FERC Rejects CAISO Changes To Backstop Capacity Procurement, Due To Risk Of Skewing Bilateral Capacity Market Used By LSEs, Retail Suppliers

FERC has rejected the California ISO's proposed changes to its risk of retirement capacity procurement mechanism (CPM).

Under the proposed changes to the CPM, CAISO proposes to: (1) create two request windows, one in the spring and one in the fall, to allow resource owners more lead time to make decisions about retirement; (2) modify the attestation requirement to permit resources to pursue legitimate business opportunities instead of retirement; (3) make acceptance of the risk of retirement CPM designation mandatory for resources that request it; and (4) eliminate the market-based compensation methodology in favor of the existing cost-based methodology.

The California PUC protested the changes, arguing that the establishment of a spring application window will result in "gaming and front-running" of the CPUC’s bilateral resource adequacy process. The CPUC contended that cost-based compensation will interfere with the bilateral resource adequacy process because the cost-based compensation provided to risk of retirement CPM resources may be higher than market revenues, which could lead to gaming of the bilateral resource adequacy process by resource owners in order to earn higher revenues than otherwise available through a bilateral contract.

FERC generally agreed with these concerns and rejected CAISO's filing

"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. 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. 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. Specifically, we are 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," FERC said

"Therefore, without more comprehensive reform, as discussed below, 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," FERC said

FERC encouraged CAISO to adopt broader CPM and RMR reforms

"We do not conclude, however, that a risk of retirement CPM designation can never precede the bilateral resource adequacy process because of the potential for front-running. 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. For example, Calpine notes that critical operational and investment decisions must be made 6-12 months in advance of the year of potential retirement. We encourage CAISO to continue evaluating whether resource adequacy resources are receiving sufficient notice of their potential obligations, as discussed further below," FERC said

"Finally, we note that CAISO has initiated a stakeholder process to holistically examine both the RMR 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. We encourage CAISO to propose a package of more comprehensive reforms, as discussed below. 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," FERC said

"Given the importance of these issues, we strongly encourage CAISO and stakeholders to make progress in the ongoing stakeholder process and to adopt a holistic, rather than piecemeal, approach. We believe 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," FERC said

Docket No. ER18-641-000