On Rehearing, FERC Allocates Must-Offer Generation Costs To Retail Suppliers, Rather Than Single LSE

FERC has granted rehearing of a prior order concerning the allocation of must-offer generation commitment costs in the California ISO, and in doing so, allocated the costs to a broader group of LSEs (which includes retail suppliers), rather than a single LSE.

The origins of this proceeding date back more than a decade to CAISO’s May 2004 filing of Amendment No. 60, which proposed, among other changes, to allocate must-offer generation commitment costs using a "bucket" rate design

Most of the costs (almost $100 million) at issue here relate to the South of Lugo path and whether it was considered a local or zonal constraint.

Costs related to the constraint were initially assigned on a local basis, to only a single LSE, Southern California Edison.

The constraint was later classified as zonal, which would allocate costs to additional LSEs.

However, FERC in 2016 rejected a refund report from CAISO which would have resettled prior must-offer generation costs related to South of Lugo, and which would have allocated the costs on a zonal basis to new LSEs (via a surcharge) to provide a refund to SCE

Now, however, FERC on rehearing has reversed its prior finding with respect to refunds. FERC now finds that it was appropriate for CAISO to administer market resettlements, with surcharges on a broader group of LSEs, due to the change to zonal allocation.

Citing recent court precedent, FERC said that, "Upon further consideration of the relevant case law and recent Commission precedent, we reverse our prior rejection of the Refund Report and find that it was appropriate for CAISO to administer market resettlements as a result of the Commission’s final orders on Amendment No. 60. Having weighed the equities, we find that CAISO reasonably determined that it would be fundamentally unfair for a single load-serving entity (LSE) to bear full responsibility for costs that should have been allocated zonally, and that, as a not-for-profit entity, CAISO has authority to collect such refunds from the parties that should have paid if the just and reasonable methodology had been in effect from the start."

FERC granted requests for rehearing from CAISO, PG&E and SCE and accepted the prior refund report. FERC also denied a complaint from retail supplier parties that had sought to stop CAISO's use of surcharges on other LSEs to pay for the refunds.

"Permitting one LSE to bear significant must-offer costs under a cost allocation that was later determined to be unjust and unreasonable, while permitting other LSEs to escape cost responsibility that they would have incurred under the just and reasonable allocation, comports with neither cost causation nor general principles of equity," FERC said

The Alliance for Retail Energy Markets and Shell Energy North America (US), L.P. had called the resettlement implicated by the refund report, which has now been approved by FERC, as amounting to, "unlawful retroactive rate increases/surcharges."

Docket No. ER04-835-010, et al.