On November 18, 2022, FERC accepted a September 19, 2022 proposal from the California Independent System Operator (“CAISO”) to correct “excessively high” payments being made to electric storage resources that are forced to discharge to meet state of charge requirements when providing ancillary services. The proposal also aims to encourage those resources to reflect opportunity costs through their ancillary services bids rather than energy bids.

CAISO and its Department of Market Monitoring (“DMM”) discovered that some storage resources were receiving “large and unwarranted” bid cost recovery payments in excess of the Locational Marginal Price (“LMP”) when the resources paired regulation down awards, a type of ancillary service, with high energy bids. CAISO speculated that some storage resources may be reflecting opportunity costs (i.e., to avoid dispatch) in their energy bids rather than their ancillary service bids. CAISO suggested this resulted in high bid recovery payments when CAISO dispatched those resources to meet the state of charge requirement for providing ancillary services. To remedy the undue payments, CAISO proposed (1) to make electric storage resources ineligible for bid recovery payments during real-time intervals where the state of charge constraint applies; and (2) to emphasize the state of charge constraint by adding it to the CAISO Tariff, rather than just including it in a Business Practice Manual, which was CAISO’s prior practice.

FERC found CAISO’s proposal to be just and reasonable because ineligibility for bid recovery payments only occurs in a narrowly-defined circumstance that will “prevent future occurrences of the excessively high, unjustified . . . payments . . . identified by CAISO and DMM.” Further, FERC found the proposal consistent with the principles underlying bid cost recovery, which are intended to uplift resources when market revenues alone do not sufficiently cover certain operating costs. These, FERC proffered, are not costs electric storage resources generally experience. Finally, FERC found that the just and reasonable rate of compensation for forced discharge is the real-time LMP for the energy dispatched to ensure a storage resource can provide the ancillary service schedules awarded, and agreed with CAISO that storage resources can reflect the costs of charging and discharging in their regulation service bids. The new policy is effective as of September 20, 2022.

A full copy of the Order can be found here.