United States: FERC Accepts Modifications To CAISO's RAAIM Charges And Payment Methodology

On March 29, 2018, FERC issued an order accepting proposed modifications to the methodology used to evaluate the availability of resource adequacy ("RA") resources and resulting charges and payments under the Resource Adequacy Availability Incentive Mechanism ("RAAIM") administered by the California Independent Operator Corporation ("CAISO"). In the order, FERC agreed that CAISO's proposal addressed identified problems such as overweighting certain types of resource adequacy capacity and discouraging parties from providing other types of capacity.

To ensure resource adequacy within the CAISO balancing authority area, CAISO and local regulatory authorities require load serving entities ("LSEs") to acquire certain types and amounts of RA capacity. For example, LSEs must acquire a certain amount of "generic/system RA" for serving forecasted load plus a reserve margin, as well as "flexible RA," that must be capable of quickly ramping up and down to manage system variabilities. In turn, CAISO's tariff also imposes must-offer obligations on the resource adequacy resources themselves.

Since 2015, CAISO has administered a bid-based settlement mechanism for resource adequacy resources to meet their must-offer obligations or otherwise substitute for unavailable resources (see October 12, 2015 edition of the WER). As part of the RAAIM settlement process, resources are charged or penalized depending on whether they are available during their must-offer obligation periods—called availability assessment hours. The availability assessment hours vary by RA type, with generic/system RA required to be available for a pre-determined set of five consecutive hours corresponding with peak demand periods, and flexible RA required to be available from five to 17 consecutive hours, depending on the flexible RA subcategory. For overlapping capacity obligations—i.e., when a resource is obligated to provide generic/system and flexible RA—CAISO assesses availability based on the more restrictive must-offer obligation.

Shortly after first administering the RAAIM settlement process, CAISO realized that, because the methodology treated each availability hour equally, flexible RA was disproportionately advantaged because it often had more capacity hour obligations than generic/system RA resources. CAISO also noticed that the RAAIM's focus on average MW amount within a given availability assessment hour could lead to resources designating a minimal flexible RA MW amount with a maximum hourly amount, thereby minimizing their penalties but reducing incentives to provide capacity at other times.

In a Federal Power Act section 205 filing on January 29, 2018, CAISO proposed three RAAIM reforms to address these problems. First, instead of equal treatment across the board, CAISO proposed to treat each MW equally within its availability assessment period. Second, CAISO proposed to calculate each resource's average monthly availability through separate assessment for generic/system RA capacity and flexible RA capacity. Third, CAISO proposed to calculate RAAIM non-availability charges and availability incentive payments based on the number of days in as month that the resource has an obligation to provide generic/system and/or flexible RA. Additionally, CAISO argued that it was unnecessary and impracticable to segment non-availability penalty charges according to RA type, instead of continuing to use a single non-availability penalty charge.

Various parties intervened to comment on or protest CAISO's changes. Notably, Southern California Edison ("SoCal Edison") protested CAISO's plan to retain a single penalty assessment for overlapping generic/system and flexibility capacity, arguing that it would discourage resources from participating at all if they are penalized for not providing one type of resource, while another type is fully provided for within an assessment hour. A public interest group, Public Citizen, Inc., argued that CAISO did not properly consider how the changes would financially impact retail consumers.

FERC upheld CAISO's proposal and granted an April 1, 2018 effective date, as requested in the filing. FERC found that CAISO's proposed methodology revisions would improve incentives for resource adequacy resources to meet their must-offer obligations and provide substituted capacity. As a result of the changes, FERC observed, resources would no longer be able to distort the RAAIM settlement process by relying on minimal amounts of flexible RA to offset the non-performance of larger amounts of generic/system RA. In so doing, FERC rejected SoCal Edison's argument in favor of targeted non-performance penalties, noting that, although it might support resources' ability to recover costs, such a scheme would introduce unnecessary complexity and potentially dampen incentives for resources providing overlapping capacity. FERC also noted that CAISO lacked data on bilateral resource adequacy contracts to be able to fully implement targeted penalties. FERC similarly rejected Public Citizen's comments, noting that RAAIM does not directly affect retail rates and that the record did not indicate otherwise.

A copy of FERC's order can be found here.

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