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Stakeholders: California ISO backstop procurement plan still needs major fixes

Key stakeholders are calling on the Federal Energy Regulatory Commission to require changes to the California ISO's proposal to overhaul its backstop procurement tools, with some saying the plan falls well short of the holistic approach FERC wanted.

The plan is linked to the shifting resource mix in the Golden State. The growth of renewables has decreased energy market revenues and put financial stress on conventional resources, spurring CAISO to rely more on its backstop procurement tools to keep certain resources running.

CAISO submitted a proposal in April to revise its reliability must-run, or RMR, program and capacity procurement mechanism, or CPM. The plan would put all backstop procurement aimed at addressing plant retirements under the RMR program while eliminating a retirement provision in the CPM.

Other changes to RMR include using a single cost-of-service compensation structure for all RMR contracts, imposing a must-offer obligation and availability requirements on RMR resources, and updating the rate of return for RMR resources.

CPM resources are paid based on their bids into a competitive solicitation process, and offers are capped unless a resource can prove to FERC that its costs exceed the cap, the proposal said. CAISO had planned to limit CPM compensation above the soft-offer cap but now plans to address that issue in a separate filing.

More changes sought

Rather than taking a holistic approach to fixing backstop procurement, the proposal simply seeks to repurpose and expand the use of its RMR contract without addressing concerns that RMR contracts undermine the bilateral resource adequacy market, NRG Power Marketing LLC said. It urged FERC to reject the proposal and wait for the state to make more comprehensive changes to the resource adequacy program.

Southern California Edison Co. said using a single RMR category and implementing a must-offer obligation are significant steps forward. But it asked FERC to order CAISO to make a batch of changes, for instance, to ensure RMR costs and resource adequacy credits are doled out to load-serving entities correctly.

Among other changes, Pacific Gas and Electric Co. urged FERC to reject CAISO's proposal to expand RMR to include system and flexible reliability needs in addition to local reliability needs because CPM is better for nonlocal reliability requirements.

The CAISO Department of Market Monitoring supports most of the proposed changes but said more evaluation of CPM and RMR pricing is needed. And the DMM said the ISO should ensure resources cannot self-select backstop designations based on compensation.

"DMM shares concerns raised by other stakeholders that under the current and proposed framework, newer pivotal resources with undepreciated capital costs may have an incentive and ability to self-select RMR compensation while older pivotal resources would prefer CPM compensation at or near the soft offer cap," the DMM said.

Among other concerns, the California Public Utilities Commission said the plan to pay RMR resources their full cost of service is too generous considering that a plant could have earned above-market revenues before and after the RMR contract. FERC should replace this with an obligation for an RMR resource to file a negotiated cost-of-service filing for up to the full cost of service, the CPUC said.

The CPUC added that CAISO's reluctance to consider a holistic review of its backstop mechanisms is illustrated by the fact that the proposal consists largely of RMR reforms, noting that CPM compensation needs key changes to prevent resources from over-recovering their costs. (FERC docket ER19-1641)

Kate Winston is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.