Commissioner Richard Glick Statement
May 29, 2020
Docket No. ER20-1075-000
Dissent Regarding California Independent System Operator Corporation (CAISO)
The California Independent System Operator (CAISO) has filed two options to reform how it compensates certain resources selected through its capacity procurement mechanism (CPM). Both options address the compensation for resources that seek to bid their capacity above a so-called “soft offer cap.” Resources that bid above that soft offer cap must justify their bid based on their costs; resources that bid below the soft offer cap need not.[1] CAISO’s first option permits resources to submit a bid above the soft offer cap up to a level that reflects their going-forward fixed costs[2] plus an adder equal to 20 percent of those going-forward costs. The second option permits resources to submit a bid that reflects the same costs, but without the 20 percent adder. Under either option, a resource that is selected through the CPM receives its bid price and also retains the market revenues it earns during the period of its CPM designation.[3]
Today’s order accepts the first option. I dissent from that determination because CAISO has not shown that it is just and reasonable to allow CPM resources to receive an additional 20 percent adder on top of a resource’s full going-forward costs and all market revenues. I do, however, believe that CAISO has shown that its second option, without the 20 percent adder, is just and reasonable.
As an initial matter, I recognize that either of CAISO’s two options is likely an improvement over the status quo, which allows a resource to bid above the soft offer cap up to its full annual cost of service, including a return on and of capital, and retain all market revenues.[4] But section 205 of the Federal Power Act[5] requires a public utility to show that a proposed revision is just and reasonable, not just that it is a step in the right direction. Accordingly, the fact that both of CAISO’s proposed options are improvements over the existing tariff does not relieve the Commission of its responsibility to determine whether those options are, in themselves, just and reasonable.
CAISO has failed to demonstrate that the first option, with the 20 percent adder, is just and reasonable. As CAISO’s Department of Market Monitoring (DMM) succinctly put it, the “filing does not include any explanation or analysis of how or why a 20% adder is an appropriate level relative to potential costs of ‘long term maintenance’ and ‘environmental upgrades’ that would not be recovered under the rest of the CPM payment for going-forward fixed costs plus the unit’s net market revenues.”[6] Without such evidence, there is nothing in the record to support the Commission’s finding that it is just and reasonable to allow resources that bid above the soft offer cap to recover 120 percent of the short-term fixed costs.[7]
The 20 percent adder is particularly troubling because, as noted, CPM resources retain all market revenues earned during the period of their CPM designation. Neither CAISO’s filing nor today’s order explains why we should presume that those market revenues are insufficient to cover a CPM resource’s long-term investments or why an additional 20 percent of going-forward costs is appropriate on top of those revenues. Especially given the evidence of market power in the CPM process,[8] the Commission ought to provide some reason to believe that the 20 percent adder will be anything other than a windfall for high-cost generators before finding it just and reasonable.
Instead of pointing to any such evidence, both CAISO and the Commission rely on the Commission’s acceptance of a 20 percent adder in establishing the current soft offer cap.[9] But that soft offer cap is based on the going-forward costs of a generic reference resource, not the going-forward costs of any particular resource. It is one thing to apply a percentage adder to the costs of a generic resource to ensure that the resulting offer cap covers comparable resources’ going-forward costs. After all, a reference resource is supposed to be a representative estimate and will never perfectly reflect the costs of any single real-world resource. But, under either of CAISO’s two proposed options, a potential CPM resource bidding above the soft offer cap gets to recover its actual going-forward fixed costs,[10] eliminating that concern and ensuring that the resource will be able to use whatever it makes in the market to finance any necessary long-term investments. Accordingly, the fact that the Commission used a 20 percent adder when calculating the soft offer cap does not indicate that it is necessarily just and reasonable to apply the same adder on top of an individual resource’s actual going-forward costs when calculating that resource’s maximum bid.
To be clear, my position is not that any adder or other form of compensation on top of a resource’s going-forward fixed costs and market revenues is categorically unjust and unreasonable. As DMM notes, it is conceivable that a resource could require additional revenue to cover its long-term costs and, if so, CAISO may want to consider ways for individual resources to recover those particular costs.[11] But the record before us does not provide any reason to believe that it would be just and unreasonable to provide every resource offering above the soft offer cap an additional 20 percent of its going-forward costs.
CAISO’s second option does not provide a 20 percent adder and, therefore, does not present the concerns discussed above. In essence, that option requires resources to use their market revenues to cover long-term investments. Absent evidence suggesting that such revenue is insufficient to cover a resource’s long-term costs—evidence which this record lacks—that approach more appropriately balances customer and generator interests and is, in my view, just and reasonable.
For these reasons, I respectfully dissent.
[1] Cal. Indep. Sys. Operator Corp., 171 FERC ¶ 61,172, at P 3 (2020) (Order).
[2] Those costs are a resource’s “(1) fixed operations and maintenance costs; (2) ad valorem taxes; and (3) insurance costs.” Id. P 7.
[3] Id. P 12.
[4] See id. P 3.
[5] 16 U.S.C. § 824d (2018).
[6] DMM Comments at 6.
[7] Emera Maine v. FERC, 854 F.3d 9, 27-28 (D.C. Cir. 2017) (explaining that the Commission had not met its burden to show that a rate was just and reasonable where it failed to point to any evidence indicating that the particular number set was, in fact, just and reasonable).
[8] See DMM Comments at 14-18 (discussing the “numerous indications that the CPM process has not been competitive on either a local or system basis”).
[9] Order, 171 FERC ¶ 61,172 at P 36; CAISO Transmittal at 16, 19.
[10] See, e.g., Pacific Gas & Electric Comments at 16-17 (explaining that CAISO’s proposed CPM “compensation formula is unit-specific and therefore would be guaranteed to cover the unit’s going-forward fixed costs”).
[11] DMM Comments at 3-4 (suggesting that “instead of employing a one size fits all 20% adder[, . . .] CAISO could allow a resource seeking compensation above the CPM soft offer cap to demonstrate any actual going forward costs needed for ‘long term maintenance’ and ‘environmental upgrades’ that would not be covered under the categories of going forward fixed costs that are recoverable under current CPM tariff provisions” and receive compensation sufficient to cover those specific upgrades).