On March 14, 2014, FERC issued two related orders on fuel cost recovery in the California Independent System Operator Corporation’s (“CAISO”) markets.  In the first order, FERC granted the CAISO’s petition for a limited tariff waiver allowing generators to recover increased natural gas costs.  The second order rejected a competing proposal from California generators.

On March 4, 2014, a group of generators who supply energy in the CAISO markets submitted an Emergency Request for Temporary Waiver, asking that FERC waive certain provisions of the CAISO tariff in order to allow generators to recoup fuel costs that they incur when natural gas prices spike.  Two days later, on March 6, 2014, CAISO submitted to FERC its own request for a waiver seeking to address the same issue.  In a March 14, 2014 order, FERC denied the generators’ petition for failing to identify specific problematic provisions of the tariff.  FERC also found that the generators’ request was too expansive in scope, effectively seeking a broad waiver of the CAISO tariff that would incorporate “significant changes to the CAISO current market rules.”  Although it denied generators’ waiver request, FERC concurrently issued an order granting CAISO’s separate request for a waiver of two provisions of its tariff for a limited duration of time.

At issue are supply bids submitted to CAISO by generators in the day-ahead market.  These bids are partly based on each unit’s startup and minimum load costs and calculated using either a proxy cost or a registered cost methodology.  According to the generators and CAISO, these approaches fail to accurately capture the cost of natural gas when the natural gas market experiences significant volatility.  As a result, explained the generators, “the CAISO’s dispatch algorithm will see the generator electing proxy cost for its start-up and minimum load costs as having fuel costs significantly below its actual costs, and will commit the generator’s units at minimum load based on this inaccurate cost profile.”

Generators had argued for their own tariff waiver on the grounds that CAISO’s more limited proposal would not adequately address the problems related to natural gas price volatility.  They argued that the anticipated CAISO proposal would reduce the errors within the methodologies, but would not eliminate them.  The generators also expressed concern that the CAISO proposal would not assist with making generators whole in instances when they acquire natural gas after being committed and are then de-committed.  In approving the CAISO petition, FERC concluded that the CAISO’s proposed waiver would serve to address a concrete problem in a limited manner and noted that CAISO will be commencing a stakeholder process to develop a long-term solution going forward.  The CAISO proposal will waive tariff sections (Calculation of Natural Gas Price) and (Registered Cost Option) for the purpose of settling transactions until April 30, 2014.  CAISO states that when natural gas prices for a specific trading day exceed 150 percent of the gas price calculated pursuant to CAISO’s tariff, the limited wavier will allow CAISO to use updated natural gas price data for settlement purposes.

FERC previously granted two requests addressing similar issues in other parts of the country.  On January 31, 2014, FERC granted the New York Independent System Operator’s request for a waiver of a $1,000/MWh offer supply cap that prevented generators from recovering their costs when natural gas prices spiked due to extreme weather.  On February 11, 2014, FERC granted a similar bid-cap waiver requested by the PJM Interconnection, L.L.C.

To view FERC’s Order Denying Generators’ request, click here.  To view FERC’s Order Granting CAISO’s waiver, click here.