United States: FERC Approves CAISO's Resource Adequacy Revisions

On October 1, 2015, FERC issued an order approving the California Independent System Operator's ("CAISO") revisions to its capacity procurement mechanism ("CPM") to, among other things, implement a competitive solicitation process to procure backstop capacity. In the order, FERC found that (1) compensating CPM capacity based on a competitive solicitation process will result in compensation driven by competitive factors and (2) the use of a soft cap and 20 percent adder to compensate resources will provide them with enough revenue for system upgrades and improvements.

On March 17, 2011, FERC conditionally accepted and suspended CAISO's proposed CPM compensation methodology ("March 2011 CPM Order"). The CPM is a voluntary backstop mechanism that permits CAISO to procure capacity to address a deficiency or supplement resource adequacy to maintain grid reliability. To compensate resources providing this backstop capacity, CAISO initially proposed an administratively-set price of $55/kW-year plus a 10 percent adder. In the March 2011 CPM Order, FERC rejected CAISO's proposal and directed staff to convene a technical conference to ensure that non-resource adequacy resources received appropriate compensation. Subsequently, on December 23, 2011, CAISO filed an Offer of Settlement , which proposed a revised CPM capacity price of $67.50/kW-year for the first two years and $70.88/kW-year for the remaining two years. On February 16, 2012, FERC approved that settlement, which expires February 16, 2016.

On May 26, 2015, CAISO filed tariff revisions and an Offer of Settlement to amend its CPM tariff authority. In the filing, CAISO proposed, among other things, to revise its process for selecting capacity to receive CPM designations by implementing a competitive solicitation process. Rather than compensate designated resources using an administratively set price, CAISO proposed to pay designated resources their bid price. Specifically, CAISO proposed to compensate CPM capacity based on a unit's as-bid price up to a soft offer cap of $6.31/kW-month, plus a 20 percent adder. CAISO explained that it proposed to implement the soft offer cap to mitigate market power in case there was a limited pool of non-resource adequacy resources to meet a reliability need. Finally, CAISO stated that its revised CPM process is open to all non-resource adequacy, reliability must-run, and CPM resources.

In approving the revisions and Offer of Settlement, FERC found that compensating CPM capacity based on a competitive solicitation process will result in compensation driven by competitive factors. Accordingly, FERC found that the competitive solicitation process will reflect both changing market conditions and fluctuating prices in capacity. Furthermore, FERC found that the soft offer cap plus a 20 percent adder should allow sufficient recovery to facilitate incremental upgrades and improvements by resources. FERC also noted that, under CAISO's proposal, resources can cost-justify a higher rate than the soft offer cap by making a filing with FERC. Thus, FERC found that CAISO's filing should facilitate adequate cost recovery. Finally, FERC concluded that CAISO's competitive solicitation process would help ensure that each resource providing backstop capacity receives adequate revenue to maintain reliable operations and is, therefore, just and reasonable.

NRG Power Marketing LLC ("NRG") filed a protest arguing that non-resource adequacy resources dispatched by CAISO to meet a minimum online commitment constraint should receive CPM designation. NRG also proposed that CAISO conduct a reliability assessment when it dispatches a non-resource adequacy unit to determine whether it relied on that unit's capacity to meet system reliability needs. NRG further proposed that, if the assessment shows that CAISO did rely on that unit's capacity for reliability, CAISO should provide that resource with CPM designation and compensate the resource accordingly. FERC declined to address whether non-contract capacity used to meet a minimum online constrainst should receive a CPM designation, stating that the issue was outside the scope of CAISO's filing. Furthermore, FERC found that NRG's proposal was not necessary to make CAISO's proposal just and reasonable.

CAISO's revised CPM tariff provisions have an effective date of January 16, 2016 so that CAISO can conduct competitive solicitations in advance of the March 2016 resource adequacy month and begin administering the CPM process on March 1, 2016.

A copy of the order is available here.

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