On January 25, 2012, the California Independent System Operator Corporation (“California ISO”) filed a petition with FERC to waive section 43.2.6(3) of their tariff to permit the CAISO to issue a Capacity Procurement Mechanism (“CPM”) designation related to a Calpine Corporation (“Calpine”)  facility.  California ISO seeks to prevent the May 2012 retirement of Calpine’s Sutter Energy Center (“Sutter”), an air-cooled, combined cycle, 525 MW facility. In November 2011, Calpine sought approval from the California ISO to retire the facility.

Under the California ISO tariff, CPM designations are used by the ISO to provide capacity payments for plants not under bi-lateral contracts whose capacity is needed for reliability due to a projected capacity shortfall by the end of the calendar year following the current resource adequacy compliance year.  The payments to Sutter are estimated to be 17.4 million for the six months – June to December 2012.

The problem faced by the California ISO is that 12,079 MW of existing generation is expected to retire due to environmental regulations requiring the use of once-through cooling at coastal plants.  California ISO projects that this will create a capacity shortfall of 3,500 MW as early as 2017 (even taking into account capacity additions of mostly variable, renewable resources).  The California ISO is concerned that if Sutter retires now it will be difficult to re-permit the facility — if needed — at a subsequent date in the future.

Thus, the California ISO seeks waiver of the “calendar year following the current year” requirement so that it may make capacity payments to Sutter in order to “buy time” and keep the unit operational.  The California ISO proposes to use the CPM designation to keep the Sutter unit from retiring during 2012.  The filing does not address what will happen during the 2013-2017 period.  To address this issue, the California ISO expects to file a risk-of-retirement tariff amendment.  The latter would remunerate generators for mothball costs during the unit’s mothball period.  Moreover, the CPUC has issued a draft resolution that if adopted orders PG&E, SCE, and SDG&E to enter into a contract with the Sutter Plant by the end of 2012.  Importantly, Sutter does not qualify as a “reliability must run” unit as it does not address local reliability needs.  Accordingly, the California ISO is looking for creative ways to keep the plant open.

A copy of the California ISO petition is available here.