On May 29, 2020, FERC accepted the California Independent System Operator Corporation’s (“CAISO”) proposed update to its capacity procurement mechanism (“CPM”) compensation for offers above the soft offer cap, where a participating resource will be compensated at the resource’s going-forward fixed costs plus a 20 percent adder. The new CPM compensation formula will go into effect June 1, 2020. Commissioner Richard Glick dissented, stating that while he agreed that CPM compensation should be determined by a resource’s going-forward fixed costs, CAISO had failed to show that the 20 percent adder was just and reasonable.

CAISO and the local regulatory authorities within its balancing authority area (“BAA”) jointly administer California’s resource adequacy program in order ensure that load serving entities within the BAA have sufficient capacity to meet their peak load. In order to remedy unresolved resource adequacy deficiencies or to meet specified reliability needs, CAISO also relies on backstop capacity procurement authority, in the form of the CPM. Under the CPM, resource owners may voluntarily submit bids in a competitive solicitation process to designate their resources as CPM resources. There are two compensation options for CPM resources: (i) the resource can receive compensation equal to its capacity bid price, provided the bid was below the “soft offer cap,” or (ii) the resource can receive compensation above the soft offer cap, provided that it justifies the amount in a FERC filing, per a formula. Under the formula, a resource’s compensation would be determined by looking to the resource’s annual cost of service, including a return on and of capital. Additionally, under either option, the resource would be able to retain the market revenues it earns during the period of its designation as a CPM resource.

On February 25, 2020, CAISO submitted tariff revisions to update the CPM formula. CAISO proposed to replace the existing CPM formula with one that calculates compensation based on a resource’s going-forward fixed cost (i.e. fixed operations and maintenance costs, ad valorem taxes, and insurance costs) plus a 20 percent adder. This was CAISO’s preferred formula. CAISO also offered an alternative formula, should FERC reject its preferred formula, where compensation would be calculated based on a resource’s going-forward fixed cost but without the 20 percent adder.

FERC accepted CAISO’s preferred formula, finding that the new formula based on a resource’s going-forward fixed costs plus a 20 percent adder would allow resources to recover fixed costs plus a return on capital. FERC found that the 20 percent adder is consistent with its precedent on CPM compensation and also would facilitate incremental upgrades and improvements by the resources.  FERC disagreed with certain commenters who argued that CAISO’s proposal would weaken the incentives for resource adequacy contracting, finding that the soft offer cap represents the high end of the range of resource adequacy prices, so there would be no incentive for load bearing entities to forgo entering bilateral resource adequacy contracts.

In his dissent, Commissioner Glick argued that CAISO had not shown why the 20 percent adder was appropriate, considering that CPM resources would already receive their going-forward costs while also retaining all market revenues earned during their period of CPM designation. Commissioner Glick stated that the 20 percent adder is merely a windfall for high-cost generators. Instead, Commissioner Glick stated that he believed that CAISO’s alternative formula, without the 20 percent adder, was just and reasonable.

FERC’s order is available here.