FERC (Again) Usurping States' Rights in Addressing Generation Capacity

Just as it has done in the Northeast, FERC is setting up the California market for FERC's preferred resource adequacy construct, ordering a technical conference to "collectively" pursue solutions to "reliability," but in reality meaning generation adequacy.

FERC's direction came in an order rejecting the California ISO's proposed flexible capacity and local reliability resource retention (FLRR) mechanism, which would have offered financial support to discrete resources that are uneconomic or at risk of retirement, but are determined to be needed for flexible capacity and local reliability in the next two-to-five year forward period.

FERC rejected the FLRR mechanism because, among other reasons, FERC said that CAISO failed to, "explain how, without more comprehensive market reforms, sufficient compensation opportunities will arise for FLRR-designated resources to continue operating without additional years of FLRR payments." (emphasis added)

However, rather than limit its action to the proposal before it, FERC has created a narrative that California is facing imminent reliability changes, which compels a FERC solution.

"Because of the sense of urgency and the magnitude of our order today and, in order to facilitate the expeditious resolution of the underlying reliability issues presented in this proceeding, the Commission directs staff to convene a technical conference with California stakeholders. The Commission is cognizant of and appreciates the efforts made by CPUC, CAISO, and market participants on this front. It is not our intention to disrupt or discourage those efforts. However, the Commission has a statutory duty to ensure reliability, and the FLRR filing directly raises this issue for the Commission and highlights an impending need for more flexible resources in California in the upcoming years. Thus, we direct staff to convene a technical conference to collectively pursue solutions to the reliability challenges presented in this proceeding," FERC said.

"[A] well-designed, market-based tool that produces forward price signals for flexible capacity and local reliability resources may be a more effective method for ensuring that an appropriate mix of resources are procured," FERC said (emphasis added).

FERC's language and approach is strikingly similar to its findings in PJM and ISO New England when it compelled the RTOs into forward, centralized capacity market structures. In those markets, as in California, FERC rejected discrete backstop payments (reliability must-run contracts) as not just and reasonable because they were out-of-market payments, and they did not signal a future need for new capacity. Of course, FERC's adopted solution for mandating capacity payments from load to all cleared capacity would be just as out-of-market as RMR contracts but for FERC creating a "market" for capacity.

Moreover, FERC's claims that California market "reforms" are needed to signal new investment should be viewed skeptically, given the same thing was said about the need for PJM's Reliability Pricing Model when first filed at FERC. In reality, 90% of capacity payments in PJM have gone to existing resources, which would have been cheaper to maintain if only discrete units needed for reliability had been given "out-of-market" payments, rather than providing all cleared capacity an out-of-market subsidy.

Docket ER13-550