Electricity Markets

FERC rejects CAISO changes to procurement mechanism

The Federal Energy Regulatory Commission recently rejected proposed tariff revisions submitted by the California Independent System Operator related to the ISO’s risk of retirement capacity procurement mechanism. Included among the proposed revisions was the creation of annual windows to allow resource owners more lead time to make decisions about retirement.

In its April 12 order rejecting the tariff revisions, FERC encouraged the grid operator to propose a more comprehensive package of reforms (Docket No. ER18-641).

Since 2006, CAISO and the local regulatory authorities within its balancing authority area, primarily the California Public Utilities Commission, have jointly administered the resource adequacy program.

The resource adequacy program requires that load serving entities procure capacity to meet their forecasted peak load plus a reserve margin, as established by their local regulatory authority.  The program also requires load serving entities to procure local and flexible capacity, as determined by CAISO and adopted by their local regulatory authorities. 

To remedy unresolved resource adequacy deficiencies and/or meet specified reliability needs, CAISO relies on backstop capacity procurement authority under the capacity procurement mechanism (CPM) provisions of its tariff.

FERC accepted new category of procurement in 2011

FERC in 2011 accepted a new category of CPM procurement, “risk of retirement CPM,” which would allow CAISO to procure capacity from a non-resource adequacy resource that would otherwise retire because it did not have a capacity contract for the current or upcoming year, but was determined by CAISO to be needed for reliability reasons for the following year.

In its order from earlier this month, FERC notes that the designation acts as a “bridge” to prevent the resource from retiring before it is needed for reliability by providing a guaranteed payment stream during the term of the designation.

Because the risk of retirement CPM designation is a part of the reliability backstop program, CAISO cannot issue designations in a way that would circumvent the bilateral resource adequacy procurement processes conducted by the local regulatory authorities.

Therefore, under the current CPM framework, CAISO can issue a risk of retirement CPM designation if:

  • The resource owner has offered all eligible capacity into all competitive solicitation processes during the current year;
  • The resource was not contracted as resource adequacy capacity during the current year for the upcoming resource adequacy compliance year;
  • CAISO’s technical assessments project that the resource will be needed for reliability purposes by the year following the next resource adequacy compliance year; and
  • No new generation is projected by CAISO to be in operation by the time of the identified reliability need. 

If these requirements are met, the grid operator will issue a study report that explains the basis and need for the CPM designation and will provide a 30-day window for a load serving entity with a deficiency in its annual resource adequacy plan to procure capacity from the resource at risk of retirement, which would obviate the need for the designation.

CAISO proposal

In January 2018, CAISO filed proposed tariff revisions related to its risk of retirement CPM.

CAISO said that the risk of retirement of resources needed for reliability remains a significant concern as the percentage of renewable resources in the overall resource portfolio increases, energy market prices decrease, and therefore the potential revenue available to cover the fixed costs of existing generation resources declines.

The ISO said that one of the most fundamental deficiencies of the existing risk of retirement CPM process is that, because resources do not submit their annual resource adequacy showings until the end of October, the CAISO is unable to announce a designation until mid-December for the upcoming year, which does not provide resource owners with sufficient lead time to make significant business decisions regarding expenditures required to permit a resource to continue operating or to make preparations for retirement.

Annual windows

To address this issue, CAISO proposed to implement two annual windows for resource owners to request a risk of retirement CPM designation. 

During the first window, which would occur between April and June, resource owners would be able to request risk of retirement CPM designations for the remainder of the current year (Type 1 designation) and/or for the upcoming year (Type 2 designation). 

During the second window, which would take place after the annual resource adequacy showings are submitted to CAISO at the end of October, resources could seek a risk of retirement CPM designation for the upcoming year (Type 3 designation). The ISO noted that the Type 3 request window corresponds to the current designation process, and the Types 1 and 2 designations would be a new feature intended to make risk of retirement CPM designations a more practicable option than the current process for resource owners.

CAISO believes that the proposed two-window process will improve its planning and allocation of resources and promote the orderly retirement of resources that do not receive risk of retirement CPM designations. Moreover, it believes the two-window process will help protect against over-procurement of CPM resources and unnecessary cost incurrence.

For all three types of designations, CAISO proposes to establish limited exceptions to the existing retirement attestation requirement to make it more practical and avoid unreasonably foreclosing legitimate business opportunities.  Specifically, the grid operator proposed to require the resource owner to attest that, unless the risk of retirement CPM designation is granted, the decision to retire is final unless (1) CPM or some other type of CAISO procurement of the resource occurs; (2) the resource is sold to a nonaffiliated entity; or (3) the resource enters into a resource adequacy contract for the remainder of the current resource adequacy compliance year.

CAISO also proposed to make it mandatory for a resource requesting a designation to accept the designation, unless it becomes a resource adequacy resource for the designation period. Risk of retirement CPM designations are currently voluntary.

Finally, the CAISO proposed to eliminate the current option for a resource to submit and be paid a market-based offer price up to the soft cap of $6.31 per kilowatt-month, and to retain the existing cost-based compensation methodology, under which resources are paid their annual fixed revenue requirement.

CPUC sees “gaming and front running” threat

The CPUC argued that the establishment of a spring application window will result in “gaming and front-running” of CPUC’s bilateral resource adequacy process and disputed the notion that any of CAISO’s proposed revisions would mitigate this effect.

The state commission also argued that cost-based compensation will interfere with the bilateral resource adequacy process because such compensation may be higher than market revenues, which could lead to gaming of the bilateral resource adequacy process by resource owners seeking to earn higher revenues than they otherwise would through a bilateral contract.

Pacific Gas & Electric similarly asserted that the proposed spring application window has the potential to distort the bilateral resource adequacy market.

Southern California Edison, the CAISO’s Department of Market Monitoring, Pacific Gas & Electric, Six Cities (Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside), San Diego Gas & Electric, and the CPUC, all assert that the cost-based compensation methodology is not just and reasonable because it provides for full fixed cost recovery in addition to the resource’s right to retain all market revenues. 

FERC rejects CAISO revisions

FERC said that while it finds that the issues raised by CAISO underscore the importance of a robust resource adequacy program to support reliability and bulk power system resilience, the ISO has failed to adequately show that its proposal addresses the front-running concerns raised by protestors and that the proposal will avoid potentially deleterious effects on the competitiveness of capacity procurement under the CPUC’s resource adequacy program.

“We find that protestors’ concerns regarding the potential for the spring request window to distort prices or otherwise interfere with the bilateral resource adequacy process have merit and are significant enough to render CAISO’s proposal unjust and unreasonable,” the Commission said in the order.

Because a resource that is at risk of retirement likely has costs greater than what the resource would earn in a competitive market, the resource-specific cost-based compensation offered by CAISO under the risk of retirement program is likely to exceed what a resource could earn under a bilateral resource adequacy contract, the federal agency said.

“Despite CAISO’s proposed revision to require a resource with a conditional Type 2 designation to make a reasonable effort to participate in all applicable resource adequacy competitive solicitations, we are concerned that this provision will not mitigate front-running concerns.”

FERC is concerned that the resource with a conditional Type 2 designation would likely offer, in the bilateral resource adequacy market, no less than the payment it expected to receive as CPM risk of retirement resource.  Therefore, in the absence of more comprehensive reform, “we find that any incremental improvement that may result from CAISO’s proposed revisions here are outweighed by the potential for deleterious effects on the competitiveness of capacity procurement under CPUC’s resource adequacy program.”

At the same time, the agency said it hasn’t concluded that a risk of retirement CPM designation can never precede the bilateral resource adequacy process because of the potential for frontrunning.  “Indeed, we recognize that the record contains some evidence that could suggest that certain resources could benefit from earlier notice of a potential risk of retirement CPM designation.”

FERC noted that CAISO has initiated a stakeholder process to holistically look at both the reliability-must-run and CPM programs. “This further indicates the need to coordinate reform of these programs rather than proposing incremental changes that only address a portion of the underlying challenges.”

FERC therefore encouraged the ISO to propose a package of more comprehensive reforms. “We expect that any such proposal will recognize the need to balance appropriate compensation for resources with the consideration of ratepayer concerns, as well as the need to strike a balance between CAISO’s backstop procurement authority and primary procurement of supply needed for resource adequacy purposes.”

The Commission encouraged the grid operator and stakeholders to make progress in the ongoing stakeholder process and to adopt a holistic, rather than piecemeal, approach. 

FERC thinks that this should include: (1) revisiting the issue of the adequacy of CPM and RMR compensation; (2) evaluating whether both risk of retirement CPM and RMR need to be retained as separate backstop mechanisms; (3) examining the timeline and eligibility requirements for issuing risk of retirement CPM designations and how those factors may impact bilateral resource adequacy procurement; and (4) evaluating measures that would trigger the review of its backstop procurement if it appears to be overused.

As noted by CAISO, the difference between RMR and risk of retirement CPM designations, is that the former is due to a reliability need for the current resource adequacy compliance year and the latter is due to a need for the following year.  In addition, RMR applies only for local reliability needs, and risk of retirement CPM is for broader reliability needs and can be used for local, system, or flexible capacity. 

The Commission directed CAISO to submit quarterly informational filings, starting on June 1, 2018, and every three months thereafter until the stakeholder process is completed. CAISO must report on the progress of the ongoing stakeholder process addressing RMR and risk of retirement CPM.