water Resources State 
Water Project filed motions to intervene. Williams Power Company, Inc. 
(Williams), Powerex Corp. (Powerex), Portland General Electric Company 
(Portland), Pacific Gas and Electric Company (PG&E), the Indicated 
Parties,\18\ and Alliance for Retail Energy Markets (AReM) filed 
motions to intervene and comments. California Electricity Oversight 
Board (CEOB) filed a motion to intervene with comments supporting the 
CAISO's filing but made no other comments. Independent Energy Producers 
Association (IEP) filed a motion to intervene out-of-time and comments. 
City of Santa Clara, California (SVP) and Public Service Company of New 
Mexico (PSNM) filed motions to intervene and protests. The CAISO filed 
an answer on January 5, 2006.
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    \17\ The Mirant Parties consist of Mirant Americas Energy 
Marketing, LP, Mirant California, LLC, Mirant Delta, LLC, and Mirant 
Potrero, LLC.
    \18\ The Indicated Parties consist of Avista Energy, Inc., Puget 
Sound Energy, Inc., Coral Power, L.L.C., and Sempra Energy.
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Raising CAISO Bid Cap

    12. PG&E, AReM, and Powerex generally support the CAISO's proposal. 
AReM states that the CAISO's proposal is rational and reasonable and 
has been sufficiently justified by the CAISO. AReM notes that the risk 
of electricity supply shortfalls in California remains high, 
particularly during the summer of 2006, and that given the dramatic 
increases in natural gas costs that have occurred over the past year, 
the current $250/MWh bid cap raises the risk of generator bid costs 
exceeding the current bid cap level. AReM cautions that this interim 
increase in the cap by the CAISO, however, should not be perceived to 
mitigate the necessity for the further ``hard'' bid cap increases 
mandated by the Commission.\19\ Powerex cautions that it is important 
for the CAISO and the Commission to continue to give careful 
consideration in determining the bid cap levels associated with the 
various markets so that (1) there is a demonstrated need for the 
mitigation, and (2) the mitigation levels do not negatively impact the 
efficient operation of the market or the reliable operation of the grid 
both in California and West-wide. PSNM, SVP, Portland, and Williams 
support or do not oppose \20\ the CAISO's proposal to raise the bid cap 
to $400/MWh. No intervenor opposed the CAISO's proposal to raise the 
bid cap level.
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    \19\ See July 2005 Order, 112 FERC ] 61,013 at P 104.
    \20\ PSNM states it takes no explicit position regarding whether 
the $400/MWh bid cap selected by the CAISO is optimal or constitutes 
a sufficiently high price to eliminate risks of supply shortfalls, 
but agrees in principle with the CAISO's conclusion that higher 
natural gas prices necessitate an increase in the existing $250/MWh 
bid cap. Williams cautions that its comments in support of the 
CAISO's proposal should not be construed as an endorsement of price 
caps as it remains opposed to price caps for a number of reasons.
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``Hard'' vs. ``Soft'' Bid Cap

    13. PSNM, SVP, Portland, and Williams oppose changing the CAISO's 
bid cap from a ``soft'' to a ``hard'' cap.
    14. PSNM argues that although the Commission has directed the CAISO 
to replace the existing ``soft'' cap with an escalating ``hard'' cap 
starting in 2007, concurrent with implementation of the CAISO's MRTU, 
it would be unjust and unreasonable to implement a ``hard'' cap, 
particularly on such short notice, while still retaining the current 
market design structure. PSNM notes that, in our July 2005 Order, the 
Commission did not authorize adoption of a ``hard'' cap as part of the 
current market structure or otherwise suggest that the CAISO needs to 
or should adopt a ``hard'' bid cap prior to adoption of the MRTU in 
2007. PSNM contends that implementing a ``hard'' cap now, at the 
proposed $400/MWh level, would limit suppliers' ability to recover 
their substantiated costs if congestion costs and natural gas prices 
cause the competitive market price to exceed $400/MWh, thereby creating 
a risk of supply curtailments. PSNM points out that if, as the CAISO 
claims, the $400/MWh price it has selected is unlikely to be exceeded 
during the one year period prior to adoption of the MRTU, then 
retention of the ``soft'' cap should be of little concern. By contrast, 
PSNM argues, if the CAISO's estimation of the market price produced by 
higher natural gas prices is incorrect, and actual prices exceed the 
$400/MWh level, the effect on California markets could be severe.
    15. SVP argues that the CAISO's proposal to change from a ``soft'' 
cap to a ``hard'' cap is not supportable. They assert that the three 
CAISO departmental reports attached to the filing in support of the 
proposal recommended an increase to a $400/MWh ``soft'' cap, not a 
``hard'' cap. SVP argues that the CAISO's studies conclude that, with 
current gas prices projected between $10 and $12 per Mcf, a ``soft'' 
cap of $400/MWh is roughly equivalent to the $250/MWh ``soft'' cap 
implemented when gas costs were approximately three to four dollars per 
Mcf. SVP contends that the CAISO studies do not provide any rationale 
to support a change from a ``soft'' cap to a ``hard'' cap, and in fact, 
assert that a $400/MWh ``soft'' cap is necessary to maintain the status 
quo. According to SVP, the CAISO's Board of Governors' resolution 
changed the CAISO's departmental recommendations to a ``hard'' cap 
without explanation or analysis. SVP points out that the CAISO's only 
comment on the change is that the Commission required the CAISO to 
change to a ``hard'' cap once MRTU is implemented, and that 
implementing a ``hard'' cap now will ease the transition to a $500/MWh 
``hard'' cap when MRTU is implemented in 2007. According to SVP, 
without the structural changes MRTU is expected to bring about, there 
is no justification for the change to a ``hard'' cap, and the CAISO 
fails to justify any present need for a ``hard'' cap versus a ``soft'' 
cap and does not address the potential consequences of the change. SVP 
further argues that the escalation in natural gas prices and the recent 
bankruptcy filing of Calpine Corporation further strain the market and 
risk contributing to a shortfall of energy in California.
    16. Portland argues that the ``hard'' nature of the new bid cap 
proposal does not adequately promote a transparent and workable market 
with the appropriate application of constraints and oversight. 
Specifically, Portland argues that a hard cap would force the CAISO to 
resort to out-of-market (OOM) purchases to acquire capacity resources 
when market prices within the CAISO market exceed the cap. By 
definition, according to Portland, such OOM purchases would involve 
capacity and associated pricing that would not be offered to all market 
participants in real time, and thus do not promote an efficient, 
transparent, and workable market. In contrast, Portland argues that a 
``soft'' cap would achieve that goal because the current ``soft'' cap 
methodology provides a ceiling that market participants may not exceed 
without: (1) Demonstrating that their costs justify a higher bid; and 
(2) being subject to refund.
    17. Williams similarly requests that the Commission reject the 
proposal to change the bid cap from a ``soft'' to a ``hard'' cap. 
Williams submits that the same concerns that resulted in the current 
``soft'' cap continue to exist. Specifically, Williams expresses the 
concern that should fuel prices continue to rise, its operating costs 
may exceed $400/MWh, and with the must-offer obligation still in place, 
it may be

[[Page 6066]]

required to operate at a loss. Williams states that the CAISO seems to 
base its proposal for a ``hard'' cap on the Commission's directive in a 
separate proceeding to replace the current ``soft'' bid cap with a 
``hard'' bid cap when the CAISO's MRTU market design is 
implemented.\21\ However, Williams argues, the environment under which 
a generator will operate when MRTU is implemented will be significantly 
different than today's environment,\22\ and accordingly the CAISO's 
attempt to justify the imposition of a ``hard'' cap at this time, by 
comparing the proposed cap with the initial MRTU ``hard'' cap of $500/
MWh, is misplaced.
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    \21\ See The CAISO Amendment No. 73 Filing at 5 (citing July 
2005 Order, 112 FERC ] 61,013 at P 104 (2005)).
    \22\ Williams notes that the ``hard'' cap directed by the 
Commission under MRTU is initially set at $500/MWh and ultimately 
increases to $1,000/MWh (a structure that Williams points out was 
approved by the Commission prior to the recent run-up in fuel 
prices), the must-offer obligation will not exist under MRTU as it 
does today, and the California Public Utility Commission's (CPUC) 
resource adequacy requirement should be in place when MRTU is 
implemented, resulting in less reliance by load on the CAISO's real-
time market.
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Price Cap in the WECC Outside the CAISO

    18. Powerex and Indicated Parties contend that the CAISO-proposed 
bid cap increase should be applied throughout the West in order to 
prevent artificial distortions in the electricity markets that could 
result from different price caps between regions. They note that the 
expected increases in natural gas prices in the winter of 2006 will 
affect not only the CAISO markets, but all electricity markets in the 
West. As Indicated Parties further state, the West-wide market power 
mitigation program was established to meet the same goals as the CAISO 
market power mitigation, namely to address market power concerns 
without undermining incentives for new entry and long-term adequacy. 
Therefore, according to Indicated Parties, until the Commission 
releases the western markets from the temporary mitigation program, the 
West-wide price cap should be no less than the bid cap for the CAISO 
market. Indicated Parties request that the Commission take action under 
FPA section 206 to ensure that any elevation in the bid cap applicable 
to the CAISO markets is matched by an identical elevation in the price 
cap applicable to the remainder of the WECC. Powerex and Indicated 
Parties support the increase of the West-wide price cap to $400/MWh.
    19. The Indicated Parties further assert that the Commission should 
hold that the bid cap in the non-California portion of the WECC will be 
a ``soft'' cap that permits cost justifications for sales above the 
level of the cap, and not a ``hard'' cap as the CAISO has proposed for 
its markets. They argue that if natural gas prices move even higher 
than their current levels, a ``hard'' cap of $400/MWh may not be 
sufficient to ensure full cost recovery for some generators. They 
assert that a ``soft'' cap at least permits generators to sell at 
prices above the cap as long as they can justify their elevated prices. 
Indicated Parties also request that the Commission clarify the type of 
documentation that sellers need to supply to justify prices above the 
applicable bid cap. According to Indicated Parties, this clarification 
will reduce the possibility of artificial constraints by making it 
easier for sellers with incremental costs above the level of the cap to 
decide whether to contribute their output into the market.

Ancillary Services

    20. Powerex states that the cap on ancillary service capacity bids 
should be increased to $400/MWh. It asserts that neither the CAISO nor 
MSC has offered any reason for the failure to raise this bid cap. 
According to Powerex, different bid caps for energy and ancillary 
services could potentially distort electricity markets since not all 
possible markets scenarios can be foreseen.

Effective Date

    21. SVP asserts that the CAISO violated the FPA by making an 
unauthorized tariff change. SVP states that the CAISO filed its 
proposed Amendment 73 on December 21, 2005, and requested expedited 
consideration in order to implement the proposal on January 1, 
2006.\23\ SVP notes that on December 22, 2005, the Commission 
established a comment date of January 3, 2006, for protests and 
interventions, and did not authorize a January 1, 2006 effective 
date.\24\ According to SVP, despite the Commission's absence of 
approval, the CAISO announced its intention to make the proposed 
``hard'' cap effective on January 1, 2006.\25\ SVP states that the 
CAISO has no authority to unilaterally implement tariff changes before 
the Commission approves the changes. It states that the Commission 
should not tolerate such actions which violate the filed rate 
doctrine.\26\ SVP states that the CAISO's unauthorized change in the 
tariff could cause bids to be rejected or could cause sellers to choose 
not to bid.
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    \23\ See CAISO Amendment No. 73 Filing.
    \24\ California Independent System Operator Corp., Notice of 
Filing, Docket No. ER06-354-000, Dec. 22, 2005.
    \25\ See CAISO Market Notice, Dec. 27, 2005.
    \26\ See FPA sections 205(c), 16 U.S.C. 824d(c) (2000), and 
206(a), 16 U.S.C. 824e(a) (2000); see also Arkansas Louisiana Gas 
Co. v. Hall, 453 U.S. 571, 581 (1981) (explaining that ``under the 
filed rate doctrine, the Commission alone is empowered to [accept 
proposed rate filings], and until it has done so, no rate other than 
the one on file may be charged.''); Williams Power Co. v. California 
Independent System Operator Corp., 110 FERC ] 61,231 at P 18, 
clarification denied, 111 FERC ] 61,348 (2005) (explaining that 
``[i]f the CAISO believes that additional tariff provisions are 
necessary to maintain operational control of its system and to 
minimize operating costs, it must request prior Commission 
authorization of the proposed tariff changes.'').
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Discussion

Procedural Matters

    22. Pursuant to Rule 214 of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.214 (2005), the notices of intervention and 
timely, unopposed motions to intervene serve to make the entities that 
filed them parties to these proceedings. We will accept IEP's motion to 
intervene because it will not be prejudicial at this early stage in the 
proceeding.
    23. Rule 213(a)(2) of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.213(a)(2) (2005), prohibits an answer to a 
protest unless otherwise ordered by the decisional authority. We will 
accept the CAISO's answer because it has provided information that 
assisted us in our decision-making process.
    24. IEP failed to file a timely Statement of Issues as required by 
Order No. 663.\27\ Order No. 663 applies to all pleadings, including 
protests and comments,\28\ and requires that any issues that a movant 
wishes the Commission to address must be specifically identified in a 
section entitled ``Statement of Issues'' that must list each issue 
presented to the Commission in a separately enumerated paragraph that 
includes representative Commission and court precedent on which the 
party is relying. Any issues not so listed in a separate section will 
be deemed to have been waived. Order No. 663 became effective September 
23, 2005. IEP's late motion to intervene and comments, filed on January 
4, 2006, omitted the Statement of Issues. For this reason, we deem IEP 
to have waived the issues in its comments. While Indicated Parties did 
include a ``Statement of

[[Page 6067]]

Issues,'' any issue not specifically identified by Indicated Parties in 
their ``Statement of Issues'' is deemed waived.
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    \27\ Revision of Rules of Practice and Procedure Regarding Issue 
Identification, Order No. 663, 70 FR 55,723 (Sept. 23, 2005), FERC 
Stats. & Regs. ]31,193 (2005).
    \28\ Order No. 663 does not apply to comments on rulemakings or 
comments on offers of settlement. However, that exception does not 
apply here because IEP is commenting on a tariff filing. See Order 
No. 663.
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Commission Determination

CAISO Bid Cap
    25. The current $250/MWh ``soft'' bid cap in the CAISO's energy 
market was established in October 2002 when natural gas prices were 
between $3 and $4/MMBtu. As the CAISO noted in its filing, in recent 
months, concerns over tight natural gas supplies have resulted in high 
and volatile natural gas prices throughout the country. Natural gas 
spot prices in California recently reached as high as $14/MMBtu.\29\ 
Since natural gas is the fuel source for a significant portion of 
generation used to meet California load, this price rise and volatility 
led the CAISO to have concerns that the current level of the bid cap 
may constrain the CAISO's ability to acquire sufficient power in real 
time. Given the current market design, which includes a must-offer 
obligation and a $250/MWh cap on energy, the Commission is concerned 
that generators may not have the opportunity to adequately recover 
their costs. We note that no intervenor has opposed the increase, and 
find that raising the bid cap is justified by the well-documented rise 
in gas prices. Accordingly, the Commission accepts the CAISO's proposal 
to raise the current bid cap from $250/MWh to $400/MWh.
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    \29\ See Daily price survey ($/MMBtu), Platts Gas Daily, Dec. 
14, 2005, at p. 2 (listing the midpoint for ``PG&E city-gate'' at 
$14.325).
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    26. The Commission rejects, however, the CAISO's proposal to change 
the current ``soft'' nature of the cap to a ``hard'' cap during this 
interim period prior to the implementation of MRTU and a resource 
adequacy mechanism. Neither the MSC nor DMM recommended changing the 
cap from a ``soft'' to a ``hard'' cap, and the CAISO has not adequately 
supported such a change. A ``hard'' cap, in combination with the 
CAISO's current must-offer obligation,\30\ could result in confiscatory 
rates because it would raise the possibility that sellers could be 
forced to operate at a loss. Based on the current circumstances of 
rising and volatile gas prices, we will retain the cap as a ``soft'' 
cap during this interim period. The CAISO has filed an emergency 
request in response to an unusual situation of rapidly rising natural 
gas prices, and the Commission believes the importance of ensuring a 
market design that is both reliable and non-confiscatory outweighs the 
CAISO's desire to transition towards a ``hard'' cap directed by the 
Commission to begin at the implementation of MRTU in 2007.
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    \30\ We note that the current must-offer obligation in 
California (and the WECC), which lacks a separate capacity payment, 
is different from a must-offer obligation where sellers, as part of 
a resource adequacy program, voluntarily accept a must-offer 
obligation in exchange for receiving a capacity payment.
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Price Cap in the WECC Outside the CAISO

    27. Our preliminary judgment is that the maximum price for spot 
market sales in the WECC outside the CAISO, as established by the 
Commission in our July 2002 Order, should also be raised to a $400/MWh 
``soft'' cap. As we stated in that order, ``California is an integral 
part of a trade and reliability region in the West. Because of this 
interdependency of market and infrastructure, conditions in and changes 
to the California market affect the entire region.'' \31\ Accordingly, 
pursuant to our authority under section 206 of the FPA, we propose to 
increase the cap to a $400/MWh ``soft'' cap for all spot market sales 
in the WECC outside the CAISO, defined in our June 19, 2001 Order as 
sales in the WECC that are 24 hours or less and are entered into the 
day of or day prior to delivery.\32\
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    \31\ July 2002 Order at P 2.
    \32\ See San Diego Gas & Electric Company v. Sellers of Energy 
and Ancillary Services Into Markets Operated by the California 
Independent System Operator and the California Power Exchange, 95 
FERC ]61,418 at n. 3 (2001).
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    28. In light of issues raised by entities in this proceeding and 
the Commission's above proposal, we hereby institute, under section 206 
of the FPA, 16 U.S.C. 824e (2000), an investigation into the price cap 
on spot market sales in the WECC outside the CAISO. We recognize the 
interest of entities regarding this investigation and, therefore, the 
Commission invites interested persons to submit comments on this issue 
within 10 days from the date of issuance of this order. We note that 
implementing a $400/MWh bid cap in the CAISO while the remainder of the 
WECC retains a $250/MWh cap could cause the non-CAISO WECC to have 
difficulties in attracting imbalance energy if gas prices were to rise 
substantially prior to Commission action. Because gas prices have 
leveled off since the CAISO's filing, we believe the potential for this 
to occur in the near term is small, however, the Commission intends to 
act expeditiously to address this WECC cap upon the expiration of the 
comment period.
    29. In cases where the Commission institutes an investigation on 
its own motion, section 206(b) of the FPA, as amended by section 1285 
of the Energy Policy Act of 2005,\33\ requires that the Commission 
establish a refund effective date and that date must be no earlier than 
the publication date of the Commission's notice that it intends to 
initiate such proceeding but no later than five months after the 
publication date. Therefore, we find that the refund effective date, 
pursuant to section 206(b) of the FPA, as amended by section 1285 of 
the Energy Policy Act of 2005, is the date on which this order is 
published in the Federal Register.
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    \33\ Pub. L. No. 109-58, Sec.  1285, 119 Stat. 594, 980-81 
(2005).
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Ancillary Services

    30. Powerex argues that the bid caps should be the same for both 
the CAISO energy and ancillary services markets. Powerex asserts that 
neither the CAISO nor MSC has offered a rationale for not raising the 
ancillary services bid cap from its current $250/MWh level, and cites 
potential market distortions without giving details of how they might 
occur. In its answer, the CAISO dismisses this concern, pointing out 
that PJM has a $1,000/MWh energy bid cap and a $100/MWh regulation bid 
cap, and asserting that ancillary service capacity is a fixed cost and 
that gas prices do not affect the cost of ancillary services. The CAISO 
argues that to the extent the CAISO accepts an ancillary services 
capacity bid from a supplier, and then calls on the unit to provide 
energy, the supplier will be able to reflect any increased gas costs in 
its energy bid. Finally, the CAISO argues that the ancillary service 
capacity bid cap will continue to be a ``soft'' cap, thus allowing 
suppliers to submit bids in excess of $250/MWh, provided they can 
provide cost justification for such bids.
    31. The Commission recognizes that until the implementation of MRTU 
in 2007, the current CAISO market design does not have a day-ahead 
market that co-optimizes energy and ancillary services. The CAISO 
relies on ancillary service capacity being offered by sellers directly 
to the CAISO for various categories of reserves. Sellers must make the 
decision to sell either energy or ancillary services. To the extent a 
seller chooses to make its capacity available for selling an ancillary 
service like spinning reserves, it could incur an opportunity cost by 
not selling energy. Thus, under the current market design, the price of 
energy could have an impact on the price of ancillary services and 
suppliers may thus choose to provide energy instead of ancillary

[[Page 6068]]

services if the ancillary service capacity bid cap is below this 
opportunity cost.
    32. Given these concerns, we will address the issue of the 
appropriate level of the CAISO ancillary service capacity bid cap in 
the section 206 investigation instituted in this proceeding. We 
recognize the interest of entities regarding this issue, therefore, the 
Commission invites interested persons to submit comments on the 
appropriate level of the CAISO's ancillary service capacity bid cap 
within 10 days from the date of issuance of this order. As discussed 
above, we find that the refund effective date, pursuant to section 
206(b) of the FPA, as amended by section 1285 of the Energy Policy Act 
of 2005, is the date on which this order is published in the Federal 
Register.

Effective Date

    33. We note that in its answer, the CAISO states that it has not 
implemented Amendment No. 73 and it does not intend to make the $400/
MWh bid cap effective until approved by the Commission. In fact, the 
CAISO asserts that it made repeated statements in its transmittal 
letter and market notice that it requested the amendment be made 
effective on January 1, 2006 or as soon thereafter as possible. As 
noted above, the Commission accepts the CAISO's proposal, as modified, 
effective as of the date of this order.

The Commission Orders

    (A) The Commission accepts and modifies the CAISO's proposal to 
adjust its bid cap for real-time energy bids and adjustment bids to 
$400/MWh, as discussed within the body of the order, effective upon 
issuance of this order.
    (B) Pursuant to the authority conferred upon the Commission by the 
FPA, particularly section 206 thereof, the Commission institutes an 
investigation into the price cap in the WECC outside the CAISO and the 
ancillary service capacity bid cap in the CAISO, as discussed in the 
body of this order. Entities may submit comments regarding these issues 
within 10 days from the date of issuance of this order.
    (C) The refund effective date established pursuant to section 
206(b) of the FPA, as amended by section 1285 of the Energy Policy Act 
of 2005, as discussed in the body of this order, is the date upon which 
this order is published in the Federal Register.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 06-1090 Filed 2-3-06; 8:45 am]
BILLING CODE 6717-01-P