In June 2018, CXA La Paloma, LLC (“La Paloma”) filed a complaint at the Federal Energy Regulatory Commission (FERC or “the Commission”) seeking to require the California Independent System Operator (CAISO) to implement a centralized capacity market to procure the electric generation capacity that is needed to reliably operate California’s electric grid. La Paloma argued that California’s existing resource adequacy process—which principally relies on bilateral contracting between load-serving entities (LSEs) and generators—has produced outcomes that are unjust, unreasonable and discriminatory. A coalition of other generators supported La Paloma’s complaint. The generators claimed, among other things, that California’s resource adequacy process fails to send accurate price signals needed to attract and retain resources needed for reliability, does not provide generators with a reasonable opportunity to recover their costs, and results in CAISO having to resort to out-of-market mechanisms to acquire capacity that is needed to operate its system. These arguments are not new, but have been raised, in one form or another, by numerous generators doing business in California for years.
On November 19, 2018, FERC denied the complaint in full—not only declining to mandate a centralized capacity market, but also declining to order any more granular reforms or even to study the issue further through a technical conference.
California’s Resource Adequacy Regime
Unlike the three Eastern organized electricity markets (PJM Interconnection, L.L.C.; ISO New England Inc.; and the New York Independent System Operator), CAISO does not use a centralized resource adequacy procurement process (e.g., a capacity auction) to ensure adequate system capacity and reliability. The reasons for this—and the complex nature of resource planning and capacity procurement in California—are rooted in California’s history and its status as a single-state wholesale market that is subject to both federal oversight by FERC (through CAISO) and state energy policies and initiatives.
CAISO and the California Public Utilities Commission (CPUC) address resource adequacy principally through bilateral, near-term contracting between LSEs and generators. In brief, LSEs are required to contract with generators for a “Resource Adequacy” (RA) capacity product. RA is intended to ensure that LSEs have sufficient capacity to meet their peak load plus a reserve margin. RA contracts obligate the generator owner to make the resource available for dispatch in the CAISO energy market.
For various reasons, the RA program has been viewed by many as flawed and has led to RA prices that are often too low to adequately compensate certain existing natural gas-fired generators needed by CAISO to run its system. Generators claim that state policies promoting the development of certain types of preferred generation resources, and a lack of alignment between resources that LSEs can use to meet RA requirements and those that CAISO actually needs to run its system, have increasingly resulted in LSEs not securing capacity commitments from specific generators that are needed by CAISO. These developments have affected existing natural gas-fired generators in particular since they rely on the RA market to compensate them for their capacity and, in many cases, are needed by CAISO to operate the grid reliably. Unlike newly built generators, existing generators are not eligible under state policy to be included in Investor-Owned Utilities’ Long-Term Procurement Plans (LTPPs), which effectively prevents them from obtaining substantially higher, longer-term capacity payments. This is because existing generators are already presumed to be available when assessing additional resource needs through the LTPP process. While such resources may be presumed to be available, in fact, insufficient RA revenues can jeopardize their continued operation. As a result, CAISO has increasingly needed to rely on “last-resort,” out-of-market mechanisms to secure capacity from generators that could not sell RA capacity at sufficient prices to sustain operations.
The Complaint Proceeding
On June 20, 2018, La Paloma, which owns a 1,124 MW natural gas generating facility in McKittrick, California, filed a complaint against CAISO alleging that CAISO’s tariff is unjust, unreasonable and unduly discriminatory as it relates to resource adequacy. Premised on the failure of the RA market to send accurate price signals that can attract and retain resources that are needed for reliability, La Paloma urged FERC, as a remedy, to implement a centralized resource adequacy procurement process like those used in the Eastern markets (i.e., a capacity market with centralized, uniform locational pricing and other key features).
While the complaint was filed by a single generator, it garnered broad support from other generators and proponents of competitive markets. On August 24, 2018, the Electric Power Supply Association, a trade association representing independent power producers, filed comments supporting the complaint and the implementation of a centralized capacity market. The Western Power Trading Forum also filed comments supporting the complaint. Calpine, a major independent power producer, filed comments supporting La Paloma’s claim that the CAISO tariff is unjust and unreasonable as it relates to resource adequacy, but proposed, as a remedy, comprehensive reform of CAISO’s backstop capacity procurement mechanisms, which it viewed as more realistic than a centralized capacity market given the nature of the California market. CAISO, along with various LSEs and public interest groups, opposed the complaint.
FERC’s November 19, 2018 Order
In its November 19 order, FERC denied La Paloma’s complaint in full. FERC’s basis for denying the complaint was technical: that La Paloma failed to identify any specific provisions of CAISO’s FERC-approved tariff that were not just and reasonable as is required in a complaint under Section 206 of the Federal Power Act. FERC found that CAISO’s resource adequacy processes were crafted to respect the role of state and local regulatory authorities over resource procurement. FERC found that La Paloma failed to demonstrate that circumstances surrounding the bifurcated framework and division of responsibilities over resource adequacy in California had changed such that this division of responsibilities was unjust and unreasonable or that it has resulted in CAISO not being able to ensure sufficient capacity to operate the grid reliably. FERC rejected La Paloma’s arguments regarding the insufficiency of revenues in the CAISO market, finding that La Paloma did not demonstrate that existing generators are systematically denied the opportunity to recover their costs or that revenue insufficiency will lead to the premature retirement of needed resources.
FERC also noted that La Paloma did not identify any reliability violations resulting from alleged inadequacies of CAISO’s resource adequacy paradigm and found that evidence of CAISO’s increased use of backstop capacity procurement mechanisms does not demonstrate a reliability concern or failure of the resource adequacy paradigm to attract and retain flexible capacity. In addition, FERC found that La Paloma’s claim that California’s LTPP program unduly preferences renewable resources and discriminates against existing generation was not legally cognizable because it focused on state-administered programs and not CAISO’s tariff. Finally, FERC rejected requests by various generators to convene a technical conference on the issue of resource adequacy in California, finding that potential resource adequacy reforms were being appropriately considered through the CAISO stakeholder process and CPUC proceedings.
Implications
Complaints about California’s wholesale electricity market and capacity procurement process are nothing new. Historically, FERC has been reluctant to take action that could be viewed as interfering with the state’s energy policy objectives and resource planning process, instead relying on market changes to be considered through CAISO stakeholder processes and CPUC proceedings. In its complaint, La Paloma sought to place the alleged flaws in California’s capacity procurement process squarely before FERC to resolve. La Paloma (and other generators) may have hoped that a newly constituted FERC might be more willing than prior Commissions to consider such grievances, particularly given the Commission’s focus, in other contexts, on resource adequacy from a grid reliability and resiliency standpoint, and the impact of state policies on wholesale markets.
FERC’s actions in denying the complaint outright suggest that its overall approach to regulation of the California market as it relates to resource adequacy issues might not differ much from prior Commissions. For various reasons, many thought it unlikely that FERC would attempt to mandate a centralized capacity market in California; FERC’s rejection of that request was perhaps the least notable part of its order. Rather, the manner in which FERC denied the complaint was significant. In particular, by denying generators’ request for a technical conference (which would not bind FERC into taking any action or initiating any proceedings) and endorsing stakeholder processes and state regulatory proceedings as the appropriate forums to consider reforms, FERC appears to be signaling that it will continue to take a deferential approach to California resource adequacy issues. Further, the substance, tone and outcome of the order, considered together, suggest that FERC is not concerned about what many consider to be a problem of current regulatory policies failing to send the right market signals to spur needed competitive generation in California, which could have longer-term, negative impacts on grid reliability and energy prices.
