On June 5, 2013, FERC issued an order conditionally granting the California Independent System Operator Corporation’s (“CAISO”) petition for declaratory order, allowing CAISO to force certain power sellers, including JP Morgan Ventures Energy Corp. (“JP Morgan”), to reimburse CAISO electricity distributers for overpayments caused by a flaw in CAISO’s bid cost recovery calculation.  In the order, FERC approved CAISO’s resettlements spanning from the date that CAISO had first implemented its flawed bid cost recovery mechanism, April 1, 2009, until the effective date of the tariff revision which addressed the calculation’s defect, March 25, 2011.  The resettlement amount for the entire period is expected to total $52 million in reimbursement costs.

CAISO’s tariff provides for a bid cost recovery mechanism in order to ensure that where CAISO commits a resource, that resource will at least recover its fixed start-up and minimum load costs. Where a resource’s energy market revenues are insufficient to cover those costs, the bid cost recovery mechanism provides resources with a make-whole payment. CAISO had developed and implemented a formula through a business practice to calculate this make-whole payment.  Subsequently, in 2011, CAISO discovered the formula contained a flaw, exacerbated by certain bidding practices, which caused load to overpay certain resources.  CAISO then filed tariff revisions with FERC to correct the methodology going forward, and set to recalculating the prior bid cost recovery payments as corrected by the new bid cost recovery mechanism formulation.

CAISO has completed resettlements for bid cost recovery payments from August 1, 2010 through March 25, 2011, totaling $35.3 million.  CAISO anticipated that the additional resettlements for bid cost recovery payments from April 1, 2009 to July 31, 2010 would total approximately $16.7 million.  In its petition, CAISO requested that FERC approve both the completed and the anticipated resettlements.  JP Morgan protested the request, arguing both that CAISO’s resettlement process was procedurally faulty and that, contrary to CAISO’s assertions, the disputed business practice as it existed initially did not conflict with CAISO’s tariff and therefore resettlements to address a formula that was not flawed are inappropriate.

FERC agreed with CAISO that resettlements are necessary to give effect to CAISO’s filed rate, finding that “the resettlements lead to an equitable result that provides for full recovery by resources of their bid costs.”  FERC therefore granted CAISO’s request for declaratory order, approving both the completed and the anticipated settlements, conditioned on CAISO filing a report with FERC detailing the calculations of the resettlements. FERC dismissed JP Morgan’s arguments, explaining that CAISO’s resettlement process, while imperfect, did not affect the due process rights of parties, and dismissing JP Morgan’s arguments related to the substance of the business practice’s formula as without merit.

To read the order in full, click here.