FERC Rejects Electric Generators’ Request to Adopt Centralized Capacity Market in California
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.