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No Generator Left Behind

A new theory on capacity markets and the missing money.

Fortnightly Magazine - May 2008

credit to LSEs for certain demand-response resources and credits other resource contracts that the California Independent System Operator cannot easily call upon (without declaring a stage two emergency, which the CAISO does not like to do). So resources run short in real time, prompting CAISO to step in to remedy the problem by using various “backstop” programs. One such program is the RCST—reliability capacity services tariff—set to sunset on at the end of 2007, but which FERC has now revived. (See, FERC Docket EL08-20.) Another is the ICPM —interim capacity procurement mechanism—proposed by CAISO as a fill-in to replace the RCST until its new MRTU kicks in, with locational marginal pricing and financial congestion management, but which has been delayed indefinitely. (See, FERC Docket No. ER08-556, filed Feb. 8, 2008.)

In short, the CPUC’s RA rules tend excuse LSEs from reserving enough capacity, and then hit up the IPPs for the shortfall, but paying them an inadequate compensation equal only to their going forward avoidable costs; not a CONE-based rate. (Note: The CPUC is re-examining its RA regime in two new rulemakings: R.08-01-025, Feb. 4, 2008; R.08-02-007, Feb. 20, 2007. )

Overall, the IPPs say that compensation comes up short under CAISO’s RCST and ICPM plans, and should run more in line with estimates of new plant construction costs and CONE values that can be seen in a recent study conducted by the California Energy Commission. (See, “Comparative Costs of California Central Station Electricity Generation Technologies,” Final Staff Report, CEC-200-2007-011-SF, December 2007.)

The IOUs, of course, need not rely on RCST or ICPM payments. They can roll the entire plant cost into rate base in CPUC-sanctioned rates, by which they get a full, guaranteed recovery of all fixed costs, including return on capital. Thus, the IPPs argue that the current and honest capacity price exceeds their meager RCST payments or proposed ICPM compensation, represented clearly in the form of new gas turbine units constructed recently by the regulated, investor-owned electric utilities, such as Southern California Edison. (Note: SCE denies in FERC filings that certain of its recent turbine projects are truly representative of going construction costs, as it claims that it built the plants on a rush schedule to meet emergency needs. (For more on this issue, see Protest of Independent Energy Producers Asso., Affidavit of Joseph Cavicchi, FERC Docket No. ER08-556, filed Feb. 29, 2008.)

In fact, IPP complaints suggest that CAISO’s short-term backstop strategy actually may depress the energy market price, already heavily mitigated in California. As Constellation Energy and Mirant explained in their comments in the ICPM docket, “Unplanned-for operational issues that arise in the short term are not solved by procurement of more capacity; they are solved by procuring more energy.”