On March 29, 2013, the Commission rejected a proposal by the California Independent System Operator Corporation (“CAISO”) that would provide financial assistance to resources that are either at risk for retirement or are uneconomic, but are still needed for flexible capacity and local reliability (“FLRR mechanism”). Instead, the Commission encouraged CAISO and its stakeholders to develop a market-based mechanism that offers incentives for resources that address adequacy and operational needs in CAISO. The Commission further ordered FERC staff to convene a technical conference with CAISO, the California Public Utilities Commission (“CPUC”), and industry participants within 120 days of its order to identify new solutions.
CAISO stated in its filing that it is facing resource adequacy and reliability concerns due a variety of factors, including the influx of variable energy resources, distributed generation, and potential retirement of “once-through-cooling” resources. As a result, CAISO anticipates a shortage of 3,500 MW of capacity could occur as early as the end of 2017, increasing to a shortage of 4,600 MW of capacity by 2020. CAISO’s proposed FLRR mechanism would identify and provide financial compensation to resources that are at risk of retirement during the present year, but are needed for flexible capacity or local reliability needs in the next two to five years. CAISO proposed to conduct a system flexibility study each spring to give load serving entities information for procurement of resources. Under CAISO’s proposal, resource owners could then request FLRR designation from CAISO based on information demonstrating that they are uneconomic to operate. According to CAISO’s filing, an independent evaluator would then examine whether the resource would be uneconomic. If approved by CAISO’s Board of Governors, an FLRR resource would be compensated for going forward costs, less (1) all bilateral capacity contracts and capacity procurement revenues received and (2) 90 percent of net energy and ancillary services revenue earned in CAISO’s markets. In its filing, CAISO characterized the FLRR mechanism as an “interim measure.”
The Commission rejected CAISO’s FLRR mechanism, finding that CAISO did not demonstrate the effectiveness of the proposal or whether it would result in just and reasonable rates. The Commission further found that there was insufficient evidence in the record that the FLRR mechanism would ensure long-term reliability. The Commission also expressed concern that the FLRR mechanism would undermine the need for forward price signals for flexible capacity. Ultimately, the Commission found that CAISO’s FLRR proposal was “an ineffective out-of-market solution” providing payments to uneconomic resources that “have not been shown to be needed for reliability purposes” based on potentially changing demand and generation forecasts.
While the Commission rejected CAISO’s proposal, the Commission recognized the underlying reliability issues presented by CAISO and directed FERC staff to hold a technical conference with the CPUC, CAISO, and industry participants to examine possible solutions. The Commission discouraged further efforts by CAISO to change the FLRR mechanism, directing CAISO to focus on a market-based mechanism instead.
Commissioner Norris dissented in part from the Commission’s order, agreeing with the majority regarding why the FLRR proposal is “unworkable,” but stated he would “give California another crack at a solution before moving this into FERC’s court.”
A copy of the Commission’s order is available here.