On April 22, 2022, the Commission on remand from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), reversed its approval of the California Independent System Operator Corporation’s (“CAISO”) proposed Capacity Market Adder (“20% adder”). The Commission ordered CAISO to submit a compliance filing that removes the 20% adder from its Open Access Transmission Tariff (“OATT”) and replace it with an alternative methodology that excludes the 20% adder.

In February 2020, CAISO filed OATT revisions, which included two alternative, mutually exclusive proposals for pricing the Capacity Procurement Mechanism (“CPM”) soft-offer cap. CAISO requested that the Commission first consider its preferred proposal. Under that proposal, when a resource submits an offer above the CPM soft-offer cap, it would file with the Commission to support its price included in that offer based on the resource’s going forward fixed costs, plus 20% of the foregoing amounts. In the alternative, CAISO proposed that when a resource submits an offer above the CPM soft-offer cap, it would be required to file with the Commission to justify the price included in its offer based on the resource’s going forward fixed cost but would not include the 20% adder. In May 2020, the Commission accepted CAISO’s 20% adder proposal, finding that it was consistent with Commission precedent on CPM compensation.

The California Public Utilities Commission (“CPUC”) sought rehearing of the May 2020 Order, which was denied by operation of law. CPUC appealed the decision to the D.C. Circuit, which found that the Commission’s reliance on the 2015 CPM Order was not the product of reasoned decision-making. Specifically, the D.C. Circuit found that the Commission did not consider the distinction between bids submitted below the soft-offer cap, which were the subject of the 2015 CPM order, and bids above the soft-offer cap. The D.C. Circuit held that the Commission erred by relying on precedent “without recognition of the substantial difference between the two cases,” and found that the record did not contain any evidence or findings to support the Commission’s decision to accept the 20% adder. Thus, the D.C. Circuit vacated the May 2020 Order and remanded the case to the Commission.

On remand, the Commission reversed its original acceptance of the 20% adder and accepted CAISO’s alternative proposal. The Commission’s order explained that it considered resource-specific compensation for a resource with going forward costs above the soft-offer cap. The Commission found that there was no evidence in the record regarding the actual cost of recovery needs of specific resources with going forward costs above the soft-offer cap that would show that an adder is warranted. Moreover, the Commission reviewed the record to determine whether the 20% adder was appropriate. The Commission found that there was no evidence in the record showing why 20% was the proper adder or why it was justified. Thus, the Commission found that CAISO did not meet its burden demonstrating that 20% was just and reasonable.

In reviewing CAISO’s alternative proposal, which was not originally addressed in the May 2020 Order, the Commission found that CAISO met its burden of demonstrating that its compensation method was just and reasonable. Specifically, it found that the alternative proposal was consistent with the Commission’s precedent showing that compensation for voluntary backstop procurement mechanisms should support recovery of a resource’s going-forward costs. The Commission directed CAISO to submit a compliance filing within 30 days that removes the 20% adder methodology and replace it with the alternative proposal.

The order on remand can be found here.