FERC took the unusual step on September 26 of releasing publicly a staff report on a confidential investigation of bidding behavior by importers at the interties into the California Independent System Operator ("CAISO") control area. The report cleared Powerex, the power marketing affiliate of BC Hydro, of any wrongdoing and found that the problems with bidding at the CAISO's interties were a product of the CAISO's tariff and not any impropriety. In releasing the Staff report, FERC said it hoped to clear up confusion regarding its Market Behavior Rule 2, which prohibits market manipulation, by providing an illustration of a wholesaler pursuing "legitimate business interests." FERC also hoped to grant some closure to the contentious CAISO intertie bidding issue, which the CAISO made public at a board meeting in March.
The investigation was initiated when the CAISO asked FERC staff to investigate potential manipulative bidding at its interties. The CAISO alleged that from the implementation of its Phase 1B market redesign on October 1, 2004, through early March 2005, importers (and in particular, Powerex) were submitting offsetting incremental and decremental bids solely for the purpose of triggering and collecting "uplift" payments, although they were not actually delivering any net energy into the CAISO. Under the CAISO tariff, uplift payments that were made to importers represent the difference between the CAISO's market clearing price and an importer's bid price. These payments are awarded to importers to encourage competitive bidding at the CAISO interties. The CAISO claimed that these uplift costs totaled approximately $18.5 million for this six month period and alleged that Powerex and other importers were manipulating its supplemental energy markets.
During its investigation, FERC staff examined whether Powerex had violated Market Behavior Rule 2 and CAISO Tariff Enforcement Provision 7.1, both of which prohibit actions or transactions that do not have a legitimate business purpose and are intended to or foreseeably could manipulate electricity market prices, conditions, or rules. The staff investigators concluded that Powerex had not engaged in any wrongful behavior and had made its bids for the "legitimate business purpose of maximizing its physical energy purchases and sales in the CAISO" because its transactions had economic substance within the meaning of Market Behavior Rule 2. Powerex could not have reasonably foreseen that its bidding behavior would result in high uplift payments, the investigators explained. Moreover, they also reported that the CAISO had exaggerated its total uplift payments during the relevant period, finding only $4.6 million in uplift payments during the period under investigation. Those payments were caused not by errant market participant behavior but due to the CAISO's rules then in place. Transactions undertaken in contemplation of FERC-approved rules and regulations or at the direction of an ISO or Regional Transmission Organization do not violate Market Behavior Rule 2, the staff investigators explained. In April the CAISO amended its tariff to decrease the amount of uplift payments that it will make. [Intertie Bidding in the California Indpendent System Operator's Supplemental Energy Market, 112 FERC ¶ 61,333 (2005)]