Washington (Platts)--29Aug2012/617 pm EDT/2217 GMT

Tariff changes proposed to federal energy regulators by the California Independent System Operator would prevent exercise of market power by expanding the ISO's mitigation abilities, Cal-ISO said Wednesday.

Cal-ISO proposed the changes to the US Federal Energy Regulatory Commission, saying they would address potential market power in two areas of the Cal-ISO market.

"The ISO has, to date, observed only one market participant taking advantage of these opportunities to exercise market power, and available mitigation measures have limited excessive gains from the behavior," the ISO told FERC. "However, the ISO has determined that additional mitigation authority is warranted to protect the market from noncompetitive behavior."

The ISO cannot identify the market participant, Cal-ISO spokesman Steven Greenlee said in a Wednesday email. He said the ISO's department of market monitoring observed strategies by the participant to exercise market power with exceptional dispatches in April and more aggressively in May. The market monitor also observed a bidding strategy by the market participant to gain exaggerated payments for residual imbalance energy. The energy involved is less than .5% of total system energy, and the money involved was $2.8 million and $7.7 million, respectively, he said.

In the filing to FERC, the ISO proposed to expand the circumstances under which it is permitted to mitigate the amount of exceptional dispatch energy payments to include all exceptional dispatches that are needed to move a resource from its minimum operating level to its minimum dispatchable level. The revision will keep a resource from inflating the price through the exercise of market power, the ISO said.

The ISO also proposed to amend tariff provisions governing payment for residual imbalance energy, which is energy attributable to a resource ramping down from a real-time dispatch at the end of a previous hour or ramping up to a real-time dispatch at the beginning of an upcoming hour. The ISO's current payment structure for residual imbalance energy creates an opportunity for the exercise of unilateral market power and inflated payments far above the cost of producing energy, the ISO said.

The ISO proposed to pay the resources the locational marginal price unless the LMP is lower than their bid, in which case the ISO would pay the resource the lesser of the bid price or the default energy bid.

"Both of these rule changes address situations in which a market participant's bidding behavior can create or contribute to the exercise of market power," the ISO said. "Also, both of these changes eliminate the incentive for participants to bid and participate in the ISO markets in an effort to inflate payments through these two out-of-market mechanisms."

The ISO also requested waiver of the 60-day notice requirement and for the changes to become effective Wednesday.

Between March 2011 and June 2011, Cal-ISO made four filings to FERC alerting the commission to abusive bidding strategies that led to more than $73 million in improper payments, resulting in FERC approving tariff changes and launching an investigation. Though not identified by the ISO, the entity was later revealed to be JP Morgan Ventures Energy. FERC named the company in a July federal court filing that sought a ruling that JP Morgan must hand over 25 emails the company says are protected by attorney-client privilege. The court case is ongoing.

--Jason Fordney, jason_fordney@platts.com --Edited by Jason Lindquist, jason_lindquist@platts.com