Comments on Dec 16, 2024 and Jan 22, 2025 session for scarcity pricing

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

BPA supports the continued assessment of the scarcity pricing topic because scarcity pricing is an important tool that markets utilize to prevent major consequences due to reliability events.  Bonneville supports the further evaluation of the scarcity pricing-related topics listed on page 18 of the materials shared during the December 16, 2024, session presentation.

BPA recognizes the ideal approach to meeting the objectives (improving reserves pricing and earlier notice of potential reserves shortages) requires full re-optimization and procurement of ancillary services in real-time. BPA understands the challenges of implementing these solutions. However, BPA urges CAISO to continue its coordination with operators and other internal subject matter experts in hopes of finding any incremental advancements toward improved reserve management and price formation in the real-time market.

Additionally,

1. BPA does not support the concept of the settlement-for-differences between the day-ahead and real-time markets as it may distort the value of capacity.  Before further development of this enhancement, CAISO should summarize the historical impacts associated with the unavailability of reserves in the real-time market.
2. BPA does not have an opinion on the CAISO collapsing of spinning and non-spinning reserves into one operating reserve product or to the elimination of cascading procurement between regulation and operating reserves.
3. BPA supports triggering the Scarcity Reserve Demand Curve when “arming load” so long as the mechanics can be resolved to prevent a whipsaw effect between pricing and newly available energy resulting from the load arming event. BPA sees this as essential to ensure that when the SRDC is impacted by load arming, the market doesn’t simultaneously recognize incremental available energy, thus undermining the intent of the SRDC alarm.
4. CAISO may give consideration to a new or separate initiative when considering specific enhancements for the EDAM/WEIM in order to be more inclusive of impacted market participants. 

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

BPA is neutral to procuring additional spin/non-spin products in hopes of improved management of scarcity conditions.  BPA's support of additional FRP is conditional on a thorough enumeration of the impacts, if any, to non-CAISO WEIM Entity resource sufficiency testing requirements.  The existing market design limitations make the efficacy of these actions uncertain. As noted in the presentation, the lack of real-time re-optimization and the CAISO reserve procurement being limited to the CAISO BAA may both substantially reduce the desired impact of simply procuring additional reserves.  Before considering adding these additional costs, it would be reasonable to simulate the impact of extending these specific procurement curves or possibly even testing a limited trial in the live market.

The implementation of a new reserve product and associated demand curve is an interesting concept if it can avoid negative impacts due to existing market design limitations, while meeting our objectives (e.g., gradual price rise ahead of impending supply shortfalls).  It is recognized this alternative (i.e., designing a new reserve product) may require a new and separate initiative.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

BPA supports further review and evaluation of the VOLL metric as a replacement for bid caps.  Other ISOs appear to be migrating to the VOLL metric, and CAISO should monitor these actions in addition to assessing the impacts (positive and negative) if implemented at the CAISO.  BPA did note that there was CAISO interest in applying such a metric to the WEIM as well. If that path is pursued, BPA recommends casting a broader net for the stakeholder engagement to ensure that WEIM entities are fully represented and have an opportunity to gain experience with VOLL metrics.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

It is reasonable to consider the implementation of “circuit breakers” along with a VOLL metric, but the “circuit breakers” remain part of a rarely used contingency plan, not as a tool to obscure or affect price formation on a routine basis.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

The existing emergency actions are necessary but are failing to fully or properly reflect scarcity in market prices.  This reality supports the continued need for the Price Formation Enhancement Initiative and its objectives of improved, transparent pricing and earlier notices of shortages.  In the case of CAISO emergency demand response programs, Bonneville reiterates its prior comments that any resource deployment that is contingent upon Emergency Level Alert criteria should not be utilized to demonstrate resource sufficiency because the cost of these programs is not considered in price formation.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

BPA has no additional comments.  BPA appreciates the substantial effort made by the CAISO staff in support of the Price Formation Enhancement Initiative. 

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

The California Independent System Operator (CAISO) advances several potential enhancements to ancillary service (AS) procurement aimed at resolving several real-time market (RTM) limitations that impact the scarcity reserve demand curve (SRDC). These limitations include: (1) the RTM only procuring AS incremental to the quantity procured in the day-ahead market (DAM); (2) the RTM only procuring AS in the fifteen-minute market (FMM) and not in the real-time dispatch (RTD); (3) the market only procuring AS within the CAISO balancing authority area (BAA) and not the western energy imbalance market (WEIM) or future extended day-ahead market (EDAM); and (4) the practice of arming load not triggering the SRDC.

The first three potential enhancements (full AS re-optimization in the RTM, AS deliverability tests, and AS RTD procurement) would add significant computational complexity and may be technically infeasible. Given this complexity, a more detailed assessment of reliability, market efficiency, and price formation benefits is necessary before determining whether to pursue any of these approaches.

CalCCA supports the CAISO exploring settlement-for-differences between the DAM and RTM for AS. This enhancement appears to be a more implementable step towards providing stronger incentives for resources to maintain availability of awarded AS and respond to system needs. It is also comparable to the settlement of energy, in which resources pay the costs of RTM unavailability resulting in deviations from DAM schedules. CalCCA also supports the CAISO exploring collapsing spinning and non-spinning reserves into one contingency reserve product to align with the Western Electric Coordinating Council’s requirements and simplify AS procurement.

CalCCA is concerned with eliminating the cascading procurement between regulation and operating reserves, which could increase procurement costs, without quantifying the level of exposure the CAISO has to intervals with no contingency reserve capacity resulting from allowing the market to substitute regulation for spin and non-spin when cost-effective. The CAISO should quantify this risk and provide cost estimates of this change, including anticipated increases in spin/non-spin procurement costs and anticipated decreases in regulation-up procurement costs.

The CAISO documents arguments for and against triggering the SRDC when “arming load.”[1] The CAISO states that using armed load as a substitute for traditional contingency reserves suggests there is a scarcity of traditional AS supply, which is exactly what the SRDC is designed to reflect. The CAISO also states that arming load effectively alleviates some of that scarcity by creating additional contingency reserve capability, which could mean there is no longer a shortage that should trigger the SRDC mechanism. Before considering proposals for triggering the SRDC when arming load and other proposals described in the sections below, the CAISO should clearly identify instances in which the market did not provide adequate scarcity signals (either through flex alerts, EEAs, or market prices), what prices the CAISO would have wanted to reflect such scarcity, and how the proposed modifications would have resulted in the CAISO’s desired outcomes.

[1]            December 16, 2025, Presentation at 29

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

The CAISO’s three concepts for implementing gradual price increases during scarcity conditions are intended to mitigate reliability issues by providing an opportunity for energy prices to rise gradually ahead of impending supply shortfalls with enough time for market participants to respond and resolve them.[1] The CAISO provides an example of prices during the August 2020 load-shedding event that the CAISO states, “demonstrates why graduated scarcity pricing that rises with system stress levels could be more effective than the current mechanism that provides primarily emergency-driven price signals that come too late to prevent reliability events.”[2] It is currently unclear whether extending procurement curves for existing products or implementing a new product would result in the CAISO’s intended outcome. The CAISO should demonstrate, through additional analysis, how the three concepts presented would have resulted in its desired outcomes in its August 2020 example and the cost impacts of having such concepts in place throughout 2020.

Artificial means to address market pricing, such as administrative scarcity pricing, should be considered in the larger view of what is coming within the market.  As California and other states move forward with a decarbonized electricity supply, it can be expected that more resources will operate with marginal costs that are at or near $0. If marginal costs routinely result in low prices until the last MW of generation is used, the problem of scarcity pricing is larger than simply creating an artificial and administratively set price. Further, market participation occurs with highly skilled and motivated individuals who can understand market needs from multiple sources, including price-related information and non-price-related information (e.g., flex alerts and EEA notices). The CAISO should therefore look at both the positive and negative implications of administratively set prices before proceeding.

The CAISO should use the data from August 2020 and for the entire year of 2020 as follows: First, the CAISO should use the data from 2020 to determine how many hours administrative scarcity pricing would have been activated. Then, the CAISO should use the administrative price to see how it would have increased prices in the FMM and RTD. These costs can be totaled to reveal the cost to the market of this mechanism had it been in place in 2020. 

Second, the CAISO should provide how many incremental MWs the FMM would have dispatched under the new prices. While this analysis cannot address what resources out of the market would have made themselves available in the market, it does provide more information than is currently available to analyze the impact of the three concepts.

Third, the CAISO should evaluate what would happen to energy in excess of need in scarcity pricing events where no firm load shedding occurred. How would the CAISO curtail that generation, and what would be the resulting market price? This information will help reveal the cost of using scarcity pricing where no firm load shedding occurred.

For the August 2020 data in the figure provided on slide 14, please provide:

• Day-ahead hourly prices for the same period;
• The CAISO’s desired interval prices; and
• The interval prices that would have been realized under the three concepts.

This information will allow stakeholders to better identify: (1) the CAISO’s desired outcomes from the three concepts applied to the August 2020 example; and (2) the estimated cost impacts of such concepts.

[1]            January 22, 2025, Presentation at 12.

[2]            I.d., at 14.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

CalCCA continues to oppose anchoring market penalty prices to a VOLL metric that is based on the value of involuntary load curtailment rather than the cost of the marginal resource. Scarcity pricing is currently tied to the bid cap. During times of scarcity, demand response resources are typically the marginal unit and therefore set the price at their VOLL for voluntary load curtailment, which is typically at or near the current bid cap. Therefore, demand response resources are likely to be the last available supply to be dispatched. Once demand response has been fully utilized, regardless of whether consumers are willing to pay more to avoid involuntary demand curtailment, there is no additional supply and simply increasing prices would not result in more available supply.  At the same time, the increased prices would result in higher costs to consumers and higher rents to generation willing and able to accept a lower rent.

A scarcity pricing mechanism that sets prices based upon demand’s willingness to pay to avoid involuntary load curtailments is problematic because it can (1) compensate supply above the marginal resource’s costs at a cost to consumers, (2) degrade the incentives for resources to bid at their costs, and (3) create perverse incentives for generators to withhold supply in order to artificially trigger scarcity pricing intentionally. It will be extremely difficult to determine a value that adequately reflects consumers’ willingness to pay to avoid involuntary load curtailments while protecting consumers from excessively high prices. This is especially the case when demand is inelastic[1] and scarcity conditions are present, or participant bidding can give the appearance that scarcity conditions are present even if they are not.

The CAISO indicates that estimating VOLL would be complex and resource-intensive. It also notes that in the EDAM/WEIM, “the concept of a system-wide VOLL is less straightforward since each BAA is responsible for its own resource adequacy. Each BAA may have different reliability standards, planning reserve margins, and outage cost tolerances.”[2] CalCCA agrees with the CAISO that these differences complicate the process for administratively setting scarcity pricing. Without EDAM implementation, it is difficult to assess whether other potential EDAM participants support a scarcity pricing mechanism. It is also difficult to assess whether the mechanism would be used uniformly by all EDAM participants or limited to use in California only. Without a better understanding of how the mechanism would function under an expanded market, the CAISO can currently only assess the mechanism under the current market structure. As noted above, that market structure makes the implementation of scarcity pricing a very risky proposition in terms of both cost and effectiveness. 

Currently, the CAISO operates a wholesale energy market with a market clearing price that all generators are paid based upon the bid price of the marginal resource. The resource adequacy program compensates resources for dedicating themselves to the CAISO market through a must-offer obligation. Other BAAs, outside of their participation in WEIM or the future EDAM, do not have market clearing prices, and can therefore pay the next generator more during times of scarcity without having to pay all the other generators it transacted with the same price. Attempting to align penalty prices in the CAISO’s market with prices in a scarce bi-lateral market will come at the expense of California ratepayers who must pay all generators, not just the marginal resource, a market clearing price that (1) is attempting to compete with a buyer that does not have to pay all generators the same price, and (2) is not reflective of its marginal costs.

[1]            There are still relatively few programs that provide a price to consumers that is based upon the CAISO market price. Unless and until load has the ability to react to prices, the VOLL will remain difficult to estimate and market prices will fail to reflect price sensitive demand.

[2]            January 22, 2025, Presentation at Slide 17.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

CalCCA has no comments on how to implement “circuit breakers” to mitigate the financial impacts of long-duration shortage conditions at this time. Whether and how circuit breakers are implemented will depend on the ultimate price formation design.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

The CAISO states that emergency actions, while essential for reliability, may mask or distort underlying market scarcity signals, leading to weakened incentives to respond appropriately to approaching market scarcity, inefficient dispatch, and reduced transparency.[1] CalCCA does not agree that emergency actions, such as out-of-market emergency demand response and the strategic reliability reserve program, mask scarcity signals. Emergency actions are already transparent, as they are typically driven by the CAISO triggering a flex alert, EEA watch, EEA 1, or EEA 2. These triggers are publicly noticed, meaning market participants are aware of impending scarcity and potential high market prices. If the CAISO has observed instances where scarce conditions were not properly noticed (through a flex alert, EEA, or market prices), the CAISO should clearly identify those instances, what prices the CAISO would have wanted to reflect such scarcity, and how modifications to how emergency actions are reflected in the price would have resulted in the CAISO’s desired outcomes.

[1]            February 6, 2025, Presentation at 17.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

CalCCA has no additional comments at this time.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

Comments on Price Formation Enhancements

Scarcity Pricing Working Group Sessions

Department of Market Monitoring

February 27, 2025

Summary

The Department of Market Monitoring (DMM) appreciates the opportunity to comment on the ISO’s Price Formation Enhancements Working Group Sessions.[1] The scarcity pricing working group meetings have been aimed at (1) exploring market mechanisms that allow prices to gradually rise as supply shortage risk grows, (2) considering potential enhancements to the ISO’s real-time ancillary services procurement in the context of scarcity pricing, and (3) exploring approaches to better align pricing run penalty prices with market conditions and scarcity value of reserves.

As the ISO considers potential options to address these issues, DMM continues to suggest that the ISO place priority on two foundational enhancements to price formation:

1. extending the 15-minute uncertainty time horizon of the flexible ramping product (FRP), or creating a new uncertainty reserve product that serves a similar purpose
2. full re-optimizing of ancillary services in the real-time market

These two enhancements would allow the real-time market to better reflect real-time conditions and provide earlier price signals prior to a scarcity event.  

Based on discussions in the working group, DMM believes creation of a new hour-ahead uncertainty product is worth serious consideration and may be the most practical path forward for implementing the first of these price formation enhancements. As noted in working groups, extending the uncertainty horizon of the current FRP may involve significant complexity. A simpler hour-ahead uncertainty product may be much more compatible with the current hour-ahead scheduling timeframe of the broader Western Energy Imbalance Market (WEIM). 

This type of hour-ahead product would allow the costs of protecting against uncertainty to be reflected in real-time market prices, and reduce the potential for scarcity before it occurs. This product could also be designed to replace the need for the large load bias by ISO operators in the hour-ahead and 15-minute markets to account for uncertainty and create additional ramping capacity. DMM looks forward to further discussion of this possibility in future working group meetings.

With respect to scarcity pricing, DMM does not believe that anchoring penalty prices to the value of lost load would necessarily provide more accurate price signals to the market during times of potential scarcity. Using an estimated value of lost load could significantly inflate penalty prices to values several times greater than the current market bid cap, without a sound theoretical reason for doing so. DMM recommends the ISO first address more fundamental price formation issues before attempting to establish any higher value for prices during scarcity conditions.

Comments

Extending the flexible ramping product uncertainty time horizon (or creating a new product to serve a similar role) would allow earlier and more gradual price signals of upcoming scarcity

At the January 22 working group meeting, DMM presented its longstanding recommendation to extend the uncertainty time horizon of the flexible ramping product (FRP) to account for uncertainty over longer time horizons.[2] The FRP is designed to address net load forecast uncertainty between the 15-minute and 5-minute markets. However, the time horizon for which this uncertainty is considered is a single 15-minute interval into the future. In real time, grid operators face significant net load uncertainty over longer timeframes (e.g., 30, 60, and 120 minutes from the current market interval), and the range of uncertainty increases over those longer time horizons.

As summarized in DMM’s presentation, the 15-minute uncertainty used by FRP is substantially less than what actual net load forecast uncertainty may be one to four hours in the future. Therefore, the real-time market software does not optimally position the resource fleet to meet potential high net load outcomes in these future time horizons. This prevents price impacts from potential tightening supply conditions from impacting prices in the binding interval, and contributes to operators needing to enter large load adjustments that can impact both the CAISO BAA and the entire WEIM.

DMM continues to suggest that extending the FRP uncertainty horizon, or creating a new uncertainty product to serve the same purpose, can provide three key benefits:

1. Allow the optimization to better position resources to consider upcoming scarcity in further out market intervals.
2. Improve flexible capacity and energy price formation ahead of a scarcity event by considering a longer time horizon for uncertainty.
3. Procure capacity to meet net load uncertainty over longer time horizons in the market, reducing the need for operator interventions.

The examples provided in DMM’s January 22 presentation were constructed within the context of Short-Term Unit Commitment (STUC) and a 270 minute forward-looking timeframe. However, DMM does not suggest that the FRP horizon must be extended to this specific timeframe in order for improvement or benefit to take place. Extending the FRP uncertainty time horizon to even one hour, or creating a new hour-ahead uncertainty product, could improve the current real-time market design.

A one-hour time horizon for uncertainty could align with the timeline for submission of base schedules by WEIM entities, allowing such schedules to be considered when calculating future interval net load uncertainty. This type of product would allow costs of protecting against uncertainty to be reflected in real-time market process, and could essentially replace the need for the large load bias that is currently used by ISO operators in the hour-ahead and 15-minute markets to account for uncertainty and create additional ramping capacity.[3]

Given the need for an approach that is compatible with the broader WEIM and the potential complexity added to the existing FRP by extending the uncertainty horizon, DMM believes creation of a new hour-ahead uncertainty product is worth serious consideration and may be the most practical path forward. DMM looks forward to further discussion of this possibility in future working group meetings.

DMM supports enhancements to ancillary service procurement to improve overall price formation

The scarcity pricing working group discussions contemplated changes to ancillary services procurement as one approach to implement scarcity pricing. These potential changes included elimination of cascading ancillary services procurement, full real-time re-optimization of ancillary services procured in the day-ahead market, and modification of the existing ancillary services pricing mechanism to establish a new operating reserve demand curve (ORDC) that would better inform scarcity pricing during tight system conditions.

DMM agrees that re-optimizing ancillary services in the real-time market would be beneficial. The real-time market only procures ancillary services incremental to day-ahead ancillary services awards, which may not fully capture the extent of scarcity in real-time. A full ancillary services re-optimization in real-time could increase efficiency and allow real-time energy prices to better reflect real-time ancillary services conditions. This could be especially helpful when reserve capacity is scarce in tight real-time conditions. 

DMM also generally agrees that ancillary service pricing could be enhanced to establish a more robust ORDC. However, reliance on ancillary service pricing mechanisms to establish scarcity pricing has two significant limitations: they only apply to the 15-minute real-time market, and they would not apply to the broader WEIM footprint since ancillary services are only procured by the market for the CAISO BAA.

Elimination of cascading ancillary service procurement would likely increase prices of both energy and ancillary services during extreme system conditions

In the absence of cascading ancillary service procurement, the potential increase in prices during tight conditions would result from the reduced fungibility of ancillary service products, and the increased extent to which there is a tradeoff with energy to procure additional quantities of each product. Further, elimination of cascading ancillary service procurement may lead to more ancillary services being held as contingency-only reserves. When such reserves are released as energy during tight supply conditions, they would be released at the bid cap, thus acting as a type of scarcity pricing.

The extent to which higher prices from eliminating cascading ancillary service procurement is an efficient and desired outcome depends on the true fungibility of different ancillary service products. If from an operational perspective there is an acceptable degree of substitution between some ancillary service products, eliminating cascading procurement may lead to artificial constraints and unnecessary price inflation. Cascading ancillary service procurement should not be eliminated solely for the purpose of exaggerating potential ancillary service shortfalls to drive higher prices.

Ancillary service procurement enhancements have implications beyond scarcity pricing 

DMM views enhancements to ancillary service procurement – particularly the real-time re-optimization of ancillary services – as a foundational price formation enhancement that extends beyond its implications for scarcity pricing. DMM views this important enhancement as being appropriately in scope for the current scarcity pricing initiative. However, DMM would not oppose ancillary service topics being moved to a separate, more focused initiative, if the ISO chooses to implement a scarcity pricing approach that does not directly involve ancillary services. DMM’s support of such a move would also be conditional on this topic continuing to receive the same level of serious consideration as it has in the scarcity pricing context. 

Value of lost load (VOLL) estimates will inflate scarcity prices, but may still have weak theoretical underpinnings and may be difficult to apply uniformly in all areas

At the January 22, 2025 scarcity pricing working group meeting, the ISO presented the concept of value of lost load (VOLL) as a potential anchor for pricing run penalty prices during a supply shortfall or reliability event.[4] Maximum energy prices are currently anchored to the market bid cap. The ISO suggested that VOLL-based penalty prices could better reflect the true economic cost of load shedding, and improve market price signals and system reliability. Implementing VOLL-based penalty prices would anchor the operating reserve demand curve (ORDC) to the expected value of lost load (EVLL), which is the product of an estimated VOLL value and estimated loss of load probability (LOLP).[5]

The appeal of using a VOLL estimate to establish prices under extreme system conditions is that this value is thought to be a more accurate estimation of load’s willingness to pay to avoid curtailment. However, there are many possible approaches and assumptions when choosing to establish prices based on a VOLL estimate. Ultimately, the use of a VOLL approach to pricing can lead to much higher prices under extreme conditions that may still lack a strong theoretical underpinning, and may not attract any additional supply in true scarcity situations.

DMM is concerned with the idea of applying static VOLL and LOLP values to establish penalty prices for all loads across all regions. These two values can vary significantly across different customer classes, regions, and different points in time.

VOLL estimates are typically developed from preference studies that estimate the economic cost of outages for different customer classes and outage durations. The VOLL is then administratively set at either a load-weighted average for a specific outage duration, or at a level focused primarily on a specific customer class (such as residential customers). In either approach, the VOLL is left over-valuing and under-valuing the real VOLL for certain loads.

The true range of VOLL across the system may be very large, with demand distributed at both extremes. Load associated with the lowest willingness to pay should be the first to be curtailed, and may be sufficient in quantity to resolve reliability issues. However, penalty prices are applied non-discriminatorily during extreme system conditions, meaning there is no way to apply a class-based VOLL to class-specific load shed. For example, a residential-based VOLL penalty price would apply to all load shed (not just residential load), which would inaccurately quantify the real economic cost of the outage. Even within customer classes, the true VOLL may vary significantly across regions, adding further complication to establishing accurate values across the entire real-time market footprint.

The LOLP is the probability of system load exceeding the available generating capacity during a given time period. Because the LOLP is constantly changing with market conditions, there is no way to calculate a single standardized LOLP value that accurately represents real-time conditions in every hour of every day. In theory, to account for real-time system conditions, this means that the system LOLP would need to be re-calculated relatively frequently (such as every hour) in order for it to remain accurate.

Additionally, without extensive hourly data from all WEIM BAAs (for both participating and non-participating resources), there is no way to accurately calculate a LOLP value for the regional market footprint during all hours of the day. While LOLP could be estimated under different sets of defined system conditions, such estimates are likely to be imprecise and inaccurate representations of the true LOLP at a given point in time.

Therefore, DMM does not believe VOLL-based penalty prices are likely to provide more accurate price signals to the market. DMM is concerned that VOLL-based penalty prices could significantly inflate penalty prices to values potentially several times greater than the current market bid cap, without a sound theoretical underpinning to do so.[6]

[1]  Price Formation Enhancements – Scarcity Pricing Working Group Sessions, California ISO, December 16, 2024 - February 6, 2025: https://stakeholdercenter.caiso.com/StakeholderInitiatives/Price-formation-enhancements

[2]  Recommendation to increase the FRP uncertainty horizon, Department of Market Monitoring, January 22, 2025: https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Department-of-Market-Monitoring-Flexibility-Ramping-Product-Jan-22-2025.pdf

[3]  Initial WEIM base schedules are due 75 minutes before the trading hour (T-75). While base schedules may be revised slightly at the T-55 and T-40 timelines, an hour-ahead lookout should capture the bulk of base scheduling activity.

[4]  Price Formation Enhancements – Scarcity Pricing: Anchoring Penalty Prices to the Value of Lost Load, California ISO, January 22, 2025: https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Price-Formation-Enhancements-Session-2-Jan-22-2025.pdf

[5]  EVLL = VOLL * LOLP. Page 10, Price Formation Enhancements – Scarcity Pricing: Anchoring Penalty Prices to the Value of Lost Load, California ISO, January 22, 2025: https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Price-Formation-Enhancements-Session-2-Jan-22-2025.pdf

[6]  Gorman and Callaway (2024) found an average VOLL estimate of $10- 14/kWh ($10,000-$14,000/MWh) for California residential customers. Page 15, Price Formation Enhancements – Scarcity Pricing: Anchoring Penalty Prices to the Value of Lost Load, California ISO, January 22, 2025: https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Price-Formation-Enhancements-Session-2-Jan-22-2025.pdf

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Please see the PDF attached below the final question for DMM's fully formatted complete set of comments. For the reader's convenience, the complete text of the comments is pasted in response to #1, but there may be some formatting errors.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

Please see the PDF attached below the final question for DMM's fully formatted complete set of comments. For the reader's convenience, the complete text of the comments is pasted in response to #1, but there may be some formatting errors.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

Please see the PDF attached below the final question for DMM's fully formatted complete set of comments. For the reader's convenience, the complete text of the comments is pasted in response to #1, but there may be some formatting errors.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

Please see the PDF attached below the final question for DMM's fully formatted complete set of comments. For the reader's convenience, the complete text of the comments is pasted in response to #1, but there may be some formatting errors.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

Please see the PDF attached below the final question for DMM's fully formatted complete set of comments. For the reader's convenience, the complete text of the comments is pasted in response to #1, but there may be some formatting errors.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

Background and Summary of Comments

Energy Division staff (ED staff or staff) of the California Public Utilities Commission (CPUC) develops and administers energy policy and programs to serve the public interest, advises the CPUC, and ensures compliance with CPUC decisions and statutory mandates. Energy Division staff provides objective and expert analyses that promote reliable, safe, and environmentally sound energy services at just and reasonable rates for the people of California.[1] 

ED staff appreciates the opportunity to comment on CAISO’s initial thinking on scarcity pricing in this Price Formation Enhancements Working Group.  In general, ED staff supports incremental and minor changes due to the major changes already coming with the launch of the Extended Day Ahead Market (EDAM) in 2026.  Southern California Edison similarly encouraged CAISO to consider the broader context of EDAM when evaluating scarcity pricing. SCE also suggested that the existing EDAM design for emergency assistance could already accomplish the goal of curing supply deficiencies.[2] Furthermore, ED staff agrees with CalCCA’s previous comments that “[b]efore moving forward with any proposed solution, [CAISO] must determine (1) whether existing market mechanisms are insufficient to send the right price signals during periods of scarcity to incent resource availability, and (2) whether the options to consider presented [...] would achieve the CAISO’s desired outcomes such as reliability, incentive alignment, and market efficiency.”[3]

ED staff is concerned that scarcity pricing could unnecessarily increase customer costs and therefore favors proposals like those from CAISO’s Department of Market Monitoring (DMM) which recommends extending the uncertainty time horizon for the Flexible Ramping Product (FRP), instead of extending the FRP procurement curve or creating new products.  Similarly, ED staff is concerned about applying a Value of Lost Load (VOLL) pricing mechanism due to the risk of extremely high prices for CAISO customers. 

ED staff suggests CAISO maintain the status quo with regard to out-of-market actions tied to emergency demand response (DR) programs because raising prices through an administrative scarcity pricing mechanism or product could pose a direct conflict to established CPUC DR policy and cause a double-payment for CAISO customers (ratepayers).  When the CAISO market prices no longer reflect scarcity conditions because of out-of-market emergency DR, that is evidence that DR is working as intended because the scarcity conditions have improved and load has dropped.  SCE likewise encouraged CAISO not to consider arming load and manual load shedding as part of the list of actions not captured by price formation because “there will always be grid needs requiring addressing through reliability measures that cannot be included in the [market] optimization.”[4]

Additional background on CPUC DR policy is attached in an appendix.  This is similar to information that ED staff submitted in March of 2024 in the price formation enhancements initiative.    

Enhancements to Ancillary Services

ED staff supports addressing this issue through fixes to existing CAISO processes.

[1] More information about the CPUC Energy Division is available at: https://www.cpuc.ca.gov/about-cpuc/divisions/energy-division

[2] SCE’s October 14, 2024 comments on scarcity pricing in the Price Formation Enhancements initiative, available at: https://stakeholdercenter.caiso.com/Comments/AllComments/114a0a80-8e7c-441b-b561-06f32aa9eb4c#org-111f7836-c0b9-4285-ac32-b6ba8a2f3c79.

[3] CalCCA Comments on Scarcity Pricing, February 20, 2024.

[4] SCE February 14, 2024 comments on working group priorities and scarcity pricing, available at: https://stakeholdercenter.caiso.com/Comments/AllComments/9c5f5397-76f6-41ce-83b5-91ec505d92f2#org-7377d607-05fb-495f-bad6-b3d88911f6e9.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Generally, ED staff is concerned that any scarcity pricing measure could unduly increase prices and resulting costs to customers. ED staff supports more exploration of DMM’s proposal to expand the time horizon of the FRP, as an alternative to new products that could increase prices. 

In addition, some scarcity pricing measures may have important implications for reliability and existing reserve requirements and measures. Before developing new mechanisms, ED staff suggests CAISO analyze potential cost and reliability impacts, perhaps using proxies and estimates, and then present these impacts to the broader stakeholder community.

Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve.

ED staff has no comments at this time.

Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements.

ED staff agrees with CAISO’s assessment that spin and non-spin reserves are designed for very short-term needs and so may be unnecessarily costly relative to longer duration flexibility products. ED staff suggests CAISO not develop this concept further until the potential magnitude and extent of any higher costs have been analyzed and presented to the stakeholder group.

Concept 3: Implementing a new reserve product and associated demand curve.

ED staff suggests CAISO focus on enhancing/expanding existing mechanisms rather than introducing an entirely new reserve product. Enhancing existing mechanisms, such as DMM’s proposal to expand the time horizon of the existing Flexible Ramping Product, would be an incremental improvement with less administrative burden.  On the other hand, introducing a new product could be complicated, costly to implement, and result in unintended consequences since it would be untested.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

1. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach?

No. ED staff suggests CAISO should not pursue the development of a pricing system applying the proposed Value of Lost Load (VOLL) principle.

2. What are the potential benefits and drawbacks of a VOLL-based approach?

VOLL is an unproven mechanism that could lead to extremely high prices under certain circumstances, and is inappropriate for the CAISO market.  A VOLL would essentially replace the existing hard offer cap of $2,000 with higher values. For example, the Midcontinent Independent System Operator (MISO)  has proposed establishing a new "Pricing VOLL" of $10,000/MWh and a new "System VOLL" of $35,000/MWh.  Applying VOLL values of a similar magnitude to CAISO could lead to excessive increases in prices and higher costs for California customers. For example, even if only 10% of bids in CAISO were to clear at the proposed MISO VOLL values, a VOLL of $10,000/MWh would result in $45 million in total market costs for just one hour, while a VOLL of $35,000 would result in $157 million in total market costs for just one hour.[1]  The magnitude of such impacts can be seen using a real-world example: On August 16, 2023, CAISO called a demand response event. CAISO then raised the bid cap from $1000/MWh to $2,000/MWh, which led to prices spiking. The highest bid became the clearing price for the entire market.  Although on a typical day total wholesale market costs usually range from $40-$70 million, on August 16 total costs reached over $250 million.  If a VOLL had been in place at that time, total market costs for that day would have reached into the BILLIONs of dollars.

Moreover, VOLL would only make sense for wholesale electricity markets that do not include Resource Adequacy (RA) programs or markets - such as ERCOT - because such markets enable generators to capture the full cost of meeting reliability through energy prices. In contrast, LSEs in the CAISO Balancing Area Authority participate in the CPUC’s Resource Adequacy (RA) program and generators receive significant revenues for providing reliability (via their availability) from capacity payments from bilateral Resource Adequacy (RA) agreements, well in advance of entering the CAISO markets.  Therefore, ED staff suggests CAISO not adopt VOLL because California’s load serving entities already pay generators for capacity to comply with the regulatory requirements of the RA program. Generators with a Must Offer Obligation (MOO) in CAISO receive energy revenue through the integrated forward market (real-time and day-ahead) and through RA capacity payments. The RA capacity payments capture the cost of reliability, which would then essentially be double counted through a costly VOLL. If CAISO were to allow prices to increase up to the VOLL, it would then have to consider whether to eliminate the RA capacity payments to avoid double-counting. The CPUC’s RA program establishes an RA requirement to meet a planning reserve margin based on loss of load expectation calculations. In doing so, the CPUC RA program already establishes demand in the bilateral RA market for capacity to provide reliability at a level that should ensure avoiding load losses.  Additional capacity requirements over and above the CPUC’s RA requirements should be handled as extreme and rare events (well outside of planning models), and so there is no need to make a “market product” using VOLL to pay for their availability.

3. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach?

ED staff supports data-driven decision-making, especially when it is unbiased towards a particular outcome.  Before the CAISO conducts a study to determine a VOLL metric, ED staff suggests the CAISO analyze the impact of VOLL pricing on prices for California customers and other EDAM BAAs. The CAISO expects EDAM to generate benefits for all market participants, including customers. If the CAISO increases prices for customers because of measures like scarcity pricing and VOLL, then the benefits of EDAM will only go to suppliers, and not to load. 

4. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

Generally speaking, the calculation of a VOLL metric is based on numerous assumptions concerning how customers value electricity reliability, and each of these assumptions will differ depending on the market in question, customer class, type of market, econometric issues, etc.  It would be difficult, if not impossible, to develop a VOLL metric that fairly and accurately applies to all of the non-homogenous customers spread across the climatically and geographically diverse regional market.    

[1] Assuming a CAISO load of 45,000 MW: 45,000 MW x 1 hour x $10,000/MWh = $450 million;

45,000 MW x 1 hour x $35,000/MWh = $1.575 billion

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

ED staff agrees that if a scarcity pricing mechanism is adopted, it should have a circuit breaker mechanism.  It is not in the best interest of ratepayers for market rules to allow for significant price periods to be sustained.  First, it has proven difficult or impossible to put breaks on a price spike event in real time, yet high prices for even a few days can lead to significant energy costs that will then need to be passed on to customers.  For example, December 2022 gas price spike events led to $3 billion in additional costs to electricity suppliers in a single month; SCE had to file an ERRA Trigger application and increase customer rates to address the unexpected costs.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions?

ED staff suggests that raising prices through a scarcity pricing mechanism or product because of an emergency DR event, could pose a direct conflict with established CPUC DR policy.  On the February 6, 2025 price formation enhancements meeting, CAISO staff raised the issue of out-of-market emergency DR not being fully visible in the market, weakening incentives by lowering price signals, and causing inefficient dispatch because resources do not reflect the scarcity value.  At the same time CAISO staff listed compelling reasons in terms of transparency and reliability to maintain the status quo and leave emergency DR programs intact:   

• Transparency:  CAISO staff described how DR is already accounted for in the market because it reduces load in the demand forecast that the CAISO market uses.  In the day-ahead market, DR programs are incorporated in the forecast and in the Real-Time market, CAISO staff stated that "the forecast generally follows the actual load, which implicitly accounts for demand response."  Further, CAISO staff listed a number of In-Market DR programs like Reliability Demand Response Resources (RDRR) and Proxy Demand Response resources (PDR). 
• Reliability: CAISO has long recognized the critical role that emergency DR plays in keeping the lights on in an emergency and CAISO staff stated in the February 6, 2025 meeting that, "emergency actions are essential for reliability," and later "emergency demand response adds supply during scarce conditions."  CAISO staff listed a number of emergency DR programs including the Emergency Load Reduction Program (ELRP), the Back-Up Generators (BUGs) used under the Demand Side Grid Support (DSGS) program, DSGS Behind-the-Meter (BTM) resources, and "strategic reserve" resources.  CAISO also described other out-of-market actions like the exceptional dispatch of RDRR. 

Historically, and in the February 6, 2025 stakeholder meeting, CAISO staff expressed concerns about a lack of visibility into DR programs.  The CPUC has addressed these concerns by ordering IOUs to create market-integrated DR programs (supply-side DR).  For programs that are not integrated into the market, the CPUC has refined over the years the load impact protocols and has worked with the California Energy Commission (CEC) to ensure the accuracy of the CEC Integrated Energy Policy Report (IEPR) demand forecast.  On a high level, this CEC forecast, and the LSE's own load forecasts are used to estimate the demand forecast that the CAISO market relies upon.  In this way the out-of-market DR is incorporated into the market because the demand forecast is reduced to account for DR.  The CPUC has worked with parties for over ten (10) years to integrate Investor-Owned Utility (IOU) DR programs into the CAISO market, starting with a July 18, 2008 CPUC scoping memo in Rulemaking (R.) 07-01-041, in subsequent rulemakings including R.13-09-011, and in various application proceedings.  ED staff provide more background on the history of DR market integration in CPUC proceedings in the attached appendix.  If CAISO’s main concern is DR integration with the market, there are several pathways available to request the CPUC address the issues via a rulemaking. 

ED staff is concerned that scarcity pricing could circumvent established DR programs that are legislatively mandated[1] and implemented by the CPUC, matters that would more appropriately be addressed in a CPUC proceeding.  The purpose of emergency DR programs is to incentivize customers to drop load, thereby reducing demand and eliminating or improving scarcity conditions.  The goal is to prevent high market prices and the resulting cost impacts to ratepayers.  When DR programs eliminate scarcity conditions, and reduce market prices, it is evidence that DR programs are working as intended.[2]     

If scarcity pricing is implemented, ED staff is concerned about California ratepayers double-paying for what CAISO categorizes as out-of-market DR programs.  In the February 6, 2025 meeting, CAISO staff stated that out-of-market DR is "price-taking" because it is not reflected in market prices.   Emergency DR (whether integrated into the CAISO market,  such as RDRR, or out-of-market, such as ELRP or DSGS) is paid for by Californians either in rates or through general funds. To increase prices using a scarcity pricing mechanism would require California ratepayers to double-pay for these resources, first with the program costs that are charged in rates or general-funded, and then with the higher scarcity prices charged to load in the CAISO market. 

Preventing double-payments by ratepayers is consistent with Public Utilities Code (Pub. Util. Code) §380(h)(7), which requires the CPUC to ensure that investments in DR are cost-effective. Increasing market prices to account for DR would eliminate the benefits of a programs’ cost-effectiveness. CPUC programs are legislatively mandated and targeted at addressing specific grid needs, lowering energy prices and providing benefits to ratepayers. Increasing costs with scarcity pricing because DR programs target peak demand would seem to run counter to these goals.    

ED staff would like to see more evidence about how these emergency DR programs are causing a problem.  ED staff suspects that emergency DR may not be an actual concern because according to a February 20, 2025 DMM report on DR Issues and Performance 2024, the only Energy Emergency Alert watch day that year was July 24, 2024.[3]  RDRR was not dispatched on that date and all other instances of RDRR dispatch were due to economic schedules in the day-ahead market.

The CAISO market is not the mechanism in which LSEs procure long-term supply and capacity products to provide reliability.  The market is only responsible for managing the dispatch of existing resources.  As Six Cities stated during the February 6, 2025 meeting, at some point increased prices are merely punitive because no additional supply exists.  High prices during a scarcity event do not lead to additional construction of new resources; instead, they only serve to extract rents from customers that cannot take any action in real time to avoid paying because the system is already pre-loaded with the amount of capacity established via the planning reserve margin as set by local regulatory authorities' RA programs. We cannot solve all of our issues regarding resource constraints with market solutions.  Pub. Util. Code §454.5(b)(9)(C) requires each utility to “first meet its unmet resource needs through all available energy efficiency and demand reduction resources that are cost effective, reliable, and feasible.”  The legislature has given the utilities and the CPUC a host of requirements for utility procurement planning, all of which is completed outside of the CAISO market.  Other long-term procurement and transmission solutions to increase supply would be more efficient than creating new scarcity pricing mechanisms that increase prices for California ratepayers. 

If the problem is that suppliers are not bidding their existing capacity supply in the market, then it would be more efficient to reform existing mechanisms, than create new scarcity pricing products or mechanisms.  Improvements to existing mechanisms could include reforms to the Resource Adequacy Availability Incentive Mechanism or DMM’s proposal to extend the uncertainty time horizon for the FRP. 

As other parties have previously requested, ED staff suggests CAISO more clearly define pre-scarcity, scarcity, shortage, and emergency events to help clarify the problems CAISO is trying to address. ED staff would appreciate clarification on the specific conditions under which CAISO would judge there to be an inadequate supply and deem appropriate countermeasures would be necessary. ED staff recommends CAISO clarify how and when the CAISO BAA is in “scarcity” conditions. This would help steer solutions to correctly consider the problem and potential impacts.  ED staff recommends CAISO consider other existing mechanisms apart from new scarcity pricing products or mechanisms in order to address concerns about out-of-market emergency DR actions. 

b. Are there other emergency actions the working group did not discuss that should be considered?

No, CAISO should not implement scarcity pricing because of emergency actions.

c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices?

ED staff suggest there are sufficient transparency mechanisms related to emergency DR.  Demand response is incorporated into the demand forecast in the day-ahead and in the real-time the forecast follows load, and in that way accounts for demand response.

d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

ED staff would need to research this more, but generally supports more minor changes given the bigger changes expected with EDAM in the future.  CAISO customers should be shielded from any price shocks related to scarcity pricing measures. 

[1] The Public Utilities Code includes many directives for utility regulated DR programs, for example:

• §380(b)(2) requires the economic dispatch of DR programs, and §380(c) targets DR during peak demand to address operating reserves and deliverable at locations and times that help address system reliability, local area reliability, and flexibility. 
• §380.5 requires the CPUC fulfill certain requirements when establishing a new DR program including compliance with the resource adequacy program, customer protections, and accurately measuring customer load shift. 

[2] See linked appendix below for more history on CPUC policy here. 

[3] The DMM report is available at: https://www.caiso.com/documents/demand-response-issues-and-performance-2024-feb-20-2025.pdf

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

1. Overarching Comments

First, before further considering additional scarcity pricing mechanisms, ED staff recommends CAISO analyze what kind of impacts that raising the bid cap to $2,000 has had on market prices.  Second, ED staff suggests CAISO ensure that the CAISO BAA does not experience artificial scarcity conditions due to a prioritization of exports over CAISO load.  ED staff is concerned that low priority exports in the day-ahead and hour-ahead and scarcity pricing mechanisms in CAISO could distort prices and potentially lead to inappropriate activation of reserves - which had already been procured by CAISO - in order to support energy transfers to other BAAs. In considering scarcity pricing, ED staff suggests CAISO clarify how it will ensure that reserves are activated for the intended procurement purpose, and not to support energy exports in scarcity conditions.

2. Open Questions

There are numerous open questions on how scarcity pricing and any proposed measures for the CAISO BAA would interact with and/or account for conditions in and actions taken by other BAAs. ED staff would appreciate answers to the following questions, which were submitted to CAISO by Calpine[1] over a year ago on February 19, 2024, but remain important and have still not been clearly addressed:

• How do adjoining BAAs deploy reserves that they hold outside the market?
• Do they hold reserves beyond that required by NERC?
• Are Reserve Sharing Groups signaling shortages through deployment? 
• Is the Reliability Coordinator indicating any issues?
• Are any BAAs declaring EEAs?
• And finally, does the CAISO BAA take into account actions by other BAAs, and if so, how?

In addition, ED staff request that CAISO address whether it holds reserves for low priority exports and what NERC requirements apply to any such requirements.

In parallel to the work here, ED staff suggest CAISO discuss any new methods for assessing market conditions outside CAISO markets which could have a profound impact on price formation across the West, including inside CAISO.  

[1] Calpine Comments on Scarcity Pricing, February 19, 2024.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

The Public Advocates Office at the California Public Utilities Commission (Cal Advocates) is the state-appointed independent ratepayer advocate at the California Public Utilities Commission.  Our goal is to ensure that California ratepayers have affordable, safe, and reliable utility services while advancing the state’s environmental goals.  Our efforts to protect ratepayers include energy, water, and communications regulation advocacy.

Cal Advocates provides no response to this question at this time. However, Cal Advocates requests that the California Independent System Operator Corporation (CAISO) study the cost effectiveness of any scarcity pricing mechanisms it proposes in this initiative, especially one which uses a Value of Lost Load (VOLL) metric that would raise the market price above the hard cap on market offers.  The CAISO should weigh any reliability benefits against estimated costs to Extended Day-Ahead Market (EDAM) ratepayers.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

 Cal Advocates provides no response to this question at this time. 

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

Recent CAISO workshops have explored a scarcity pricing design that would anchor prices to a value of lost load (VOLL) metric during periods of capacity scarcity.[1]  The VOLL is an estimation of economic costs to electricity consumers due to interruption of electric service, such as through a load shedding event.[2]  The CAISO has considered scaling penalty prices up to the VOLL in an Operating Reserve Demand Curve (ORDC) as available reserves decrease or the probability of loss of load (LOLP) increases.[3]  The CAISO has not yet calculated a VOLL for EDAM but notes that the Midcontinent Independent System Operator Corporation (MISO) has used $3,500/ megawatt-hour (MWh) and $10,000/ MWh, and is considering a new value of $35,000/MWh.[4]  These values are far above the Federal Energy Regulatory Commission’s (FERC) hard cap on economic bids of $2,000/MWh.[5]

The CAISO states that a potential benefit of using a VOLL is “improved system reliability by aligning penalty prices more closely with the actual cost of lost load.”[6]  However, it is not clear if VOLL pricing, which would set the Marginal Cost of Energy (MCE),[7] would lead to additional resources making themselves available to EDAM, beyond what may be available at the $2,000/MWh hard cap.  Since the hard cap limits resource bids, an MCE of $2,000/MWh would likely grant energy awards to all available EDAM and Western Energy Imbalance Market (WEIM) bids.  Any price above $2,000/MWh would attract offers from non-Resource Adequacy (RA) resources that did not bid[8] into EDAM or WEIM, and generation from outside the EDAM/WEIM footprints.  An estimation of the potential amount of generation that can be attracted by use of a VOLL, above the $2,000/MWh hard cap, would help to measure the effectiveness of VOLL-anchored pricing in attracting additional generation.  If the CAISO proposes to adopt such a mechanism, the CAISO should perform a study to estimate those potential quantities of generation that a VOLL-anchored price would attract and describe those quantities to this working group.

The CAISO’s Market Surveillance Committee previously noted that the value of reserve penalty prices should either be based on the value and probability of a load shed event, or the costs of actions taken to maintain an appropriate level of reserves.[9]  The CAISO should also consider VOLL price impacts to ratepayers in its evaluation of the benefits of anchoring penalty prices to the VOLL.  The average rate of wholesale energy in the CAISO area in 2023 was $65/MWh.[10]  A VOLL of $10,000/MWh would be over 150 times above the average rate paid for energy, and five times above the hard cap for energy bids.  The CAISO’s proposed use of the VOLL and ORDC to inform the cost of energy would only affect pricing during reliability events; however, this use of the VOLL and ORDC would enable extremely high payments to potentially the entire EDAM fleet for the same products the fleet would have provided through energy bids.  To illustrate, the cost to serve load during the highest average load hour on September 6, 2022 at the hard cap would cost $102.9 million but would cost $514.8 million at $10,000/MWh or $1.8 billion at $35,000/MWh for that single hour.[11] 

[1] A specific VOLL calculation has not yet been developed.  CAISO, Price Formation Enhancements: Incorporating Emergency Actions into Pricing, February 6, 2025 (PFE Feb 6 Workshop) at 7-8, 28-30.  Available at: https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Price-Formation-Enhancements-Feb-06-2025.pdf.

[2] CAISO, Price Formation Enhancements: Scarcity Pricing: Anchoring Penalty Prices to the Value of Lost Load – Afternoon Session 2, January 22, 2025 (PFE Jan 22-2 Workshop) at 8.  Available at: https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Price-Formation-Enhancements-Session-2-Jan-22-2025.pdf.

[3] PFE Jan 22-2 Workshop at 9-10.

[4] PFE Jan 22-2 Workshop at 12.

[5] The $1,000/MWh soft cap and $2,000 hard cap are intended to provide market power mitigation and can help to address imperfect information between market operators and generator costs. 157 FERC ¶ 61,115 Docket No. RM16-5-000; Order No. 831, November 17, 2016 (FERC Order 831) at paragraph 83, 89.  Available at: https://cms.ferc.gov/sites/default/files/whats-new/comm-meet/2016/111716/E-2.pdf.

[6] PFE Jan 22-2 Workshop at 11.

[7] The MCE is the primary component of the Locational Marginal Price (LMP), which is the clearing price of energy paid in the current CAISO energy markets and will be used the same way in the EDAM.

[8] The CAISO Tariff requires RA resources to bid into the day-ahead and real-time markets.  If a resource controller fails to submit a bid for RA resources, the CAISO will insert a bid for that resource itself.  CAISO Tariff 30.7.3.1 and 40.6.

[9] PFE Jan 22-2 Workshop at 16.

[10] CAISO Department of Market Monitoring, 2023 Annual Report on Market Issues & Performance, July 29, 2024 at 1.  Available at: https://www.caiso.com/documents/2023-annual-report-on-market-issues-and-performance.pdf.

[11] The highest hourly average load on September 6, 2022 was 51,479 megawatts.  Calculations consider only the MCE component of the LMP, applied only to the CAISO balancing area.  CAISO, Summer Market Performance Report: Sept 2022, November 2, 2022 at 12.  Available at: https://www.caiso.com/Documents/SummerMarketPerformanceReportforSeptember2022.pdf.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

Cal Advocates provides no response to this question at this time. 

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

Cal Advocates provides no response to this question at this time. 

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

Cal Advocates provides no additional comments at this time. 

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

The California Energy Storage Alliance (CESA) appreciates the opportunity to provide comments on the three scarcity pricing workshops.  CESA strongly supports a scarcity pricing design that results in energy prices gradually increasing as system conditions approach greater probability of insufficient supply and/or demand response to meet reliability requirements.  CAISO staff provided an excellent overview of the current Scarcity Reserve Demand Curve design, its limitations, and considerations to improve price formation as the likelihood of energy and ancillary services shortages increase.

FERC guidance on the objective of scarcity pricing is to ensure that the market price for energy reflects the value of energy during an operating reserve shortage.  CAISO has demonstrated that its Scarcity Reserve Demand Curve design, while accepted by FERC, does not live up fully to the intended objective. The CAISO Scarcity Reserve Demand Curve’s primary purpose is to establish an administrative price when there are insufficient ancillary services bids.  While this can impact the price of energy given co-optimization, it provides limited value in signaling increasing risk to reliability that should warrant higher prices of energy and ancillary services. Since CAISO only procures incremental ancillary services in the 15-minute market (FMM), scarcity pricing may not be triggered even though the available headroom across the system is reducing but there are sufficient ancillary services bids.  Also, CAISO does not procure or optimize ancillary services in the 5-minute dispatch (RTD).  Any limited benefits of the Scarcity Reserve Demand Curve to increase the value of energy in FMM are unwound in RTD.

CESA believes the concept of latent reserves will enable a scarcity pricing design that is applicable across the EDAM and WEIM footprints’ Latent reserves are unloaded supply and demand response resources that have voluntarily submitted offers into the CAISO administered real-time market. As the quantity of latent reserves is reduced the probability of scarcity conditions increases.  This necessitates the market energy price to rise above the current marginal cost resource for existing supply and recognizes the need to compensate existing and potentially new latent reserves for their availability to the EDAM/WEIM footprint.  This improves the incentive for resources already committed to the WEIM to meet dispatch instructions and attracts additional supply to the WEIM footprint.  

While imbalance reserves are a feature the EDAM, it is illustrative of how latent reserves can be considered.  Imbalance reserves are procured from compensated resources to be available in the real-time market for dispatch if needed to meet system conditions.  The imbalance reserve up requirement is set to meet the 97.5 percentile of potential net load uncertainty subject to a demand curve.  Since the quantity of imbalance reserves procured in the day-ahead market, by design, does not cover all uncertainty that can materialize, when imbalance reserve procurement proves insufficient, then latent reserves should be compensated in real-time for their availability at a price higher than imbalance reserves to reflect that a scarcity pricing event will occur absent additional supply availability. 

Your organization’s level of support for these enhancements and the rationale for your level of support.

1. Full re-optimization of ancillary services in real-time

CESA strongly supports the full re-optimization of ancillary services in the real-time market (FMM and RTD) but recognizes that the market design should evolve over time and there are more pressing market design changes needed to improve price formation during scarcity conditions.   The full re-optimization of ancillary services would enable the market optimization to better utilize storage resources.  For example, assuming a storage resource was awarded spinning reserves in the day-ahead market in the real-time market today, the optimization is limited to managing the energy dispatch to maintain the necessary state-of-charge (SOC) to meet day-ahead ancillary services awards.  Under a real-time market with full re-optimization, it may be more economic for the storage resource to buy back its ancillary services award than be dispatched to charge to meet the SOC requirement.  This would enable the market to fully utilize the inherent flexibility of storage resources to both charge and discharge while also providing ancillary services.

2. Deliverability tests for ancillary services

CESA agrees that deliverability must be considered in the re-optimization of ancillary services to provide operators with the necessary confidence in the market results.  RTD runs every five minutes. It is inappropriate to expect operators to evaluate the deliverability of zonally procured reserves, as is done today between day-ahead and real-time in two to three minutes before the start of the next RTD run.  CESA does believe too much attention has been focused on the need for multiple deployment scenarios to ensure deliverability.  As demonstrated by the history of the Flexible Ramping Product (FRP), the market optimization’s least cost dispatch will seek to award FRP to resources that cannot provide energy to avoid incurring an opportunity cost.  The purpose of the deployment scenarios is to prevent the market optimization from intentionally awarding FRP to known undeliverable resources.  This addresses the exact issue that reduces operator confidence in the market results.  The objective of deployment scenarios should be to prevent the market optimization from awarding FRP and ancillary services to known undeliverable resources.  The evaluation of deployment scenarios effectiveness is not the complete elimination of undeliverable resources after the market has run and system conditions change.  CESA believes that ancillary services could be added to the existing FRP upward and downward deployment scenarios.  There is not a need for unique deployment scenarios for ancillary services that will only increase the market optimization complexity and ability to meet market solve timelines.

3. Procurement of ancillary services in the 5-minute market (RTD)

CESA supports.  See above.

4. Implement settlement-for-differences between day-ahead and real-time markets

CESA supports.  See above.

5. Collapse spinning reserves and non-spinning reserves into one operating reserve product

CESA does not oppose and believes these exact tradeoffs should be evaluated to ensure market solve timelines are maintained under full re-optimization of ancillary services.

6. Eliminate the cascading procurement between regulation and operating reserves

CESA does not oppose and believe these exact tradeoffs should be evaluated to ensure market solve timelines are maintained under full re-optimization of ancillary services.

7. Trigger the SRDC when “arming load”

CESA believes arming load is similar to additional latent reserves becoming visible to the market.  The scarcity pricing design should already have prices rising above marginal cost and compensation occurring for other latent reserves before arming load.

8. Enhancements for the EDAM/WEIM?        

A topic that deserves far greater discussion is how a system wide scarcity pricing paradigm can be implemented given the EDAM design to establish individual power constraints by balancing authority area and establishing a unique marginal energy cost for each balancing authority area.  Incorporating a comprehensive scarcity design into the EDAM is further complicated by the various “penalty” structures for failing the resource sufficiency evaluation. 

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

CESA appreciates the discussion led by the CAISO on the three concepts.  The purpose of FRP is to manage uncertainty between market runs and to decompose ramp from the advisory interval energy price so that ramp can be settled separately in the binding interval.  FRP is not intended to provide a pure scarcity pricing signal for energy.  As highlighted earlier, the lack of full re-optimization of ancillary services across the EDAM/EIM footprint makes using spinning/non-spinning reserve procurement as the basis of a scarcity pricing design a non-starter.  The concept of a “new” reserve product unfortunately has the disadvantage, as laid out by the CAISO, that it “has to be defined (e.g., response time, duration, eligibility criteria, cost allocation) and implemented.”

CESA posits that the “new” reserve product(s) already exist as part the Day-Ahead Market Enhancements.  The combination of imbalance reserves and reliability capacity are intended to ensure there is sufficient supply available to the real-time market to meet 97.5% of potential net load.  If the real-time net load exceeds the imbalance reserve and reliability capacity awarded in day-ahead, then scarcity conditions will occur unless additional supply and demand response has voluntarily made itself available to the real-time market. 

Assume the day-ahead net load forecast was 40,000 MW and the imbalance reserve up/reliability capacity up awards were 5,000 MW. If in real-time, resources with imbalance reserve up/reliability capacity up awards have been dispatch for 2,500 MW of energy, system conditions are within normal levels of materialized uncertainty and there is not a need for a scarcity pricing signal.  If in real-time, resources with imbalance reserve up/reliability capacity up awards have been dispatch for 4,750 MW of energy, system conditions are experiencing very high levels of materialized uncertainty and a scarcity pricing signal needs to be sent to ensure all available latent reserves become available to the market because there is an increasing probability that resources with imbalance reserves and reliability capacity awards are insufficient to maintain reliability.

While balancing authority areas that remain only in the WEIM will not have imbalance reserve or reliability capacity, those balancing authorities have the ability to submit base schedules just prior to the operating hour which should reflect real-time conditions.  The resource sufficiency evaluation requirement still includes offers from unloaded resources to meet intra-hour uncertainty.  If a high proportion of the unloaded supply is regularly being dispatched for energy, it can signal scarcity conditions are approaching.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

CESA supports developing an operating reserve demand curve based upon VOLL and VOLP.  This will more accurately reflect the value of scarcity in both the day-ahead a real-time market.  However, there are near-term improvements needed to the existing CAISO scarcity pricing design as discussed above.  The operating reserve demand curve based upon VOLL and VOLP is complicated by having multiple balancing authority areas comprising the WEIM/EDAM.  This needs to be discussed in more detail.  Many of the complications will also need to be addressed in the near-term improvement, but not all.  CESA recommends that our focus be on addressing the current scarcity pricing design shortfalls, but in doing so be mindful that our long-term scarcity pricing design should be based upon an operating reserve demand curve based upon VOLL and VOLP.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

CESA supports circuit breakers.  The objective of scarcity pricing is to incentivize supply and demand response to make itself available to the market footprint that otherwise is not.  In the event the objective is not being achieved, such as during Winter storm Uri, other administrative pricing mechanisms should be employed until market-based pricing, which includes scarcity pricing, can be used to reliability manage and dispatch the system.   

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

CESA appreciated the CAISO led discussion on the appropriate pricing impact of emergency actions up to and during scarcity events. 

As CESA noted earlier, scarcity pricing is a day-ahead and real-time market-based pricing mechanism to address scarcity conditions.  It is appropriate to look at emergency actions in the same light.  If the actions are taken outside of the market horizon, such as committing long-start resources under the Strategic Reliability Reserve Program (SRRP) four to seven days before a forecasted emergency, it is unclear why the existing price formation is not correct.  If actions are taken within the market horizon, then those actions should not undermine the scarcity pricing mechanism to ensure additional supply and demand response make itself available for market dispatch.  For example, operator directed load shedding events should not be seen by the market as free supply.  CESA notes that CAISO addressed a similar issue as part of the Summer 2021 readiness initiative when load was “armed” and suppliers with contingency reserve awards were released into the energy bid stack.  Energy prices dropped because the supply entered at its marginal cost and not at or near the price cap.  CAISO addressed this price formation issue by increasing the offer price above the energy bid when contingency reserves are added to the market’s energy bid stack.  A similar logic should apply to operator actions taken within the market horizon to avert scarcity events.   

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

CESA believes CAISO should prioritize the key scarcity pricing design enhancements and lay out a roadmap to reach our desired end state.  CESA suggests the following priority: (1) amend, modify, or replace the current Scarcity Reserve Demand Curve to align with FERC scarcity pricing objectives, (2) address potential limitations to a footprint wide scarcity pricing due to EDAM design decisions, (3) evaluate and develop a VOLL based scarcity pricing demand curve, and (4) full re-optimization of ancillary services in the real-time market.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

A. NCPA supports enhancements to ancillary service procurement. NCPA believes there are serious issues with price formation that could be partially attributed to ancillary service optimization deficiencies. NCPA has observed: (1) systemic price divergence resulting in conflicting price signals during scarcity events (e.g., August 2020 heat events), (2)  plummeting real time prices while CAISO is in an active energy emergency alert and issuing Flex Alerts, and (3) questionable pricing for A/S procured in the RTM (e.g., routinely settling at $0/MW).   

B. NCPA believes that all the enhancements are worthy of consideration but understands the complexity associated with each of them. NCPA would prioritize the following three enhancements to ancillary service procurement enhancements (in no particular order among these three):

• Deliverability tests for A/S
• Full re-optimization of A/S in real time
• Eliminate the cascading procurement between regulation and operating reserves since these two A/S groups serve separate purposes and therefore should not be substituted for one another.

C. NCPA believes that these A/S procurement enhancements should be pursued as a separate policy initiative. Focusing on these enhancements in a separate policy initiative would be helpful given their potential impact on operations and complexity, and because they have only a tangential relationship to other price formation and scarcity pricing issues under discussion.   

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

1. NCPA does not support modifying FRP at this time. NCPA believes DMM should revisit its proposal after the Imbalance Reserve Product is implemented. DAME and the IRP could potentially resolve current issues or otherwise render obsolete the DMM’s current proposal.  

2. NCPA does not support modifying the contingency reserve curve at this time. NCPA’s understanding is that the CAISO optimization is allowing regulation up to substitute for spin requirements when economically beneficial. NCPA believes ending that practice may improve operating reserve procurement and availability.

3. NCPA does not support introducing a new reserve product at this time. NCPA believes existing and future products such as Flexible Ramping Product, Imbalance Reserve Product, Reliability Reserve Up, Reliability Reserve Down, Spin, and Non-Spin, and procurement should be enhanced for aforementioned reasons.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

NCPA does not support anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps, as it has not been shown that doing so will advance the ultimate goals of reliability and affordability. The current $2,000 offer caps sufficiently meet or exceed most, if not all, resources’ variable costs, and generators can exceed the caps if they can justify bids to FERC. VOLL metrics are inherently subjective, because the assumptions and inputs cause the results to vary widely. Moreover, as discussed in the presentation, there are unique challenges to CAISO developing VOLL that make this far from a mere copy-and-paste of MISO’s implementation of VOLL.  NCPA is skeptical that increasing prices will bring any material incremental real supply to the market. There could potentially be some justification for Demand Response prices in excess of $2000 based on those programs’ designs, but many of these resources are plagued with performance issues and in any case, Demand Response providers can attempt to recover costs in excess of caps at FERC. Introduction of VOLL metric could lead to market power and/or manipulation, as there is the potential that unscrupulous sellers could withhold capacity to take advantages of the possibility of the higher prices possible with this change.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

NCPA does not support anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps, as discussed in the prior response. The need for a “circuit breaker” to start reducing prices during sustained scarcity events is proof that the VOLL concept (or any other proposal that requires a “circuit breaker” element) does not, in fact, send more accurate price signals. Moreover, the need for a “circuit breaker element” similarly undercuts the notion that higher prices necessarily conjure additional supply. This is not to say that a VOLL approach should be adopted without a “circuit breaker” element, but to highlight that any claims about VOLL accuracy and efficiency should be viewed with skepticism.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

NCPA does not believe that current emergency actions such as emergency demand response programs, strategic reserve dispatch, etc. properly reflect scarcity in market prices. Many demand response resources are notoriously unreliable and glitchy. Strategic reserve dispatches can be made for any BAA in California, not just for CAISO’s benefit. CAISO must resolve persistent price divergence observed during emergency conditions. CAISO should continue evaluating the effectiveness of convergence bidding and its potential detriments to the market, especially during scarcity conditions.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

While there are glaring opportunities for improvements, NCPA generally supports the status quo regarding Price Formation generally and Scarcity Pricing specifically and is skeptical that it is feasible to implement many of the concepts being considered in this initiative in a just and reasonable way. In particular, removing cost-based caps and allowing prices to be set at arbitrary VOLL metrics will only result in increased costs to ratepayers, as there has not been any evidence or reasons for how exactly this would meaningfully improve supply or reliability. NCPA suggests evaluating the impacts DAME has on price formation and then moving forward accordingly. Similarly, CAISO is currently pursuing the Resource Adequacy Modeling and Program Design initiative to look at ways that program can be modified to ensure sufficient supply is available in order to reduce intervals of scarcity conditions. If those efforts bear fruit, scarcity pricing changes may not be necessary. 

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

Summary of PG&E’s Position of Scarcity Pricing:

1. The scarcity pricing issue affects the entire regional market (WEIM and EDAM) and any improvements to scarcity pricing should be implementable throughout the regional market.
   1. Emphasizes the importance of understanding scarcity pricing in a regionalized market, including how DAME and EDAM can address current issues and change scarcity conditions.
2. Recommends that CAISO prioritize tasks related to scarcity pricing based on whether their needs and implementation requirements will change after EDAM is operational. This phased approach will help address the most pressing issues first.
   1. PG&E cautions against adding new products to the market given the pending launch of EDAM and DAME.
3. PG&E supports creating a separate initiative to explore enhanced ancillary services (A/S) procurement (e.g., Geographical Limitation, Incremental Procurement, Granularity of Pricing, etc.).
4. PG&E questions the rationale of applying the Value of Lost Load (VOLL) in defining demand curves for scarcity pricing but supports further exploration of how other RTO/ISO markets use VOLL and handle related challenges.

On Question 1, 

a. Level of Support and Rationale:

PG&E generally supports CAISO’s efforts to enhance ancillary services (A/S) procurement. Scarcity pricing relies on the co-optimization of energy and A/S. Specifically, energy prices rise when A/S procurement targets are relaxed due to insufficient supply. Therefore, for scarcity pricing to work effectively, A/S procurement must be set appropriately.

b. Important Enhancements for Price Formation and Scarcity Pricing:

The current CAISO market has several issues that PG&E considers important:

1. Geographical Limitation: A/S is only procured within the CAISO Balancing Authority Area (BAA), limiting scarcity pricing to California. This creates an unequal footing in a regionalized market and could lead to unpredictable consequences.
2. Incremental Procurement: A/S is procured incrementally in the 15-minute market, limiting energy prices' response to supply conditions. For energy prices to signal scarcity in advance, A/S must be fully reoptimized and co-optimized with energy.
3. Granularity of Pricing: If CAISO and stakeholders aim for higher granularity in pricing to reflect locational scarcity, the current zonal-level A/S procurement will not suffice, and A/S must be procured nodally. However, PG&E finds this controversial due to A/S’ contingency preparation purpose. Procuring A/S at a nodal level may create unnecessary redundancy and significantly increase costs, which would eventually be passed on to customers.

c. Separate Policy Initiative Recommendation:

Given the scope and complexity of these issues, PG&E supports pursuing these enhancements as a separate policy initiative rather than within the Price Formation Enhancements initiative. Additionally, PG&E recommends partitioning the tasks into those that can be completed before and after the implementation of the Extended Day-Ahead Market (EDAM), considering the necessary software changes and their sequence.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Before proposing detailed solutions, PG&E emphasizes the importance of understanding scarcity pricing in a regionalized market. This includes how DAME and EDAM can address current issues, such as reflecting scarcity conditions in pricing and incentivizing supply with new products like Imbalance Reserves. Additionally, regionalization may change scarcity conditions by enabling more efficient supply transfers among BAAs. PG&E recommends that CAISO partition the work based on whether priorities and implementation requirements will change after EDAM goes live, and then address these in phases.

Considerations for Listed Solutions:

• Concept 1: PG&E has some concerns about extending the Flexible Ramp Product (FRP) procurement curve. FRP is specialized for ramping needs, and extending the procurement curve means procuring a large amount of high-quality products over time, which will be costly. Additionally, FRP is procured in both the 15-minute (FMM) and 5-minute (RTD) markets. Extending procurement only in the FMM, where scarcity pricing is currently applied, will create an excessive amount of FRP awards in the FMM compared to the RTD. This will lead to a persistent need for resources to buy back FRP in the RTD, penalizing participation in the WEM. Finally, issues such as low FRP prices during tight ramping conditions remain unaddressed. Extending FRP procurement for scarcity pricing is risky before it fully functions under its intended purpose.
• Concept 2: PG&E has fundamental concerns with this approach, as A/S (spin/non-spin) is only procured within the CAISO BAA. This means scarcity pricing would apply only within the CAISO BAA, not equally in a regionalized market. However, if CAISO could procure A/S universally in EDAM/WEM, this approach would be technically feasible with minimal market changes. Additionally, PG&E notes that further adjustments may be needed, such as procuring spin/non-spin products over a longer period, like an hour.
• Concept 3: Although conceptually viable, this solution would require significant effort, considering the time it took to develop the Imbalance Reserve product in DAME. With DAME and EDAM going live, PG&E is concerned that implementing too many changes at once will hinder market adjustment and complicate understanding market responses if issues arise.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

PG&E seeks clarification from CAISO on whether anchoring penalty prices to VOLL is limited to refining the Reserve Shortage Demand Curve (RSDC) used in Scarcity Pricing or if it intends to update penalty prices more broadly. If the latter, PG&E believes this should be discussed separately.

If VOLL application is limited to RSDV, PG&E has the following concerns and questions but supports further exploration, particularly regarding how other RTO/ISO markets use VOLL, define it, and handle related challenges:

1. PG&E fundamentally questions the rationale behind applying VOLL to define RSDC:
   • Incentivizing Long-Term Investment: PG&E cautions against adopting the high prices used by MISO and ERCOT ($9,000 to $10,000), which are intended to incentivize long-term generation investment. In California, where a Resource Adequacy (RA) system is well established, such high prices could lead to duplicative costs for load.
   • Incentivizing Additional Supply: PG&E is not convinced that VOLL is appropriate for incentivizing short-term supply. FERC Order 831 permits bid caps to rise from $1,000/MWh to $2,000/MWh, which should be sufficient to attract available supply.
   • Disincentivizing Demand: PG&E questions the effectiveness of VOLL in deterring demand increases during scarcity. We are concerned that most real-time demand is not responsive to price signals and increasing prices will not reduce demand but simply shift costs to load.
2. PG&E agreed with the challenges identified by CAISO[1]:
   • Complexity and Accuracy: Estimating VOLL is complex and resource-intensive, and hypothetical willingness to pay may differ from actual behavior during an outage.
   • Regional Differences: In EDAM/WEM, a system-wide VOLL is not applicable since each BAA may have different reliability standards.

[1] Listed on CAISO’s presentation Slide 17, in Price Formation Enhancements Working Group 8, afternoon session 2, on Jan 22 https://stakeholdercenter.caiso.com/InitiativeDocuments/Presentation-Price-Formation-Enhancements-Session-2-Jan-22-2025.pdf

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

PG&E reiterates the commons submitted on February 20, 2024[1],

“PG&E acknowledges the necessity of a Circuit Breaker (CB) mechanism once a Scarcity Pricing mechanism is established. However, PG&E believes there are existing tools described in the Tariff and BPM to intervene in abnormal pricing, thus there may be no need to develop a new CB for Scarcity Pricing. PG&E requests the CAISO to confirm whether such tools exist to allow CAISO to intervene in abnormal pricing.  Lastly, PG&E finds the problem statement limits CB triggers to an ‘an extended period of time’ and recommends CAISO define specific scenarios and triggering conditions that need intervention.”

[1] https://stakeholdercenter.caiso.com/Comments/AllComments/9c5f5397-76f6-41ce-83b5-91ec505d92f2#org-61686e4b-1164-4033-8d48-0d4d565555a5

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

PG&E appreciates CAISO’s presentation during the February 6 working group session. To enhance clarity and comparison, it would be beneficial to present the measures in a single table, including the following information: triggering conditions, estimated cost per MWh, the amount of scarcity alleviated, notification timing, and, if applicable, the sequence of actions.

In addition, PG&E requests a comprehensive chart summarizing sources of expected shortages. This chart should include forecasted demand increases and peak times, planned outages, and forecasted transfer (import/export) availability. A real-time and forward-looking dashboard summarizing this information would be highly valuable.

Furthermore, PG&E seeks detailed information on the emergency actions available to address potential scarcity in the upcoming summer of 2025. Including the aforementioned data will help in understanding and preparing for these challenges.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

PG&E emphasizes the importance of understanding scarcity pricing within a regionalized market. Specifically, it is crucial to assess how DAME and EDAM can address current issues. This includes ensuring that pricing reflects scarcity conditions and incentivizes supply in advance, particularly with new products like Imbalance Reserves. Additionally, regionalizing the energy market may alter scarcity conditions by enabling more efficient supply transfers among BAAs.

PG&E recommends that CAISO prioritize its work based on whether the needs and implementation requirements will change after EDAM is operational. This phased approach will help address the most pressing issues first.

Furthermore, PG&E highlights the differences between the CAISO market and other RTO/ISOs. We encourage CAISO to investigate why its RSDC is set differently from those of other RTOs/ISOs, the applicability of those differences to CAISO’s market, and to share these insights with stakeholders.

Summary of PG&E’s Position of Scarcity Pricing:

1. The scarcity pricing issue affects the entire regional market (WEIM and EDAM) and any improvements to scarcity pricing should be implementable throughout the regional market.
   1. Emphasizes the importance of understanding scarcity pricing in a regionalized market, including how DAME and EDAM can address current issues and change scarcity conditions.
2. Recommends that CAISO prioritize tasks related to scarcity pricing based on whether their needs and implementation requirements will change after EDAM is operational. This phased approach will help address the most pressing issues first.
   1. PG&E cautions against adding new products to the market given the pending launch of EDAM and DAME.
3. PG&E supports creating a separate initiative to explore enhanced ancillary services (A/S) procurement (e.g., Geographical Limitation, Incremental Procurement, Granularity of Pricing, etc.).
4. PG&E questions the rationale of applying the Value of Lost Load (VOLL) in defining demand curves for scarcity pricing but supports further exploration of how other RTO/ISO markets use VOLL and handle related challenges.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Concept 1:

PacifiCorp has the following concerns extending the procurement horizon as proposed:

• It will increase resource sufficiency evaluation requirements for WEIM entities.
• The imbalance reserve (IR) product will likely cover much of the uncertainty that an extended FRP product would.

The CAISO Department of Market Monitoring (DMM) proposal does seem so alleviate some concerns that PacifiCorp has with operator load biasing, but it is unclear if it would help improve scarcity prices. The changes proposed by the CAISO DMM may also be better suited for a stand-alone initiative on FRP enhancements. Extending the procurement horizon would be a significant design change that goes beyond just improving scarcity pricing signals. In PacifiCorp’s opinion, there may be specific FRP design elements, like the FRP demand curve, that could be changed to meet the goals of this initiative.

To conclude, PacifiCorp is supportive of exploring how the FRP design could be changed to support better scarcity pricing but has major concerns with expanding the uncertainty horizon and believes a holistic evaluation of the FRP may be warranted. If there are certain design elements the CAISO believes could be changed to improve scarcity pricing signals, PacifiCorp prefers the initiative focuses on those.

Concept 2:

PacifiCorp does not have comments on this concept as it pertains only to market participants within the CAISO balancing authority area.

Concept 3:

PacifiCorp is not supportive of creating a new reserve product for the following reasons:

• A new reserve product will have overlapping purpose with IR and FRP. Since it is currently unknown how the IR product will impact the real-time markets until after EDAM go-live, it’s difficult to determine what problems a new reserve product would help solve besides being used for scarcity pricing.
• Related to the previous point, creating a new reserve product would be a large undertaking especially if the advantages of doing so are not clear to stakeholders.

While PacifiCorp is not fully supportive of the three options discussed so far, PacifiCorp is supportive of this initiative further exploring potential enhancements to the FRP demand curve and how something similar to an operating reserve demand curve could be used in the WEIM. PacifiCorp believes that any new scarcity pricing mechanism should be consistent across the WEIM so that scarcity pricing signals are improved for all market participants.

If the goal of scarcity pricing is to allow market participants to proactively modify their behavior before impending shortfalls, PacifiCorp believes there may be another way to achieve this. Some other ISOs and RTOs give their market participants a visual representation of the supply and demand forecasts for the operating day. A good example is ERCOT’s supply and demand graph on their home webpage. PacifiCorp believes something similar could be useful for the WEIM because it is a transparent way to show market participants that a scarcity event may occur in a future hour. This would allow market participants to potentially change their behavior that would avoid a scarcity event.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

PacifiCorp believes there is merit in further evaluating whether penalty prices should be anchored to the VOLL rather than the bid caps because there does seem to be benefits in having penalty prices tied to an estimation of economic value. The bid caps today don’t represent reliability, and so their use in penalty pricing may be arbitrary. A major drawback PacifiCorp sees is that determining a VOLL is a complex and potentially contentious process. It is difficult for PacifiCorp to determine whether the benefits of using the VOLL for penalty prices outweigh the risks of undertaking this effort because it is difficult to determine how much effort this would be for the CAISO and WEIM entities. PacifiCorp is not opposed to using a meta-analysis if it removes the burden of determining a VOLL while still producing a VOLL that stakeholders can agree on.

While it may be that each WEIM BAA has a different VOLL, PacifiCorp believes using a single VOLL will create more consistent price formation across the footprint. Also, it would be very challenging for each WEIM BAA to undergo a study to determine their VOLL. PacifiCorp would prefer that the WEIM as a whole is studied, or a meta-analysis is used, to determine a system VOLL.   

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

PacifiCorp supports developing a circuit breaker if new scarcity pricing mechanisms are going to be implemented. At this time, PacifiCorp does not have a strong opinion on how it should be designed. The priority for PacifiCorp would be that scarcity pricing mechanisms don’t unduly harm market participants when there are scarcity conditions that cannot be resolved in the short-term by market participants. In other words, if scarcity pricing can no longer incentivize supply to relieve scarcity, then higher prices only drive cost shifts between market participants. Winter Storm Uri’s impact on the ERCOT electricity markets is a good example of when scarcity pricing mechanisms couldn’t help relieve system scarcity and instead caused huge financial harm for some market participants. As stakeholders move forward in this initiative, it would be helpful if the CAISO was able to summarize how circuit breakers in other ISOs/RTOs are designed.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

Since operators across the WEIM handle emergency situations differently, and because WEIM balancing areas may have different emergency supply or load reduction programs, PacifiCorp believes it will be difficult to consistently price emergency actions across the WEIM. Furthermore, it is not clear that there are predictable and consistent emergency actions in WEIM balancing areas that would be worth trying to price into the WEIM. The one exception pertains to load shedding. PacifiCorp believes that any energy that clears during periods of load shedding should be priced at the power balance constraint penalty price.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

In general, PacifiCorp is having a difficult time understanding what the motivations are for implementing a scarcity pricing mechanism in the CAISO markets. PacifiCorp acknowledges the theoretical benefit of scarcity pricing better aligning prices and grid conditions during periods of increased risk of supply shortages. What is less clear is how scarcity pricing mechanisms would:

• Cause market participants to modify their behavior to prevent impending supply shortfalls
• Reduce reliance on operator actions

Market participants and operators know ahead of time when system conditions may lead to supply shortages, and they take actions well before the event to procure supply. It seems unlikely to PacifiCorp that there is supply that does not participate because prices aren’t high enough in the real-time markets. Similarly, CAISO and WEIM operators take emergency actions before any event to ensure that all the supply available is being used. As this initiative has progressed, PacifiCorp has tried to think of a scarcity pricing mechanism that would cause the company to behave differently during times of supply shortages. It’s unlikely that any of the options discussed would change how PacifiCorp operates because when the company foresees a scarcity event in future days or hours, PacifiCorp procures adequate supply through the bilateral market. In a future meeting, PacifiCorp would like the CAISO or stakeholders to explain:

• What market participants will be more incentivized by higher prices in the real-time market during scarcity conditions?
• Is there supply not participating in the CAISO markets during scarcity events because prices are not high enough?
• If there is supply that doesn’t get offered into the CAISO real-time markets during scarcity events, are there potentially other reasons aside from prices that prevent the supply from being bid into the market?

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

a. The Public Generating Pool (PGP) is composed of nine publicly-owned electric utilities, eight in Washington and one in Oregon, that work together on issues of common interest. The PGP members have a large presence in the Pacific Northwest, serving approximately 1.4 million customers with approximately 8,000 megawatts of non-federal generating resources, which is approximately 90% hydro. Eight PGP members also purchase approximately 45% of the requirements power sold by the Bonneville Power Administration, who is a participant in the EIM. Two PGP members, Seattle City Light and Tacoma Power, participate directly in the EIM.

PGP is interested in improving price formation during tight market conditions in the California Independent System Operator (CAISO)-Operated markets using mechanisms that apply to the broader market, sending signals further in advance of scarce conditions, improving transparency, and maintaining performance incentives and price signals during emergency actions, as summarized in the Price Formation Enhancements (PFE) Phase 1 Issue paper. These changes to the areas of design that apply to the broader Western Energy Imbalance Market (WEIM) and Extended Day-Ahead Market (EDAM) should reduce the need for some of these potential Ancillary Service (AS) changes for the CAISO Balancing Authority (BA), and move the market away from the scarcity signal being based on a single BA’s AS procurement mechanisms. We recommend the initiative set aside some of the CAISO BA AS concepts until identified concepts that link better to all WEIM and EDAM participants can be improved upon, with a re-evaluation of any required modifications to CAISO AS at a later time and in a way that improves separation of Market Operator (MO) and BA functions at the CAISO and better links these processes to the broader WEIM/EDAM design and other regional BA tools and actions. Any proposals that come from this initiative should align with the direction of the Pathways initiative. This calls for moving in the direction of separating BA and MO functions at the CAISO and aligning the CAISO BA interactions with the broader market with those of any other BA where possible.

1. Full re-optimization of AS in RT: PGP does not support this concept. Based on the information presented, this seems extremely complex and resource intensive to implement and is disconnected from some of the core objectives of this initiative established in Phase 1 of PFE.  
2. Deliverability tests for ancillary services: PGP does not support this concept. Prior discussions in the Day Ahead Market Enhancements (DAME) initiative highlighted the fundamental challenges in how to analyze this issue and implement solutions. We do support the potential benefit of reducing CAISO’s reliance on operator interventions, but this may be accomplished through other enhancements under the scope of this initiative.
3. Procurement of ancillary services in the 5-minute market: This concept should be explored after improvements to the FRP, with the objective of minimizing the need for incremental AS procurement by the CAISO BA and improving alignment and modeling between the Fifteen Minute Market (FMM) and five-minute market. To support the concept of market-wide improvements potentially minimizing this issue, additional questions have been added to the FRP question below and should be incorporated into the design objectives discussion under that topic.
4. Implement AS settlement-for-differences between DA and RT markets: PGP does not support focusing on this concept at this time.  We are interested in understanding if this would still need to be introduced if incremental AS procurement by the CAISO BA could be reduced to certain defined conditions with improvements to the FRP product, and/or linked more clearly to Resource Sufficiency Evaluation (RSE) and related Energy Assistance design.  How can CAISO BA AS procurement evolve to align with other EDAM/WEIM methodologies of this being outside of the WEIM? Is there a specific AS performance issue that this concept is meant to address?
5. Collapse spinning reserves and non-spinning reserves into one operating reserve product: PGP supports further evaluation of this concepts later if adjustments are indicated after other improvements are made to market-wide products.
6. Eliminate the cascading procurement between regulation and operating reserves: PGP supports further evaluation of this concept later if adjustments are indicated after other improvements are made to market-wide products.
7. Trigger the Scarcity Reserve Demand Curve (SRDC) when “arming load”: PGP supports this concept, when using the “SRDC” language to refer to “scarcity price mechanisms” in general. Administrative pricing may be appropriate in these conditions given the recognition that a traditional SRDC (linked to market-based AS procurement) will not meet the objectives of this initiative. PGP would like to understand how this concept could better link to the broader EDAM/WEIM design and mechanisms such as the Resource Sufficiency Evaluation, Emergency Declaration, and Energy Assistance concept that would apply to all BAs.
8. Enhancements for the EDAM/WEIM: This initiative should focus on mechanisms and products that apply to the entire regional market, see further discussion below.

b. This Scarcity/Market Power Mitigation (MPM) Policy initiative should remain focused on improving price signals that apply to the broader market, sending these signals earlier, and addressing other key price formation issues related to tight market conditions and MO actions. Many of the concepts for improvements to CAISO AS don’t meet the “key principle” established in Phase 1 of the initiative that “scarcity pricing changes should apply symmetrically across all BAAs in the WEIM whenever possible”. Concepts that don’t meet this principle or are focused on the CAISO BAA only, should be put in a different initiative that can be oriented more directly towards the CAISO BAA once the CAISO MO and market-wide concepts are improved.  This broader initiative should include addressing interaction with the CAISO BAA AS products to further minimize the need for MO actions by the CAISO MO on behalf of the CAISO BAA. This problem statement was well documented in scarcity Sprint Session 1 from Jan 10, 2024 and the scope well outlined in the PFE Phase 1 Issue paper.

c. PGP generally supports moving CAISO BA-specific enhancements to a separate initiative at a future time. We see reducing need and conditions under which the CAISO BA needs to procure additional AS through the market in the FMM as potentially in scope to separate BA functions from MO functions and improve market transparency. To the extent that improvements to market-wide products require modifications to CAISO BA-specific AS procurement requirements, practices, or pricing mechanisms, those should be addressed at a later stage.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve.

PGP strongly supports further exploration of this concept. This should be a high priority in this initiative. The potential benefits outlined in the Department of Market Monitoring (DMM) presentation align clearly with those articulated by stakeholders in Phase 1 of the PFE initiative. DMM has also noted that this may improve the performance of the Imbalance Reserve Product, which is a critical component of the EDAM design.  The FRP product has been evolving with the goals of improving price formation and equitable and sufficient procurement of flex in the system, and it makes sense to further refine this product before introducing new AS products or other CAISO BA-specific AS changes that do not align directly with the PFE objectives.

In terms of this concept addressing some of the issues raised under CAISO the CAISO BA specific AS changes discussed during the December 16^th, 2024 meeting, we recommend further discussion to link the problem statements and drivers more closely to market-wide concepts or FRP improvements:

1. If 100% of the CAISO BA AS requirement is procured in the DA market, what conditions trigger incremental AS procurement in the FMM, and could some of these conditions be addressed with improvements to the FRP?
2. How does CAISO AS procurement in the FMM relate to how other EIM entities participate in the market? How can transparency and alignment among EDAM/WEIM BAs upstream AS provision be improved?
3. If the SRDC-type improvements in this process focus on the flexible ramping product and related demand curve(s), would this, in addition to the DAME implementation address any of the CAISO AS issues identified? In this situation, would it be reasonable for the AS-related SRDC to start at a higher value, and to only occur in times that the more transparent/market-wide FRP that already fits into the RSE, etc, cannot meet it? How can this be done equitably for the CAISO BA while improving price signals in the broader market and reducing disconnects between the FMM and RTD that impact the WEIM?
4. PGP would also like to understand if/how the need for AS settlement for differences could complement this concept or if that need could be avoided by limiting or further defining the incremental procurement of AS for the CAISO BAA in FMM into the out of market action category to be addressed in this initiative.

Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements.

See comments under question 1.

Concept 3: Implementing a new reserve product and associated demand curve.

It is unclear how a new reserve product aligns with the stated objectives and core problem statements of the PFE initiative as summarized in the issue paper.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

a. PGP has concerns that a VOLL concept is not appropriate in a market that does not have a full must offer, and this may introduce unintended consequences and price volatility. This also introduces novel design challenges when the market has entities participating under different frameworks. We see other concepts introduced in this initiative as a higher priority and potentially valuable steps in the right direction that make sense to pursue before further consideration of the VOLL.

b. It would not be prudent to implement a VOLL-based approach without a circuit breaker in place to avoid catastrophic damages if nothing can be done to address a shortfall, and the circuit breaker concept was placed as a low priority for stakeholders in Phase 1 of the initiative. Likewise, this approach seems more appropriate in markets with full participation where the incentive to withhold supply for external markets does not exist.

c. No further comment, this should not be a priority at this time.

d. PGP sees this as a fundamental challenge of this approach, making the VOLL concept misaligned with the principle that the focus of this initiative should be on signals that can be aligned and applied equally, equitably, and transparently across the broader footprint.   

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

Stakeholders already agreed that this concept was a low priority as summarized in the PFE Phase 1 Issue Paper.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

a. PGP sees the use of strategic reserves in the CAISO as complimentary to the concept of Available Balancing Capacity (ABC) for WEIM BAs and would like further education on how these mechanisms are used and impact the market and discussion of how to improve transparency in these areas, to further define if they should fall in the category of emergency actions. PGP would also like to see further discussion of the concept of administrative pricing during EEAs and how this may link to the existing emergency assistance and RSE concepts that apply broadly across the market. For DR or pending load-shed, participants should be able to realize reliability value in relation to calling on customers to reduce demand, but this mechanism should not be eroding incentives for other resources to perform.

b. PGP sees the use of load conformance as an MO action which should be explored more comprehensively in this initiative, with transparency around the use of this tool, and evaluation of price signals when this is used as concepts to be explored further, up to and including defining this as an emergency action for the purposes of this discussion. Any design proposal should meet the CAISO’s strategic objective of reducing the need for this mechanism.  

c. The emergency action definition should be more clearly articulated and evaluated for equity among BAs. If products are improved to enhance pricing leading up to emergency actions, and further linkages to the RSE, Energy Assistance Program, and incentives to perform established, this transparency and appropriate pricing should naturally occur, and hopefully later reduce the need for emergency actions.

d.  Yes, it would be counter-intuitive for load shedding events to result in a decrease in prices. The signal for all supply to perform should be at its peak during a load shed event.  

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

We appreciate the ongoing educational efforts and the periodic review provided by CAISO staff, and that these are many complex and inter-related topics, but some topical coverage in Phase 2 has been disconnected from the prioritization and key principles established with stakeholders in PFE Phase 1. PGP would prefer to narrow the scope and begin to work on a couple of key issues that were clearly prioritized by stakeholders, and align this initiative with the direction of the Pathways transition and new Regional Organization governance scope, including:

• Focusing on products and concepts that apply to the broader market and linkages to the WEIM and EDAM and moving away from SRDC designs that would result in AS procurement in the CAISO BA driving the market or impacting the WEIM price formation in a counter-intuitive way
• Improving transparency and price signals leading up to scarcity events, ex. FRP improvements
• Establishing a shared definition of what constitutes “logical” price signals during emergency actions, and developing market changes to align with this definition
• Incentivizing resource performance and additional supply during tight conditions, and
• Further defining what is considered an “emergency action” or “out of market action” and developing market mechanisms to reduce them.

Also in alignment with conclusions from Phase 1 of the initiative, PGP would be interested in exploring further how RSE failures and Emergency Energy Assistance translate if at all to scarcity price signals. This concept seems to have general stakeholder support while aligning with the structural design and voluntary nature (limited must offer) of WEIM participants, and may be worth exploring in this forum as part of the relevant current design.  A review of this program and linked concepts in WEIM, related design concepts in EDAM (ex DA RSE Exchange), and documentation of linkages to the objectives of this initiative may cultivate new ideas that are less complex to implement than major changes to AS procurement, but that support market transparency and help fulfill the overall objectives of the initiative.

PGP recommends that in future presentations, linkage back to the Phase 1 summary and stakeholder priorities of the scarcity initiative are clearly articulated and reiterated, while incorporating any additional progress made in Phase 2 and continuing to check for alignment with the direction of the approved Pathways approach to the Regional Market. For next steps, we recommend using feedback from this round of comments and the Phase 1 summary to develop and sequence a narrower list of topics to enable the group to progress into the design phase. We look forward to continuing to engage in this important topic.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

The Salt River Project Agricultural Improvement and Power District (SRP) appreciates the opportunity to submit comments on the Scarcity Pricing working groups.

• SRP supports additional investigation into enhancements of ancillary service procurement which promote price equity between CAISO BAA and WEIM/EDAM entities and avoid price separation between market participants during scarcity events.

• Non-CASIO entities supply their own AS and are not impacted by an AS shortage within the CAISO BAA, but they may still offer energy product. The label of the incremental MW award as EN or AS is not relevant to the non-CAISO generator, but that does not detract from the value of additional MW sent to CAISO BAA during an AS shortfall.

• At the December 16 session, CAISO highlighted existing market features including Available Balancing Capacity (ABC), Assistance Energy Transfers (AET), and Flex Ramp Product (FRP). ABC and FRP only solve for physical constraints or power balance issues and as currently designed, scarcity cannot be adequately reflected in their dispatch price. AET, while addressing a physical constraint (capacity or flex shortfall), also includes a scarcity price component.
  • When non-CASIO market participants provide AS assistance to the CAISO BAA during an AS shortfall, both the AS provider and AS receiver could be financially settled based on existing market mechanisms, with compensations above the LMP. These transactions could be scheduled either via intra-hour WEIM transfers or through a separate e-tag on an hour-ahead or day-ahead basis. CAISO itself is considered a WEIM participant and would be eligible to opt into AS assistance under this structure.
  • A framework for AS procurement could be applied to both the WEIM design and EDAM, and it may supplement Resource Adequacy planning initiatives.
  • Employing an AS assistance tool would translate effectively and allow for relatively quick implementation compared to other proposals.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

• Concept 1: Extending FRP procurement curve
  • SRP does not support extension of the FRP procurement curve to address scarcity pricing until outstanding concerns by WEIM entities about significant seasonal volatility in the flex ramp uncertainty requirement are resolved. Introducing additional elements into the FRP curve may further complicate the existing process.
  • WEIM entities currently have mechanisms available to manage FRP insufficiency, which raises questions about whether an extended FRP curve could accurately reflect scarcity conditions.
• Concept 2: Extending spin/non-spin procurement curve
  • SRP does not support this proposal to address scarcity conditions. It may introduce additional unexpected pricing impacts which will be more difficult to isolate. Further, it may worsen price separation between CAISO and WEIM.
  • CAISO has also considered collapsing reserves into one contingency reserve product, which would simplify the overall reserve procurement proves. However, this approach would not address scarcity pricing in the event of an AS shortfall.
• Concept 3: Implementing a new reserve product
  • SRP does not support implementation of a new reserve product for WEIM.
  • Adding another reserve product to the stack would further extend market run times and introduce additional model complexities for a problem isolated to the CAISO BAA. Significant additional resources would be required to design, price, and integrate a new reserve product into vendor software for hourly RSE tests, base schedule submissions and bid formulation.
• Instead of introducing unnecessary complexity, SRP encourages the CAISO to focus on solutions to optimize exiting market processes and ensuring entities can address AS shortfalls through established market mechanisms in both real-time and day-ahead markets to supplement resource adequacy efforts.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

VOLL is different for every BAA participating in the market, and most importantly, not all inputs are quantifiable costs. Many balancing areas and individual LSEs are subject to public accountability and service reliability scores which, when not met, can severely impact customer and regulatory relationships. Such factors may not be fully captured through an economic metric like VOLL. SRP encourages the CAISO to consider whether bid caps or VOLL may more realistically depict the true cost and quality of service tradeoffs.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

• SRP seeks to better understand the real-time impacts to CAISO and WEIM from implementing “circuit breakers” during long-duration shortage conditions. SRP requests clarification on if these circuit breakers would be applied between CAISO and WEIM participants, similar to the GHG shadow tie, or would they be implemented at the BAA level, or LSE level.? How might the introduction of additional binding constraints impact the efficiency and effectiveness of current market processes?
• The MISO circuit breaker model is essentially a way to ratchet bid caps during prolonged periods of strained system conditions, but specifically related to its demand response and VOLL programs.
  • The concepts of VOLL and circuit breakers may have some cross-over with the newly launched Demand and Distributed Energy Market Integration working group.
  • If stakeholders desire a ratchetted approach to penalty pricing, CAISO will need to determine the various thresholds different prices take effect. The emergency events or scarcity conditions which trigger penalty pricing may differ significantly between CAISO and non-CAISO BAAs.
• In August 2024, CAISO implemented a similar mechanism with the Price Formation Enhancement for Bidding Above the Soft Offer Cap. Continuing to study the impact of this prior initiative could provide necessary insight into the effectiveness of such penalty pricing programs on CAISO market outcomes.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

True load shedding events are a worst-case scenario and should not include elective demand response programs, which are voluntary and typically pre-scheduled by many LSEs. Elective DR programs should not trigger scarcity pricing on their own but can, however, provide valuable market signals for when scarcity pricing should take effect. SRP suggests the CAISO ensure that price signals reflect genuine scarcity while preserving the role of elective DR as a proactive market tool rather than an emergency response measure.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

No additional comments.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

At this time, the Six Cities remain unpersuaded that the potential changes to the CAISO’s ancillary service procurement are needed or appropriate to accomplish scarcity pricing objectives in the CAISO.  These changes generally have broader implications than just for scarcity pricing, and of particular concern is the fact that these reforms would likely have an uneven impact throughout the CAISO markets, as they would not be applicable to WEIM and EDAM participants.  This raises concerns regarding the cost and reliability impacts to CAISO balancing authority area entities.  For this reason, the Six Cities are not advocating for adoption of these enhancements.  Please also refer to the general comments provided below in response to question no. 2 regarding the overall objectives and outcomes of this initiative.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

The Six Cities remain concerned with the overall objectives of this initiative and the specific outcomes that the CAISO is attempting to achieve with consideration of scarcity pricing policies.  At this time, it is not clear that there are definitive concerns with either price formation or with the CAISO’s ability to attract resources during scarce conditions.  The proposal to transition away from marginal cost pricing during certain conditions represents a significant paradigm shift, and the proponents of pricing reforms have a high burden to demonstrate that there will be meaningful benefits that will be achieved if new pricing rules are introduced.  While the Six Cities appreciate the CAISO’s consideration of different approaches, there is not one concept that clearly emerges as the most cost-effective and efficient approach that will not impose undue costs on ratepayers. 

Complicating this analysis is the CAISO’s regional market participation.  As is the case now with the CAISO’s implementation of scarcity pricing through ancillary services, unless it is possible to design scarcity pricing structures in a way that will be applicable to all balancing authorities participating in the CAISO’s markets, any changes in pricing rules may not have the desired effect of gradually signaling scarce conditions and eliciting additional supply. 

The Six Cities request that the CAISO provide more information summarizing what the CAISO would like to see changed in pricing outcomes during scarce conditions.  For example, graphical representations of how the CAISO would like to see prices reflected in the market as compared with the pricing that occurred during certain scarce conditions in the past would be helpful to stakeholders in evaluating design options.  Relatedly, it would be helpful to analyze the costs and benefits of any scarcity pricing concepts so that stakeholders can assess the tradeoffs of different design concepts.  Finally, does the CAISO have any way of evaluating how much additional capacity it could realistically see in its markets if any of the concepts listed above are adopted?

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

The Six Cities continue to strongly oppose consideration of Value of Lost Load (“VOLL”) estimates as a basis for penalty pricing and are unpersuaded that VOLL provides enhanced accuracy in measurement of the economic cost of load shedding or otherwise offers a superior methodology for pricing during scarce conditions.  Among other concerns, the VOLL concept does not appear to be limited to any particular market conditions that are reasonably reflective of scarcity.  It also appears to be incompatible with any notion of assuring just and reasonable rates for consumers—the revised pricing elements that comprise the MISO pricing program are alarmingly high, and the Six Cities would be concerned with implementation of these values within the CAISO markets without significant data showing that these measures would not only not harm ratepayers, but would produce tangible and measurable economic and reliability benefits.  VOLL does not address or consider conditions in which the pricing of supply should reflect the cost to provide that supply, and is vague with respect to the concept of valuing avoided demand curtailment.  There also is no clear link between an escalating VOLL and effective attraction of additional supply.  A high level of VOLL will not lead to additional supply if there is no additional supply available.  The questions raised by the CAISO regarding determination of VOLL within the CAISO and within the broader WEIM/EDAM footprint and the limitations on the CAISO’s ability to determine these values without relying on external studies illustrate the challenge and complexity of implementing VOLL in a way that achieves just and reasonable outcomes. 

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

In the event that the CAISO adopts any of the additional scarcity pricing measures that are under consideration, the Six Cities support development of circuit breaker mechanisms to mitigate impacts of excessive prices, especially during extended periods of time or in conditions where scarcity pricing is not achieving the objective of drawing additional supply resources to the market.  The Six Cities support consideration of both timing and price level metrics, which could be designed to operate in tandem.  For example, the circuit breaker could be structured so that it will be implemented if prices reach a specified level for a specific period of time.  At this time, the Six Cities are not prepared to definitely articulate a preferred methodology for design of circuit breaker mechanisms and support exploration of different alternative design options. 

More fundamentally, given that scarcity pricing designs (beyond the ancillary services-based approach in use today) would be new and are untested in CAISO markets, the Six Cities recommend that the circuit breaker be designed and implemented in a relatively conservative manner, at least for an initial period of time, meaning that the duration and extent of scarcity prices should be minimized through operation of the circuit breaker.  The Six Cities support this approach even if the result is that scarcity pricing is, in effect, not fully implemented for some period of time within the CAISO markets as a consequence of the circuit breaker parameters being set more conservatively for an interim period.  A conservative approach to the initial circuit breaker design will provide market participants with experience regarding any new scarcity pricing approaches, may help protect ratepayers from unreasonable outcomes, and may allow for recalibration of scarcity design reforms if it appears they are not working as intended.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

The Six Cities agree that use of some or all of these measures may be, but are not always, reflective of scarce conditions.  For example, use of emergency demand response programs during actual conditions of scarcity is appropriate; however, the Six Cities are concerned with conditions when these programs might be triggered and the CAISO is not actually experiencing a shortage of resources.  Similarly, “other market operator actions” can be reflective of a range of conditions that may or may not properly be reflected in pricing.

The Six Cities would like to understand how other market operators of WEIM/EDAM balancing authorities manage scarcity.  If the CAISO moves forward with proposed scarcity pricing measures in this initiative, it will be important to ensure the design of these measures can be applicable throughout the WEIM and EDAM and not solely to the CAISO.

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

To highlight and add emphasis to some of the concerns noted above, there are fundamental challenges and a high potential for unintended and inequitable consequences associated with implementing market-based scarcity pricing signals in the context of a regional market that involves multiple BAAs with varying approaches to procurement of reserve products and operational responses to scarcity conditions.  It is critical that any design changes flowing from this initiative create incentives and pricing impacts applicable throughout the market footprint and avoid disproportionate impacts on different sub-areas of the market.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

SCE’s feedback on the following Ancillary Service (AS) proposals is as follows:   

AS Re-Optimization in Real-Time 

SCE opposes re-optimizing AS procurement in real-time. SCE believes that fully re-optimizing AS is inappropriate due to the complexities involved in tracking and switching between reserves and energy. Additionally, there are concerns about the deliverability of AS in real-time, especially during tight supply conditions. The current approach of procuring a majority of reserves in the Day-Ahead Market and incrementally procuring additional AS in real-time is more predictable and reliable.    

Deliverability Test for AS 

SCE remains neutral on whether CAISO should explore enhancing the deliverability test for AS. Conceptually, moving to a more granular AS regional procurement could benefit the market. However, this approach would be sub-optimal compared to nodal procurement, which CAISO currently deems infeasible due to computational complexities, implementation challenges, and necessary technology upgrades. More analysis is needed to understand the potential benefits of transitioning to a more granular regional procurement of AS. 

It would be helpful if CAISO could provide insights into the benefits realized from moving the Flexible Ramping Product (FRP) from zonal to nodal procurement. This analysis could offer better insight into whether transitioning from zonal to nodal procurement of AS is worthwhile, assuming it becomes technically feasible in the future 

Procurement of AS in the 5-Minute Market 

SCE does not see this proposal as practical to procuring AS in the 5-minute market.  SCE concerns are like those under “AS Re-optimization in Real-time".  AS is supposed to be dispatched with 10-minute notice, it's not clear how 5-minute procurement works with 10-minute dispatch.   

Implementation Settlement-for-Differences between day-ahead and real-time markets 

It is not clear the Settlement for Differences solution is addressing a substantial issue. It would be helpful for CAISO to provide a sense of the frequency of resources not being able to meet with day-ahead AS awards, along with a general indication of reasons for those resources inability to perform.  This information will help SCE assess whether the AS settlement-for-differences change is necessary.   

Collapsing Spinning and Non-Spinning Reserves into One Operating Reserve Product 

SCE opposes combining spinning and non-spinning reserves into one product.  The two products have similar required response times; however, spinning reserves should be more valuable and reliable given existing synchronization with the grid. Combining the two products could potentially increase costs without any benefit.  If CAISO should move forward with this suggestion, it should be made extremely clear that the synchronization and ramping benefit offered by spinning reserves does not provide value to CAISO and the grid. 

Eliminating Cascading Procurement between Regulation and Operating Reserves: 

SCE opposes eliminating cascading procurement between regulation and operating reserves. SCE believes that the current approach adheres to the “least cost dispatch” principle and supports an efficient market. The focus of this proposal should not be on eliminating cascading procurement of AS, but rather on how AS is utilized when AS products are substituted for others. The market should ensure that products are used for their intended purposes when substitutions occur.  

Triggering the Scarcity Reserve Demand Curve (SRDC) When Arming Load 

SCE is open to triggering the Scarcity Reserve Demand Curve (SRDC) when arming load, but only in situations where reserves are converted to energy. Simply arming load without conversion should not trigger administrative scarcity pricing when there are still sufficient reserves in the market. If a situation like that were to occur, it would appear to be more like a forecast error by the CAISO than a true scarcity event. 

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

SCE is amenable to further pursuit of concepts 1 and 2 but opposes the introduction of a new reserve product as contemplated in concept 3.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

SCE strongly opposes the use of Value of Lost Load (VOLL) due to its significant complexity and uncertainty. The value of lost load can vary widely depending on the time of day, season, location, and customer profile, making the methodology inaccurate and highly speculative.  There is already a separate capacity framework to address scarcity and reliability.  VOLL pricing doesn't make sense given the existence of this framework.  

SCE believes that using VOLL as a basis for pricing scarcity events can lead to overpricing, which deviates from the marginal cost of supply—a fundamental principle of efficient market design. This deviation can result in prices that do not accurately reflect the true cost of providing electricity but rather the theoretical cost of outages, thereby undermining the market’s economic efficiency and the fundamental principle of cost-of-service ratemaking. Additionally, the methodology can have unintended consequences, such as incentivizing resources to bid above the marginal cost of energy and basing their bidding strategy on theoretical rather than actual costs. 

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

SCE does not have an opinion at this time.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

SCE urges CAISO to be very careful of adopting a design that automatically sets scarcity pricing when using specific products designed for California and funded by ratepayers.   Setting scarcity pricings for some of those products can result in double payment from ratepayers.   

Out-of-Market Emergency Demand Response 

SCE opposes the inclusion of out-of-market demand response (DR) products for triggering scarcity pricing. Programs such as the Emergency Load Reduction Program (ELRP), Load Modifying Demand Response, and Distribution Resources are not bid into the market and should not be factored into market pricing mechanisms. CAISO should not allow these products to set administrative pricing. Including these products in scarcity pricing calculations alongside those that are bid into the market would distort market signals and undermine market integrity. Furthermore, these programs are funded either through rates or the general fund, and triggering scarcity pricing whenever these products are activated would result in customers double paying for the same service.¹ The rules of the program should dictate when they’re used, not administrative pricing set by the CAISO.  

Reliability Demand Response Resources (RDRR) 

RDRRs (Reliability Demand Response Resources) are in-market demand response resources with a minimum bid price near the top of the bid cap, set at $950/$1900. When the market triggers RDRRs, prices have already risen significantly, there is no need for administrative scarcity pricing.  

However, when RDRRs are dispatched out-of-market, the reasons for the dispatch are not always clear. These reasons can include a Transmission Emergency or an unforeseen Energy Emergency. 

If CAISO wants to pursue the idea of out-of-market RDRRs setting scarcity pricing, it needs to outline procedures that clearly indicate the reason for an out-of-market dispatch.  This will allow stakeholders the ability to opine on which situations would warrant administrative set scarcity pricing.   

Strategic Reliability Reserves 

SCE opposes the inclusion of Strategic Reliability Reserve products for triggering scarcity pricing. Like out-of-market demand response products, Strategic Reliability Reserve products are funded through rates and utilizing its dispatch as a trigger to scarcity pricing would result in customers paying double the service it supposed to provide. Strategic Reliability Reserves is not a conventional product that is typically bid into the market on a normal basis, so using them as a trigger for scarcity pricing is an issue.  SCE understands that, once these resources are enabled, these units will be bid into the market and normal market dynamics will work.  

Power Balance Constraint Price Relaxation during Load Shedding Events 

This is a topic that needs additional discussion.  SCE does not have a position at this time.   SCE want to discuss further what pricing looks like when load shedding events occur.  SCE is not clear on whether the power balance constraint relaxation price is appropriate, and this depends on how scarcity is priced in other conditions. 

¹ Statement made by Energy Division in the comments for Price Formation Enhancements: Working Group Session 12, Scarcity Pricing Sprint 3, January 24, 2024 under Appendix.  Available at: https://stakeholdercenter.caiso.com/Common/DownloadFile/3360b00e-eda9-4f29-89f4-a56d513761e8 

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

SCE does not have any further comments.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

Please see Vitol’s response to the question below

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Vitol supports concept 3 through an implementation of an Operating Reserve Demand Curve with an extended reserve requirement. We believe this will enable more accurate prices and improve market efficiency:

• An ORDC allows market prices to gradually rise to reflect operating reserve shortages.  This would help ensure the system is better postured to meet the energy and reserve needs of the system.  Also, it may prevent shortage conditions in the first place because market participants are incentivized to take action before one occurs. In turn, this may lead to a more efficient dispatch, as the it may not be necessary to go further into the supply stack to cure a scarcity condition.
• An ORDC is an effective tool for ensuring emergency actions do not distort prices.  CAISO has numerous out-of-market emergency deployments that do not participate in price formation, but impact the clearing of the supply stack and may mask an underlying scarcity price signal.  These issues can lead to weakened pricing incentives, inefficient dispatch, reduced market transparency, and out-of-market costs, such as make whole payments. An ORDC is able to overcome these distortions by reflecting the reliability cost of diminishing reserves in binding market prices.  
• In addition, an ORDC can avoid out-of-market actions in the first place.  For example, when day-ahead prices are expected to clear near the offer cap there is less incentive to bid for demand.  This can lead to insufficient supply being cleared relative to the CAISO load forecast and out-of-market resource commitments to address the gap. 

Vitol is still assessing the need to extend the reserve procurement beyond the reliability requirement in order allow price to rise gradually using a demand curve co-optimized with energy.  The extension could be achieved through a new reserve product or increasing the procurement of an existing one. We believe the review of the options should stay in the price formation enhancements initiative due to its direct impact on market prices. 

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

An ORDC that utilizes VOLL would help ensure energy prices accurately reflect the value of operating reserve shortages.  By definition, VOLL is the price that consumers are willing to pay to avoid an interruption of electrical service. Accordingly, we believe this an effective tool for reflecting the value of involuntary load shed in market prices.   

We need more information to consider if it would make sense to leverage the independent VOLL surveys, such as the Lawrence Berkley Labs meta database. It would be helpful to understand how robust the customer data is for western states and different load classes. Ultimately, it is important to ensure any survey data is based on observations in the region itself or can be calibrated to account for regional differences.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

Under an enhanced ORDC construct, Vitol believes that a circuit breaker mechanism is needed. Circuit breakers are essential in that they establish a pre-defined threshold for triggering adjustments to price caps.  They obviate the need for the ISOs and RTOs to create new rules or seek Tariff waivers in the middle of an extended pricing anomaly.  This fosters market certainty and avoids inevitable challenges that come with sudden administrative changes and possible retroactive settlement.   Lastly, circuit breakers protect the market from prolong extreme market outcomes that can lead to uncured defaults, which are socialized across the risk pool consisting of market participants. 

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

Please see comments above on emergency actions. 

Ensuring the power balance penalty is reached during load shed events makes sense in that there is an actual system-wide energy shortage. That said, from a price formation perspective it may not be necessary under an ORDC framework due to its pricing contribution during involuntary load shed being the Value of Lost Load.  In this way, the ORDC can address a myriad of price formation issues. 

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

1. During the December 16, 2024 session, the working group discussed several potential enhancements to ancillary service procurement. Please provide feedback on the following: a. Your organization’s level of support for these enhancements and the rationale for your level of support. b. Which of the enhancements do you believe are most important for improving price formation and/or scarcity pricing? Explain your reasoning. c. Do you believe these AS procurement enhancements should be pursued as a separate policy initiative, or should they remain within the Price Formation Enhancements initiative?

WPTF appreciates CAISO’s acknowledgment that nodal ancillary services (AS) are no longer feasible. As a result, CAISO has indicated that the re-optimization of AS is not currently an option as operators noted they would only be comfortable with re-optimizing AS if nodally procured. Being able to re-optimize AS in real-time was a key component to enhancing scarcity pricing through ancillary services. Without this, it seems that the other changes to AS being considered will not have as significant an impact in terms of improving scarcity pricing.

Thus, the other changes being considered are better suited for a separate effort, as they represent a broader overhaul of the AS market rather than specific improvements to scarcity pricing through AS adjustments. The only reason to maintain a stronger connection between the scarcity pricing discussions and changes to AS would be if the focus shifts toward enhancing the current AS Scarcity Pricing Demand Curve by means of extending procurement for spin and non-spin. However, as we mention in response to point #2 below, we do not believe that approach would go far enough to establish a robust scarcity pricing mechanism.

2. During the January 22, 2025 morning session, the working group presented three primary concepts for implementing gradual price increases during scarcity conditions: • Concept 1: Extending the Flexible Ramp Product (FRP) procurement curve. • Concept 2: Extending the procurement curve for spin/non-spin beyond minimum requirements. • Concept 3: Implementing a new reserve product and associated demand curve. For each concept, please provide feedback on the following: a. Your organization’s level of support and the rationale for your level of support. b. If you support this concept, please provide specific recommendations for implementation. c. Describe any potential impacts (positive or negative) of this concept on your organization and the broader market. d. Please outline how this concept may or may not be a mechanism that can achieve scarcity pricing across the regional market footprint. e. Should the working group explore any alternatives to these three concepts?

Any ideal solution should achieve three impacts:

1. Reflect scarcity pricing in the day-ahead market (DAM), the Fifteen Minute Market (FMM), and Real-Time Dispatch (RTD)
2. Reflect scarcity pricing in both energy and ancillary services (AS)
3. Impact prices in both CAISO and non-CAISO EDAM/EIM Balancing Authority Areas (BAAs)

Below is a table summarizing how we believe each of the three options discussed aligns with these impacts. Following the table, we provide a more detailed analysis of each option.

Option 1: Extending FRP
FRP is a real-time product, meaning it does not achieve impact #1 since it would not be reflected in day-ahead prices. Creating systematic price differences between day-ahead and real-time markets that cannot be reconciled can lead to issues with convergence bidders. If scarcity pricing were implemented through FRP and thus only in real-time, there would be a significant and systematic price difference whenever the system is in tight conditions. This would give convergence bidders an opportunity to submit virtual demand in the day-ahead market to capitalize on these price differences when liquidated at real-time prices while not actually allowing prices to “converge”.

Option 2: Extending Procurement for Spin/Non-Spin
Extending the procurement for Spin/Non-Spin beyond the minimum requirement would still result in the same issues we face with the current AS scarcity demand curve. It would only apply to the IFM, which rarely triggers scarcity conditions, and FMM. Re-optimization in real-time (both FMM and RTD) could potentially work, but given CAISO’s announcement that they cannot reoptimize existing AS, this seems infeasible. Additionally, it would not apply to the EIM/EDAM, so it would only be relevant to the CAISO BAA.

Option 3: New Reserve Product and Demand Curve
We are not in favor of introducing a new reserve product simply to create stronger price signals. New products should only be introduced if there is a clear need for them, and we anticipate that this new reserve product would face the same challenges as Option 2, particularly the inability to re-optimize in real-time. Furthermore, CAISO should focus on implementing the new products (IRU, IRD, RCU, RCD) already FERC approved and addressing outstanding issues with the current products before considering the introduction of others.

3. During the January 22, 2025 afternoon session, the working group discussed anchoring market penalty prices to a Value of Lost Load (VOLL) metric instead of bid caps. Please explain your organization’s feedback, including your level of support and the rationale for your level of support. Address the following: a. Do you believe VOLL is a more accurate reflection of the economic cost of load shedding than the current bid cap approach? b. What are the potential benefits and drawbacks of a VOLL-based approach? c. How should the CAISO determine appropriate VOLL levels? Should it conduct its own studies, rely on meta-analyses (like MISO), or use another approach? d. For the regional market, please outline the challenges or benefits of using a single VOLL across WEIM/EDAM given the BAAs may each have a different VOLL. How can accurate LOLP calculations be performed, particularly in WEIM BAAs where not all resources participate in the market?

We support further discussion around using VOLL (Value of Lost Load) as it can provide a more accurate reflection of the cost of load shedding than the current penalty which is tied to the bid cap. During scarcity conditions, when the SMEC (System Marginal Energy Cost) is set at the bid cap, it becomes difficult to determine whether the price is driven by actual scarcity or by economic bidding at the cap. To effectively signal scarcity conditions, the price mechanism should not be tied to the bid cap, as doing so removes the ability to distinguish between true scarcity and market dynamics based on the cap.

4. Should the CAISO implement "circuit breakers" to mitigate the financial impacts of long-duration shortage conditions? If so, how should these be designed (e.g., timing, price levels)?

The circuit breaker element is worth further discussions. Scarcity pricing plays a crucial role in incentivizing additional voluntary supply to be made available to the market. However, if scarcity pricing is in effect for extended periods, the added costs can outweigh the benefits. It may be worth considering the number of hours or days that scarcity pricing persists before reaching the Cost of New Entry (CONE) threshold.

5. During the February 6, 2025 session, the working group explored market mechanisms to reflect the impact of emergency actions on pricing during scarcity events. a. Do you believe current emergency actions (e.g., emergency demand response programs, strategic reserve dispatch, other market operator actions) properly reflect scarcity in market prices? If not, what are the key issues and potential solutions? b. Are there other emergency actions the working group did not discuss that should be considered? c. What specific steps can the market operator take to improve transparency and predictability related to emergency actions and their impact on prices? d. Should the market ensure that prices reach the power balance constraint relaxation price during load shedding events?

6. Please provide any overarching comments on the CAISO's Price Formation Enhancements initiative, specifically related to scarcity pricing. This section is for general feedback that doesn't fit neatly into the specific sections above.

Vitol presented an ORDC (Operating Reserve Demand Curve) construct used in another market. WPTF believes that implementing a similar mechanism, possibly on the energy side, could create a workable scarcity pricing system that addresses all the objectives outlined in response to #2. The concept could involve calculating a margin based on total available supply and demand. We envision supply would include all available supply for dispatch/awards and demand would encompass not only energy demand but other capacity products/requirements. As this margin narrows, the system would trigger points along an ORDC-type curve, gradually driving up energy prices. If the ORDC is triggered in the Day-Ahead (DA) or Fifteen Minute Market (FMM), Ancillary Services (AS) prices would also be impacted due to co-optimization. A similar margin calculation could be applied in non-CAISO BAAs (Balancing Authority Areas). For CAISO and non-CAISO BAAs we would need to discuss what would be included in the “demand” side of the equation as we anticipate it would not solely be based on energy demand but also include other product requirements as applicable. Further, any emergency actions taken to reduce demand or increase supply could be accounted for by adjusting the margin calculation, ensuring that the system conditions continue to be reflected in pricing.