SCE Comments – Natural Gas Pipeline Penalty

Stakeholder Comments
Natural Gas Pipeline Penalty Recovery
Issue Paper
Submitted by
Company
Date Submitted
Brian Rothstein
Southern California Edison
(SCE)
October 8, 2014
(626) 302-3555
SCE thanks the California Independent System Operator (CAISO) for the opportunity to
comment on the Natural Gas Pipeline Penalty Recovery Issue Paper. We appreciate CAISO’s
thoughtful and measured approach to addressing Operational Flow Order (OFO) and Emergency
Flow Order (EFO) cost recovery. SCE strongly supports CAISO’s goal of maintaining electrical
grid stability and reliability while not burdening the gas system or providing financial incentives
for disregarding operator signals.
SCE’s comments in support of OFO Cost Recovery as part of Commitment Costs
Refinements, 2012
In our comments to the Commitment Costs Refinements 2012 stakeholder initiative, SCE
supported the CAISO’s proposal regarding OFO Cost Recovery1, as well as DMM’s proposed
methodology2. SCE continues to support the recovery of accurate and reasonable bid costs and
to the extent possible, believes that generators should bid their true costs into the CAISO market,
including anticipated OFO penalty costs. We continue to believe that the scope of OFO cost
recovery should be very narrow as described in the Approved Policy3.
Recent and Upcoming CAISO Market Rules
SCE believes that the stakeholder initiatives identified by CAISO4 do and would provide
increased flexibility for generators to represent their costs in the market. The approved
1
SCE comments on the Refinements to Commitment Costs, 2012 Draft Final Proposal
(http://www.caiso.com/Documents/SCE_Comments-Commitment%20CostsDraftFinalProposal.pdf )
2
DMM Methodology to Account for Operational Flow Order Penalties Incurred by Energy Dispatches
(http://www.caiso.com/Documents/DMMMethodologyAccount_OperationalFlowOrderPenaltiesIncurred_EnergyDispatches.pdf )
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The OFO Penalty Cost Recovery rules as approved by the CAISO Board in May 2012.
4
CAISO Issue Paper – Natural Gas Pipeline Penalty Recovery, section VI:
(http://www.caiso.com/Documents/IssuePaper-NaturalGasPipelinePenaltyRecovery.pdf )
Commitment Costs Enhancements5 provides an additional 25% of Proxy Cost should generators
anticipate Real-Time or Exceptional Dispatches that could incur OFO penalties. The
forthcoming Bidding Rules Initiative, if properly implemented, may also provide opportunities
which reduce the need for cost recovery of OFO penalties.
CAISO also asks for stakeholder input on the issue that Default Energy Bids (DEBs) do not
include OFO penalty costs. When generation bids are mitigated through the local market power
mitigation (LMPM) process, inefficient dispatches could result because the DEBs don’t include
all costs, making some generators look more cost effective than they really are. At this point,
SCE cannot comment on the importance of this issue. CAISO has not provided any research or
analysis to support a position thus far. OFO penalties are ex-post charges that cannot with 100%
accuracy be known in advance of bidding timelines. SCE does not see a way for “actual” OFO
penalty costs to be included into the LMPM process and does not recommend the inclusion of
estimated OFO penalty costs. For example, DEBs are intended to represent hourly marginal
costs, but OFO penalties can accrue over a day or multiple days.
Anticipated Changes in Gas Market Rules
On March 20, 2014, the Federal Energy Regulatory Commission (FERC) filed a Notice of
Proposed Rulemaking (NOPR), initiating “further steps to improve the coordination and
scheduling of natural gas pipeline capacity with electricity markets in light of increased reliance
on natural gas by electric generators”6. SCE agrees with CAISO that the proposed changes,
including changes to the the gas day and providing additional opportunities to change gas
nominations, could increase the ability for generators to avoid OFO penalties.
SoCalGas’ tariffs do not currently call for penalties for daily under-delivery of gas, except in
extreme circumstances. However, on June 27th 2014, SoCalGas applied to the California Public
Utilities Commission (CPUC) to implement Low OFO penalties and other changes to their
tariffs7. SCE, as a customer of SoCalGas, will be greatly impacted by whatever course
SoCalGas takes. It is SCE’s preference that SoCalGas (and other gas pipelines) provide in their
tariff, clearer rules regarding gas curtailment and their ability to waive OFO penalties for
generators responding to CAISO-coordinated dispatches. The CAISO must ensure their tariff
synchronizes with the results of current CPUC processes for SoCalGas, as well as other CPUC
process related to gas in the future.
OFO Penalty Cost Recovery
In light of recent and proposed CAISO market enhancements and the uncertainty associated with
the proposed changes related to the FERC NOPR and SoCalGas’ application, SCE recommends
that CAISO defer the implementation of non-emergency OFO penalty cost recovery. SCE finds
5
Commitment Cost Enhancements Revised Draft Final Proposal, p.7
(http://www.caiso.com/Documents/RevisedDraftFinalProposalCommitmentCostEnhancements.pdf )
6
FERC News Release: March 20, 2014 (http://www.ferc.gov/media/news-releases/2014/2014-1/03-20-14-M1.asp#.VDF05J3n8dU )
7
Application of Southern California Gas Company (U 904 G) and San Diego Gas & Electric Company (U 902 G)
for Low Operational Flow Order and Emergency Flow Order Requirements
(http://www.socalgas.com/regulatory/documents/a-14-06-021/FINAL%20Low%20Flow%20App.pdf )
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that gas and electric market rules are changing in ways that these penalty costs can be accounted
for in generators’ Real-Time bids. SCE also agrees with CAISO that SoCalGas will likely revise
their tariffs regarding EFO/OFO penalties in the 2016 timeframe. Because we cannot foresee
how the ultimate revisions may vary from the current proposals or to what extent the proposed
changes will be ultimately implemented, SCE recommends that CAISO defer implementing
OFO penalty cost recovery until such time that the gas penalty and curtailment rules are known.
Emergency Flow Order (EFO) Penalty Cost Recovery
CAISO proposes in the Issue Paper to provide cost recovery for EFO penalties, which were
excluded from cost recovery in the Approved Policy. EFOs are called by a pipeline only after
non-emergency curtailments and penalties have failed to incent the appropriate behavior of gas
customers. SCE takes very seriously electrical grid and gas system reliability and cautions
CAISO against any policy that would offer recovery of emergency penalty costs in such a way
that would jeopardize either system. Any penalty cost recovery, if offered, should only be
applied to generators dispatched by CAISO in coordination with the gas pipeline operators and
only to the extent generators comply with CAISO instructions.
SCE’s Preferred Approach
SCE recommends delaying consideration of cost recovery for non-emergency OFO penalties
until SoCalGas revises its curtailment and Low OFO penalty rules. SCE believes this aspect of
the Approved Policy is no longer as significant as during the Commitment Costs 2012
stakeholder process. SCE considers the best and most favorable outcome for SCE and our
customers is for gas pipelines to waive such penalties for units complying with CAISO
instructions resulting from coordination. However, until such time as the gas pipelines enable
waiver of the penalties, SCE finds that cost recovery for EFO penalties should be extremely
narrow in scope and only apply to generators dispatched by CAISO in coordination with the gas
pipelines and in conditions where generators could not have avoided such penalty costs. SCE
believes that CAISO should clarify in its tariff the scope and rules of gas/electric coordination.
To whatever degree possible, SCE recommends that CAISO communicate with scheduling
coordinators in times of gas/electric coordination. Such advance communications could help
scheduling coordinators support the coordination efforts and avoid gas penalty costs.
SCE Answers to CAISO Stakeholder Questions
Q1: After examining the potential issues, especially the complicated settlement process
associated with the adoption of the original policy and assessing the likelihood of eligible
situations occurring, does it continue to make sense to implement pipeline penalty recovery?
A: SCE recognizes that gas pipelines have different penalty structures and there is likely not a
“one-size-fits-all” solution to validating and appropriately settling valid penalty costs within the
CAISO settlements system. SCE is willing to work with CAISO to investigate ways to minimize
the burden on their settlement process.
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Q2: Will the changes being considered in the Commitment Cost Update, Bidding Rules, and
other stakeholder initiatives be sufficient to ensure generators that they will be able to recover
any potential pipeline penalties by including them in their bids? If not, please provide
examples of when recovery may not be ensured, and an estimate of likely these examples will
be to occur.
A: SCE believes that the recent and upcoming changes do and would enhance generators’ ability
to reflect flow order penalty costs in their bids compared to CAISO market rules in place during
the Commitment Cost Refinements 2012 stakeholder process.
Q3: Are there other changes to ISO bidding and commitment procedures, or timing of the ISO
markets and natural gas pipeline markets, that would eliminate the need for these policies?
A: We find that gas/electric coordination and potential changes to the gas day and nomination
cycle could affect how gas is purchased and scheduled and could impact the need for gas penalty
cost recovery. SCE believes that the simplest solution that would minimize costs to our
customers and reduce work for CAISO, is for the gas pipelines to waive penalties for generators
dispatched by CAISO in coordination with the gas pipeline. SCE does not see a causal
relationship between EFO penalties and CAISO Load customers during times of gas
coordination with CAISO. It is preferred that the OFO penalties be avoided during times of
CAISO/gas pipeline coordination rather than having uplift costs for OFO penalties be funded by
load serving entities, and ultimately, by their customers.
Q4: If you support one of the options which allow recovery of pipeline penalties under certain
conditions, please comment on how the ISO can verify and validate the penalties through the
settlement system.
A: As stated in our answer to Q1, SCE believes that validation of penalties would be complex
and may require manual processes.
Q5: Please comment on whether the policy will create any potential reliability concerns on any
pipelines, or whether it may help to ensure the reliability of the pipelines.
A: We cannot predict the consequences of the proposed cost recovery rules. There are many
recent and proposed changes to Commitment Costs and Bidding Rules. There are also
significant changes to gas markets as proposed in the FERC NOPR and the anticipated changes
to SoCalGas’ penalty and curtailment rules. Because of these numerous variables, SCE
recommends that CAISO proceed cautiously and in coordination with the gas pipelines.
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