Opinion ID: 151421
Heading Depth: 3
Heading Rank: 3

Heading: Congestion Revenue Rights

Text: As noted above, LMP incorporates the cost of congestion into the price of energy. To provide a measure of protection for customers desiring to hedge against the price uncertainty that can result from fluctuations in congestion, California ISO proposed a system of congestion revenue rights (CRRs). Congestion revenue rights are financial instruments that entitle their holders to be paid the congestion costs associated with transmitting a given quantity of electricity between two specified points. A party planning a transmission can thus hedge its exposure to congestion costs by acquiring a corresponding [congestion revenue right]. At the time of the transmission, the party will pay [the ISO] the applicable congestion costs, but will then receive the same amount back from [the ISO] in its capacity as the holder of the [congestion revenue right]. Wis. Pub. Power, Inc., 493 F.3d at 251 (citation omitted). California ISO proposed to offer two types of congestion revenue rights: short-term (with terms of less than one year) and long-term (with ten-year terms). Both would be obligation rather than option rights. Obligation rights entitle the holder to a payment when congestion is in the direction of the congestion revenue rightthat is, when the price at the withdrawal point is higher than the price at the generation pointbut require the holder to make a payment to the ISO when congestion is in the opposite direction. Option rights, by contrast, entitle the holder to be paid but never require the holder to make a payment. California ISO proposed to allocate congestion revenue rights among load-serving entities according to an annual four-tier nomination process. For the allocation of short-term congestion revenue rights in Tiers 1 and 2 in the initial year, the ISO proposed to require that nominations for CRR allocations ... be source verified, meaning that load-serving entities would be required to demonstrate that, during a historical reference period, the [load-serving entity] had an entitlement to receive energy from the nominated sources to serve its demand. First Market Redesign Order ¶ 712. The ISO explained that basing the CRR allocation on a period that has already occurred avoids the potential for the allocation process to distort incentives to contract for energy. Id. California ISO proposed to use April 2006 to March 2007 as the historical reference period. San Diego objected, arguing that its transmission usage during this timeframe was unusually low and that the ISO's proposal would unjustifiably cause San Diego to enter the congestion revenue right allocation process with a substantial deficit of rights on which to hedge its existing procurement decisions. California ISO proposed to allow load-serving entities to convert the short-term rights they received in Tiers 1 and 2 into long-term rights in the long term tier (Tier LT). Initially, the ISO proposed to allow entities to convert 50% of their adjusted load metric (a calculation that measures an entity's exposure to congestion costs) into long-term rights. But in response to San Diego's objection, the Commission held that no more than 20% of an entity's adjusted load metric may be nominated for long-term rightsalthough the percentage increases 10% annually in subsequent years until it reaches 50%. In Tier 3 (actually the fourth tier), California ISO proposed to allow any load-serving entity to request any congestion revenue right. If demand exceeds the rights available, then every entity receives a pro rata share of the remaining rights. Finally, the ISO proposed to auction off any congestion revenue rights that remain after the four-tier process. Of course, at any stage in the process, load-serving entities are free to buy or sell congestion revenue rights through bilateral transactions with other market participants. Every year after the initial year, the same tiered nomination process is repeated, except allocations no longer are source verified. Instead, load-serving entities that previously have received short-term congestion revenue rights either can renew them or convert them to long-term rights. Third Market Redesign Order ¶ 164. San Diego and Sacramento petition for review of the Commission's approval of California ISO's congestion revenue right proposal. San Diego argues FERC did not go far enough in ordering a remedy suited to San Diego's unique circumstances. Sacramento argues FERC acted arbitrarily and capriciously in determining that the ISO did not need to offer option rights in addition to obligation rights. We consolidated these petitions for review into the instant action.