The California ISO's ("CAISO") initiative to make energy imbalance market services available to balancing authorities throughout the Western Interconnection has claimed another success. On August 31, FERC conditionally approved Arizona Public Service Company's ("APS") request to participate in the Western Energy Imbalance market ("EIM"), but denied APS its request to utilize true market-based rates in the EIM. The Commission will instead require APS to participate on the condition that it offer its participating generating units at a price at or below each unit's "Default Energy Bid." This ruling will add APS to the existing cadre of non-CAISO EIM participants including PacifiCorp and NV Energy, who participate in the EIM on similar terms, and comes on the heels of Idaho Power's April 2016 announcement that it will join the EIM.
The EIM, as FERC explained, "enables entities with balancing authority areas outside of CAISO to take part in the real-time economic energy dispatch portion of the CAISO locational marginal price (LMP)-based electricity market alongside participants from within the CAISO market." Despite the fact that CAISO has market-power mitigation measures that apply to the EIM, FERC has nevertheless remained concerned about incumbent vertically-integrated utilities exercising market power within their own service territories. FERC explained in its order—as it did in the order regarding NV Energy and PacifiCorp's participation—that, where an area consists primarily of a single seller of electricity, there is a risk that the single seller could—in its role as a market participant—strategically withhold capacity from the market and drive up prices to its own benefit. Likewise, the Commission further noted the potential for a market participant to strategically bid its resources such that the LMP does not reflect the economic unit, but instead reflects a unit with a potentially higher cost, to the benefit of the market participant's lower cost units.
Because of this concern over market power, APS will, for now, be allowed to bid into the EIM only at or below each participating generating unit's Default Energy Bid as approved by CAISO. This condition, however, could be modified in the future depending on how things play out with respect to APS's participation in the EIM:
As new balancing authority areas join the EIM it is unclear the extent to which imbalance energy will flow among the balancing authority areas. However, after a balancing authority area has been in the EIM for a year or longer, a participant may be able to perform an ex post analysis as to whether there have been frequently-binding transmission constraints that would limit potential imports into its balancing authority area (or the balancing authority area where its generation is located), as well as whether there has been price separation. We will consider any such ex post analysis and may, if appropriate, deem that the evidence shows that the balancing authority area is not an EIM submarket. In such cases, where the seller has demonstrated that it will not have market power elsewhere in the EIM, we may remove any additional conditions on the participant's participation in the EIM at market-based rates, such as the condition that the participant bid its units in at or below its Default Energy Bid.
These developments in the EIM are proceeding against the backdrop of continuing discussions and studies of the possibility of a full regional electricity market for the western United States, and the process of integrating more balancing authorities into the EIM will likely provide useful experience as balancing authorities continue to weigh the possibility of a broader market.
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