Capacity Procurement Mechanism Replacement. Second Revised Draft Straw Proposal

Transcription

1 Capacity Procurement Mechanism Replacement Second Revised Draft September 25, 2014

2 Table of Contents 1. Document change tracking Executive summary CPUC Joint Reliability Plan Proceeding Plan for stakeholder engagement Purpose Issues brief August 25 th, 2014 CPM Replacement working group CPM Offer Cap Safe Harbor Price Mitigation Options Other Options Settlement process Existing backstop authority Competitive solicitation process summary Offer procedure Offer timeline and process Participation Offer price form Offer price submittal rules for multiple capacity types Offer removal Market power mitigation Soft offer cap Offers above soft offer cap Limits on bidding flexibility Demand-side market power Designation procedure Designation procedure process description Risk-of-retirement timeline CPM designation payments Payment adjustments Availability incentive mechanism Obligations of designated resources...33 CAISO/M&IP/C.Bentley 2 September 25, 2014

3 16. CPM designation eligibility CPM event transparency Exceptional Dispatch CPM designation of partial-ra resources Next Steps Appendix CPM soft offer cap proxy resource analysis Determining the proxy resource using RA data Determining the proxy resource using non-ra data Determining the proxy resource using CPUC data...42 CAISO/M&IP/C.Bentley 3 September 25, 2014

4 1. Document change tracking This section documents changes to the Capacity Procurement Mechanism Replacement revised straw proposal. In this second revised proposal, in response to stakeholder comments, the ISO has proposed a simplified competitive solicitation process. Stakeholders indicated that the design complexity should be aligned with how often the capacity procurement mechanism is expected to be used. Since the issuance of CPM designations has been minimal to date, stakeholder stressed that the design should be simplified. This led the ISO to make significant changes to the market power mitigation section (section 12) and revise the flexible and generic offer rules in section 11.4, as well as make clarifying changes to the remaining sections on the competitive solicitation process. New sections. The ISO has added several new sections, August 25 th, 2014 CPM Replacement Working Group (section 7), Settlement Process (section 8), Soft offer cap principles and proposal ( and ), CPM event transparency (section 17), and an Appendix. Competitive solicitation process. The ISO has proposed a simplified solicitation process that includes the following elements: A single price for flexible and generic capacity. A soft offer cap and ability to file at FERC for a higher rate equal to the resource s cost of service. A soft offer cap based on an analysis of the likely marginal generation technology type during residual procurement. No additional market power mitigation procedure or pivotal supplier test. CPM event transparency. The section Exceptional Dispatch CPM designation of partial-ra resources has been moved under the broader section, CPM event transparency. Offer procedure. The competitive solicitation process timelines have been updated and moved to section Participation (section 11.2) has been updated to clarify the definition of non-ra capacity. Designation procedure. The designation procedure has been updated to take in account planned or forced outages as part of the use-limitation procedure step. If a resource is out on planned outage during the CPM designation, the ISO may work with the resource s scheduling coordinator to see if it can move its outage or choose a different resource not on outage that is more expensive if required for reliability. In response to stakeholder comments, the ISO has also added the ability if capacity offers are within 10% of each other for the ISO to take into account resource CAISO/M&IP/C.Bentley 4 September 25, 2014

5 characteristics (e.g. ramp rate, location) that may increase the reliability of the grid, but are beyond the minimum criteria needed for the CPM event. CPM designation payments. Section 14, CPM designation payments, has been updated to include additional details on forced outages, filings at FERC for a higher cost of service rate, the extension of a significant event, and payments in the event of overlapping CPM designations on a single resource. 2. Executive summary The ISO expects that the Capacity Procurement Mechanism (CPM) replacement initiative will have two phases. In the first phase, the ISO will propose a designation process and pricing mechanism to replace the current CPM when it expires on February 16, The ISO proposes to replace the current CPM with a transparent, market-based designation process and price. In addition, the ISO will examine rules related to the CPM exceptional dispatch event and flexible RA within this phase. Primarily, the ISO will address the issue of how RA capacity should be treated and paid under the CPM exceptional dispatch rules. These rules may vary based on whether a resource is partial-ra or has an hourly must-offer obligation. The second phase will address issues related to mid-range resource adequacy (RA) capacity procurement. The ISO has previously identified a gap in resource adequacy planning three to five years into the future. This gap introduces reliability risk due to the rapid change of the resource mix and the specific resource capabilities that the ISO will need to reliably operate the grid in light of significantly changed system conditions. The CPUC s Order Instituting Rulemaking to Consider Electric Procurement Policy Refinements per the Joint Reliability Plan (JRP) (CPUC Docket No. R ) will have three tracks. In track one, the CPUC is currently evaluating whether and how to move toward a multi-year forward resource adequacy program. The specific scope and timing of phase two of the CPM replacement initiative is dependent on the direction and ultimately the outcome of that proceeding. This phase will focus on how ISO rules need to change to mitigate the risk of uneconomic or disorderly retirement given the CPUC s rules. This paper constitutes the next step in the first phase of this initiative. The ISO intends to retain the current rules in tariff section 43 except to the extent it identifies specific changes in this stakeholder initiative proposal. Although this initiative addresses other outstanding issues, the primary goal of the initiative is to replace the current capacity procurement mechanism (CPM) that expires in February 2016 with a durable backstop mechanism and price. The ISO proposes to replace the current administrative designation process and price with a competitive solicitation process. Specifically the ISO would: Secure backstop capacity under the CPM through a competitive solicitation process in which market participants would submit capacity bids. CAISO/M&IP/C.Bentley 5 September 25, 2014

6 Implement market power mitigation rules consisting of a soft offer cap and limited bidding flexibility. Pay a resource-specific offer price to the resource designated under the CPM competitive solicitation process. Also addressed in this paper is an outstanding issue from the Flexible Resource Adequacy Criteria and Must Offer Obligation (FRAC MOO) initiative. The new flexible RA type proposed in FRAC MOO has created the need for the ISO to address the connection between flexible RA must-offer obligation hours and the general obligations of RA capacity. Previously there was no need to define explicitly the obligations of RA capacity and whether they were connected to must-offer hours because all RA resources had a 24-hour must-offer obligation (or an obligation to be available to the extent possible). Therefore an RA resource could never receive a CPM payment for its RA capacity. This is because the RA capacity was already secured through RA, considered to have a daily obligation, and double payments would not be allowed. Therefore there is the outstanding issue of whether the ISO should move to a construct where RA capacity is an hourly product. Under this construct, a MW could be RA one hour and not the next based on the associated RA must-offer obligations. Although this issue impacts several areas of the ISO market design, applicable to this initiative is that there are impacts on exceptional dispatches that lead to a CPM designation. In order to address this issue, the ISO proposes that any resource shown on a supply or RA plan that counts toward the flexible, local, or system RA requirement is considered an RA resource and: Any capacity that is considered RA at any point during an operating day would not receive a CPM payment if exceptionally dispatched outside the must-offer hours Any capacity that is considered RA at any point during an operating day is not eligible for a RUC payment A final issue addressed in this paper involves the treatment of partial RA resources in the exceptional dispatch designation procedure. Currently, partial RA resources that receive an exceptional dispatch are treated similarly to fully RA resources where the ISO does not go through additional checks to validate the CPM exceptional dispatch quantity. The ISO proposes that partial-ra resources be treated the same as non-ra resources in regards to the after-thefact assessment. Therefore, the ISO will validate for partial RA resources after-the-fact the amount of capacity the ISO is relying on to meet reliability needs through the exceptional dispatch. 3. CPUC Joint Reliability Plan Proceeding Capacity planning has changed and likely will continue to change as the West s energy landscape evolves. Assuring that resource planning successfully adapts to these changes requires a coordinated effort between the ISO and other agencies, including the CPUC. In acknowledgement of this, the ISO Board of Governors and the CPUC each voted unanimously CAISO/M&IP/C.Bentley 6 September 25, 2014

7 in 2013 to adopt the JRP. 1 Many of the ISO s JRP-related processes aim to ensure that the capacity is effectively offered into the ISO s market so that the ISO can efficiently maintain reliable grid operations. The CPUC s Order Instituting Rulemaking to Consider Electric Procurement Policy Refinements was created per the Joint Reliability Plan (JRP) (CPUC Docket No. R ).The CPM replacement initiative will accommodate necessary updates to the CPM as a result of new requirements that arise through the CPUC s JRP proceeding. The CPUC recently issued a notice saying the Ruling Issuing a Staff Proposal on Multi-year RA has been delayed. The CPUC proposed to consider three tracks in their JRP proceeding: Track one will consider two- to three-year forward-looking RA procurement requirements, Track two will consider implementing a long-term, joint reliability planning assessment (i.e., 4-10 years out) with the ISO and the California Energy Commission, and Track three will consider determining rules and Commission policy positions on the ISO s development of a market-based backstop procurement mechanism to succeed the existing CPM, which expires in The ISO will adjust the scope and schedule for phase two of the CPM refinements initiative based on the progress in track one of the CPUC s JRP proceeding. The ISO will only move forward with a stakeholder process to incorporate multi-year backstop rules into the CPM if it is clear that the CPUC will adopt multi-year RA requirements. The ISO will still proceed with the risk-of-retirement policy assessment in CPM phase two if the CPUC does not adopt multi-year RA requirements, and will address any remaining outstanding items from the Flexible Resource Adequacy Criteria and Must-Offer Obligation initiative (FRAC MOO). Therefore, although the schedule and scope may be adjusted, the ISO plans to conduct phase two of the CPM replacement initiative regardless of the outcome of track one in the CPUC s JRP proceeding. This allows the ISO to begin phase two of the CPM replacement initiative before the formal completion of track one of the CPUC s JRP proceeding. 1 CAISO/M&IP/C.Bentley 7 September 25, 2014

8 4. Plan for stakeholder engagement The ISO proposes the following schedule for phase one of this initiative. Item Date Paper: Revised Thursday, July 24, 2014 Meeting: Revised meeting Thursday, July 31, 2014 Comments due: Revised comments Friday, August 15, 2014 Meeting: Working Group Monday, August 25th, 2014 Paper: Second Revised Thursday, September 25, 2014 Meeting: Second Revised meeting Thursday, October 2, 2014 Comments due: Second Revised comments Thursday, October 16, 2014 Meeting: Settlement discussions Paper: Final draft proposal November December Target Board of Governors Meeting February or March, 2015 CAISO/M&IP/C.Bentley 8 September 25, 2014

9 5. Purpose The CPM is the backbone of the ISO backstop procurement authority. It ensures that the ISO will have sufficient capacity available to maintain reliable operation of the grid. The CPM backstop serves three main functions: Resolving RA deficiencies in both the year-ahead and month-ahead timeframes, Supplementing RA procurement by load serving entities in order to address reliability needs caused by significant events or when a non-ra resource is exceptionally dispatched, and Designating resources that have demonstrated they will shut down in the current year because it will be uneconomic for them to remain in service, but whose operation will be needed to meet operational or reliability needs in the year following the year in which the resource would be shut down. The discussion in this paper pertains solely to the ISO proposal to replace the current CPM. If the CPUC adopts a multi-year procurement requirement for their jurisdictional load-serving entities, following that decision the ISO will determine the appropriate backstop mechanism for such a multi-year RA framework in the second phase of this initiative. 6. Issues brief There are two significant issues related to the CPM. First, the current CPM expires on February 16, The ISO will need an approved CPM replacement before this occurs and by a date that will provide ample time for ISO and market participant systems and personnel to get ready so that the change can occur smoothly. The mechanism and compensation for backstop capacity has been a contentious and complex issue. Much of the debate has revolved around whether CPM compensation was designed to provide incentives for new investment or to buy available non-ra capacity from existing plants. This is one of the fundamental issues surrounding an administrative backstop price for capacity. Currently, the ISO has an administrative rate for CPM designations. Additionally, resources designated under the CPM have the option to file at FERC if they believe that their going-forward fixed costs plus 10 percent exceed the administrative rate. The ISO will propose design options for a durable procurement mechanism and pricing for backstop capacity. A price for backstop capacity should efficiently price backstop capacity, reflect market conditions, and provide transparency into the relative value of resource attributes. It should do this based on the location, capability, and time period of the reliability need triggering the CPM event. The CPM process allows the ISO to issue a CPM designation under three different timeframes, annually, monthly, and unsystematically. In its order regarding the initial ISO CPM proposal, FERC noted that a backstop capacity procurement design should provide a reasonable opportunity to recover fixed costs and reflect CAISO/M&IP/C.Bentley 9 September 25, 2014

10 fluctuating market conditions. 2 FERC also added that a backstop CPM should support incremental investment by existing resources to perform long-term maintenance or make improvements that are necessary to satisfy environmental requirements or address reliability needs associated with renewable resource integration. 3 On the other hand, FERC was not persuaded that backstop compensation on the basis of Cost of New Entry was just and reasonable. The ISO believes that any permanent backstop procurement mechanism would need to be designed with these factors in mind. Finally, the ISO and stakeholders have spent significant resources in the past, repeatedly redefining backstop procurement processes and compensation. The ISO finds that it is preferable to establish a more durable mechanism through this initiative, based on market design principles. Also, recognizing that two prior backstop proposals have gone through a postfiling settlement process, the ISO believes that it would be far more efficient and save considerable time, effort, and expense for market participants to attempt to reach some consensus on the contents of an ISO tariff amendment prior to the ISO filing its CPM proposal with FERC. The second CPM issue is that certain RA resources do not have a 24-hour mustoffer requirement and this has led to issues regarding RA resource eligibility to receive a CPM designation. Flexible RA resources do not have a 24 hour must-offer obligation for each day. Similarly, resources holding subset of hours RA contracts are not contractually obligated to have a 24 hour must-offer obligation, raising similar issues. The ISO will have to update the CPM eligibility and pricing rules to account for these time-limited RA resources. 7. August 25 th, 2014 CPM Replacement working group The ISO held an in person working group meeting on August 25 th to solicit stakeholder input in the CPM replacement market design. 4 Four market participants presented: Calpine, CPUC, PG&E, and SCE. The ISO also made a presentation. The initial draft straw proposal contained four key design elements; an offer cap, safe harbor price, mitigation price, and offer rules related to the price for flexible and generic capacity. Presentations offered different suggestions for each of these elements. Although the ISO summarizes the options below, rather than move forward with the previous proposal, due to the discussion at the working group and feedback from stakeholders, the ISO proposes a simplified competitive solicitation process CPM Offer Cap The following options were proposed during the working group for the CPM offer cap and in stakeholder comments: (1) Net Cone $154.14/kW-year ($12.85/kW-month) for a CT unit $145.42/kW-year ($12.11/kW-month)for a CC unit 2 California Independent System Operator Corporation, 134 FERC 61,211 at PP (2011). 3 Id. at PP 57, Presentations from the working group can be found at: ent.aspx CAISO/M&IP/C.Bentley 10 September 25, 2014

11 (2) 80% of Net Cone $123.00/kW-year ($10.25/kW-month) for a CT unit $116.33/KW-year ($9.69/kW- month) for a CC unit (3) Cap Based on Bilateral RA Contract Data Weighted average prices per year range from $2.95 to$3.46/kw-month ( ) Average prices per year range from $3.21 to $3.76/kW-month ( ) 85 th percentile prices per year range from $4.01 to$7.85/kw-month ( ) Maximum prices per year range from $24.49 to $26.54/kW-month ( ) 1.5x of the 85 th percentile price or $79.28/kW-year (4) Highest Going-forward Cost of units available to ISO Additionally there were questions as to whether: there should be a single bid price for CPM capacity, separate prices for system and local, or three separate bids (system, local, flexible) there be a annual, seasonal, or monthly cap, and/or soft or hard offer cap Safe Harbor Price The safe harbor price was one of the most discussed elements of the design. The following options were discussed during the meeting and identified in written comments. (1) Net Cone (see above) (2) Full cost of service rate for a proxy unit (established a priori) (3) $70.88 existing CPM administrative price (with or without escalator) (4) Going-forward Costs plus 15% adder $69.90/kW-year for a CC unit $63.38/kW-year for a CT unit (5) Going-forward Costs plus 10% adder $60.61/kW-year for a CT unit $66.65/kW-year for a CC unit (6) Going-forward Costs $60.60/kW-year for a CC unit $55.10/kW-year for a CT unit (7) $40 threshold price for local RA waiver applications (8) $30.77/kW-year (weighted average of RA costs for ) (9) Between $0 and $5.90/kW-month (indexed to RA prices) The lowest monthly price for system RA plus 10% The lowest monthly weighted average price for system RA The median system RA bilateral price The annual weighted average price for system RA (10) $2.40/kW-month for October-June and $12.00/kW-month from July through September (based on variation in RA prices) CAISO/M&IP/C.Bentley 11 September 25, 2014

12 (11) Going-forward Costs less energy rents (12) Price set at intercept of supply curve based on unit specific going-forward costs intercepted with CAISO total demand for system capacity or intercept of demand curve with supply curve based on generic technology type going-forward costs 7.3. Mitigation Options The ISO s straw proposal included ISO market power mitigation of resources that failed a pivotal supplier test. Suggestions for the mitigation price and standard included the following Mitigation price (1) Resource specific going-forward costs plus adder (2) Resource specific cost of service minus a market revenue deduction (3) The safe harbor price (4) Resource specific mitigation price set before or after solicitation? Mitigation Standard (1) No resource specific mitigation (2) Three Pivotal supplier test applied at time of designation (3) Two pivotal supplier test applied at time of designation (4) One pivotal supplier test applied at time of designation 7.4. Other Options Other elements of the design were also discussed. An alternative to the competitive solicitation process came up for both all CPM events and for specific CPM events. Another key topic that elicited significant feedback is the connection between the availability incentive mechanism price and the CPM proposal Administrative price (1) Administrative price for all CPMs like current framework, including extension of the existing CPM price (2) Administrative price for local Exceptional Dispatch CPMs Availability incentive price (1) Equal to the CPM safe harbor price (2) Some other price not tied to the CPM safe harbor price CAISO/M&IP/C.Bentley 12 September 25, 2014

13 8. Settlement process As a result of the working group discussions, the ISO proposes a simplified competitive solicitation process to use as the framework for settlement discussions. This framework is described in this second revised straw proposal. After receiving comments, to the extent that stakeholders believe there is a viable framework for settlement, the ISO will put the initiative process on hold and begin settlement discussions among the interested stakeholders. The ISO s ultimate goal is to file a settlement with FERC that resolves all issues regarding the CPM replacement. Other approaches may be considered as well depending on the circumstances. Once a resolution is reached with a critical mass of settlement participants, the ISO will include the outcome in the final draft proposal and continue the initiative process to take the proposal to the February 2015 Board of Governor s meeting. The CAISO will circulate a schedule for the first round of settlement negotiations to all stakeholders that have expressed interest by October 10 th. Following the first round of discussions, the CAISO will work with settlement participants to determine the appropriate next steps, schedule, etc. The ISO s expectation is that all settlement and compromise discussions among the settlement participants, statements made by settlement participants, and documents exchanged among the settlement participants will be subject to a settlement privilege. In participating in these settlement and compromise negotiations, settlement participants will be asked to accept the privileged nature of the settlement discussions. All documents circulated among the settlement participants should be appropriately marked as settlement communications. 9. Existing backstop authority Under the existing CPM, there are six circumstances where the ISO has the authority to designate eligible capacity to provide CPM services. 5 These are listed in Figure 1. Figure 1: CPM designation events 1. Insufficient local capacity in a load serving entities annual or monthly resource plan 2. Collective deficiency of capacity in a Local area 3. Insufficient system capacity in a load serving entities annual or monthly resource plan 6 4. Significant event 5. A reliability or operational need for an Exceptional Dispatch 6. Risk of retirement Beginning in the 2013 RA year, the ISO created rules that may require LSEs to provide replacement RA capacity for RA resources with planned outages during the RA month. The ISO may use the CPM to backstop any replacement requirements which the LSEs fail to provide 5 These are described in detail in Tariff section This category also allows the ISO to procure backstop capacity where a load serving entity fails to provide replacement capacity to satisfy the so-called Replacement Rule. CAISO/M&IP/C.Bentley 13 September 25, 2014

14 to the ISO after a cure period designed to allow them to bilaterally procure their replacement needs. Additionally, with the implementation of the ISO s FRAC-MOO proposal, the ISO is proposing to add insufficient flexible capacity in an annual or monthly resource plan to the tariff as a criterion for procuring backstop capacity under CPM. Also, if the CPUC adopts a multi-year requirement to their RA program, the ISO would then initiate a stakeholder process to consider adding another CPM designation category in circumstances where LSEs procure insufficient multi-year forward capacity. Use of existing backstop authority Tariff section 43 allows the ISO to issue a CPM designation under three different timeframes, annually, monthly, and unsystematically (in the case of a reliability event). In the annual (including risk of retirement) and monthly timeframes, the ISO provides the opportunity for LSEs to cure deficiencies before using the procurement mechanism itself. The opportunity for either LSEs or suppliers to resolve their deficiencies allows market participants to bilaterally contract for capacity at less than the current CPM price. During an exceptional dispatch, the ISO does not provide a cure opportunity because the ISO s need to immediately procure capacity under such circumstances is not compatible with allowing LSEs the additional time required to cure the need through bilateral contracting. 10. Competitive solicitation process summary The ISO proposes to procure and price backstop capacity designated under the CPM through a competitive solicitation process (CSP). In a 2004 order, the FERC outlined four rules for evaluating CSPs. 7 A CSP must involve: Transparency, Defined products, Evaluation criteria, and Independent oversight. 8 The ISO s competitive solicitation process will satisfy these four principles. The ISO will specify all of the mechanics and rules of the competitive solicitation in the tariff. The tariff will set forth in an understandable fashion the mechanism and timelines for submitting bids, the process and rules the ISO will follow to select bids, and transparent reporting of the outcomes of each competitive solicitation that results in a CPM designation. The types of CPM designations are, and will continue to be, clearly defined in the tariff. The ISO will set forth clear criteria for evaluating bids and selecting a resource to provide CPM capacity. The CPM tariff will have a clear soft offer cap and rules regarding the duration and removal of any bid. The ISO will implement and operate the competitive solicitation process. ISO by its nature operates independent procurement processes and additionally has a Department of Market Monitoring 7 8 Allegheny Energy Supply Co., 108 FERC 61,082 (2004) (Allegheny). Allegheny, at P 22. CAISO/M&IP/C.Bentley 14 September 25, 2014

15 (DMM). As with all market activities, the competitive solicitation process would fall within DMM s overall market monitoring authority Accordingly, the ISO believes that any CSP process it operates would meet FERC s independent oversight criterion. The ISO proposes to develop a competitive solicitation process to price and choose which resource to designate under the CPM. This process will be set up annually, monthly, and intramonthly for the associated CPM events. Figure 2: Competitive solicitation process by CPM event Annual Monthly Intramonthly Insufficient local, system, or flexible in LSE plan Collective deficiency in local area Insufficient local, system, or flexible in LSE plan Outage impact assessment- insufficient system capacity Significant Event Exceptional Dispatch Other Risk-of-retirement The foundation of the competitive solicitation process will be rules for (1) suppliers to offer non- RA capacity into the process, (2) mitigation rules, and (3) determining which resource the ISO will offer a CPM designation. This is illustrated in Figure 3. Figure 3: Competitive solicitation process Offers: 1. Registration and initial bids 2. ISO validation of bids 3. Adjustment period 4. Bid finalization Mitigation: 1. Offers capped by soft offer cap 2. Justification at FERC for higher price 3. Limited bid flexibility Designation: 1. CPM required 2. Offers evaluated using defined criteria 3. Resource is offered CPM designation Suppliers will offer into the CSPs non-ra capacity according to a defined set of rules that outline the offer format, product definition, and other terms and conditions of offering into the CSP. Offer guidelines will vary based on the CPM event as different resource products are needed for different events. Offer rules are proposed in section 11. The ISO also proposes mitigation measures. First, the ISO proposes to include a soft offer cap on all bids. There will be a single soft offer cap for all CSPs and products. Second, the ISO proposes a timeline that forces suppliers to offer in their capacity prior to the knowledge of whether and what type of CPM event may occur. The ISO does not propose to require the same CAISO/M&IP/C.Bentley 15 September 25, 2014

16 bid between the annual and monthly CSP or between the monthly and intra-monthly CSP. Finally, the ISO proposes that any offers above the soft offer cap must be cost-justified at FERC for recover up to a resource-specific cost of service rate. Mitigation is covered in section 12. The ISO proposes a procedure for determining which resource to offer a CPM designation. The procedure will be based on the relative offers of capacity a CSP and transparent evaluation criteria. The ISO proposes to use the current tariff section 43.4, which outlines the current procedure under which capacity is chosen to be offered a CPM designation, as the framework for the designation process. The ISO proposes to replace the capacity price term criteria with a procedure for market participants to offer in capacity in the event of a future need for a CPM designation. The designation procedure is proposed in section Offer procedure The ISO proposes to have three initial offer periods for capacity to enter into a CSP. The ISO proposes an offer procedure timeline that will vary depending on when the CPM designation could occur. The initial offer periods will take place (1) prior to the annual CPM process, (2) prior to the monthly CPM process, and (3) after the monthly processes closes before an intra-month CPM designation may occur. All offers must be made during these initial periods, which are before the ISO knows whether a CPM designation will be needed. Once finalized, offers may only be released under the conditions in section Finalized offers are binding and may not be removed from the CSP until released by the ISO after completion of the competitive solicitation process. All offers are assumed to be valid for either a 30-day or 60-day period depending on the CPM event type Offer timeline and process Figure 4 illustrates the proposed general timeline for offering into the CSP. During the initial offer period, the ISO will validate offers and give the supplier an opportunity to revise any nonconforming offers. After the initial offer period is closed, the suppliers will have a fixed number of days to either completely remove their offer, remove a portion of their offer, or lower their price. In the annual and monthly process the offer adjustment period will occur concurrent to the ISO determining whether there is a capacity shortage and allowing LSEs to cure any shortages through the current RA process. At the end of this adjustment period all offers will be finalized and locked in for a set period of time as the ISO assesses the need for a CPM designation. After the determination of whether a CPM is needed the ISO will either release the offers or issue the resource a CPM designation. 9 If a resource is designated for 60 days, the resource will be paid using the initial month s CSP offer price (section 14). CAISO/M&IP/C.Bentley 16 September 25, 2014

17 Figure 4: Offer procedure timeline overview The CSP timelines will be aligned with the current RA process. The ISO proposes to continue the current monthly and annual RA timelines for the CPM determination process. The ISO proposes to add a process for soliciting competitive offers for backstop capacity. In the reliability services initiative the ISO is proposing changes to the RA process timeline to be implemented for the 2017 RA year. Any necessary changes to the CSP s initial timeline will be proposed within the reliability services initiative. Unless otherwise noted all timelines are expressed in calendar days Annual timeline and process Figure 5 shows the proposed timeline for the annual CSP. Initial offers for the annual CSP would be due 7 days after the RA compliance showing. An adjustment period would coincide with the cure period and during this time market participants would have the option to remove or lower the offer price of any previously offered capacity. In the event of a deficiency for annual capacity, the ISO would run the annual CSP as described in the previous sections to procure needed capacity. Figure 5: Annual competitive solicitation process timeline CAISO/M&IP/C.Bentley 17 September 25, 2014

18 Offers into the CSP will be able to be adjusted down in price or MW until 43 days after the last business day in October. At this point the ISO will re-validate that offered capacity is not already shown on an RA plan and finalize the offer set. This finalized offer set will not be able to be removed until after the annual CSP process is complete Monthly timeline and process The ISO will solicit offers for capacity beginning at 50 days before the RA month and close the offer period 37 days before the RA month. Offer prices may be adjusted down in price or MW until 10 days before the RA month. At this point the ISO will re-validate that offered capacity is not already shown on an RA plan and finalize the offer set. This finalized offer set will not be able to be removed until after the monthly CSP process is complete. Figure 6: Monthly competitive solicitation process timeline The monthly timeline will be dependent on any changes that are needed to integrate flexible RA into the replacement rules; however, any changes to the RA timeline affecting the CSP process will be proposed within future applicable stakeholder initiatives Intra-month timeline and process Intra-month offers will be due 7 days prior to the RA month. Scheduling coordinators may remove these offers or lower the price at any time during the month, except that any offers in the system during an intra-month CPM event will be locked through the assessment and designation period. The offers will expire on the last day of the RA month. CAISO/M&IP/C.Bentley 18 September 25, 2014

19 Exceptional Dispatch Exceptional dispatches often require the ISO to make prompt backstop procurement decisions and do not allow the ISO time to conduct a separate competitive solicitation for a particular exceptional dispatch. Therefore, the ISO proposes to use offers from the intra-month competitive solicitation process if it must designate a resource under an exceptional dispatch. These offers will be due 7 days prior to the month and will expire on the last day of the month unless removed. In no event can the offer price in the monthly solicitation process be increased until the next intra-month solicitation. The ISO believes that the proposed approach best balances two goals: 1) the ability to make timely CPM designations and, 2) to reflect current market conditions to the extent practicable Significant event Significant events often require the ISO to make prompt backstop procurement decisions and do not allow the ISO time to conduct a separate competitive solicitation for a particular significant event. Therefore, the ISO proposes to use offers from the intra-month competitive solicitation process if it must designate a resource under a significant event. These offers will be due 7 days prior to the month and will expire on the last day of the month unless removed. In no event can the offer price in the monthly solicitation process be increased until the next intramonth solicitation. The significant event CPM designation has the additional rule that the ISO has the opportunity to extend the initial 30 day designation by an additional 60 days. In addition, at the end of the 90-day designation period, if the significant event is ongoing, the ISO will work with stakeholders to consider available options, which include the possibility of extending the existing CPM designation. The ISO proposes that if a significant event continues after the initial 30 day designation period and after 90 days, and the ISO desires to extend the significant event CPM in time, the ISO may: CAISO/M&IP/C.Bentley 19 September 25, 2014

20 Extend the CPM event and designation at the initial offer price of the designated resource, or Use the current intra-month offers to choose a new resource and allow the current resource under the CPM designation to offer into the intra-month CPM at a lower price. These rules are designed to prevent a resource that has a CPM designation that may be extended from increasing its offer price in the following CSP and exerting market power Participation Participation in the CSP will be strictly voluntary. The designation procedure will only occur in the event the ISO needs to procure backstop capacity, and the ISO will make all payments and allocate costs through its settlement system just as it does today. The ISO is not restricting participation in the CSP by any specific entity type; however, only non-ra capacity is eligible for a CPM designation. Non-RA capacity is any capacity not shown on an LSE annual or monthly RA plan or designated as RA during the intra-monthly showing initial assessment Roles and responsibilities of participants In order to participate in the CSP, suppliers must register and agree to abide by certain participation terms. Suppliers must demonstrate that they control the offered capacity and agree to abide by the terms and conditions. This demonstration is automatically fulfilled for resources that have a signed Participating Generator Agreement with the ISO Validation of offer eligibility The ISO will validate eligibility within the offer process by checking that offered capacity is less than the resource s NQC minus the value shown for the resource on any LSE s RA plan. Figure 7 illustrates a resource s eligible capacity to offer into a CSP. CAISO/M&IP/C.Bentley 20 September 25, 2014

21 Figure 7: Example of eligible capacity to offer in CSP The resource has already committed to the ISO 150 MW of the resource as system RA. Therefore the remaining generic amount they may offer in is 300 MW 150 MW (NQC committed system RA), which equals 150 MW. The resource has not committed any flexible RA, so may offer in their full EFC, which equals 250 MW. The ISO will validate that the supplier does not offer into the CSP more than these amounts. Capacity on outage may still participate in a CSP as long as at least a portion of their capacity is expected online during the CSP timeframe. Likewise, in the monthly and intra-monthly processes capacity not on a monthly RA plan may be offer into the CSPs, even if it is being used on certain days as replacement or substitute capacity. Annual CSP. In the annual CSP process, the ISO will validate that all offers are not overlapping with any capacity from that resource on an LSE s RA plan in any applicable month of the annual showing during offer finalization. As long as the resource has sufficient capacity between the relevant NQC or EFC and the amount shown on any LSE s plan, this capacity is eligible to participant in the CSP. After this process check, all offers will be locked in and unable to be removed until after the CSP is complete. CAISO/M&IP/C.Bentley 21 September 25, 2014

22 Monthly CSP. In the monthly CSP process, the ISO will validate that all offers are not overlapping with any capacity from that resource on an LSE s RA monthly plan during offer finalization. There will be no look back to the annual monthly RA showing to verify that the resource was not on that plan as well. Intra-monthly CSP. In the intra-monthly CSP process, the ISO will validate that all offers are not overlapping with any capacity is RA on the day the CPM designation would begin. The ISO will require suppliers to provide sufficient information in the registration process to enable the ISO to validate the eligibility of the resource to comply with the offered RA type s must-offer obligations Offer price form Offers will have a standard price form that will be consistent through all CSPs. All CSPs will have the same offer form of $/kw-year. In the annual CSP, the ISO may have deficiencies in individual months, rather than a deficiency for an entire year; so, suppliers may offer in separate value for each month in the form of $/kw-month. Offers may vary from month to month in both price and MW quantity Offer price submittal rules for multiple capacity types Offer submittal requirements will vary between the annual and monthly CSP and the intra-month CSP due to different CPM events being covered by the different CSP processes. In the annual and monthly CSP processes the ISO must develop rules to account for potential CPMs of both flexible and generic capacity. In the intra-month CSP process, the ISO does not have tariff authority to CPM specifically flexible capacity and so will only solicit offers for generic capacity. ISO annual and monthly showings In the ISO annual and monthly RA showings LSEs must meet three requirements for system, local, and flexible RA capacity. Beginning in the ISO will ask for two separate showings from ISO LSEs and suppliers. One showing will indicate generic RA and one will indicate flexible RA. The ISO will use the generic RA showing to validate the local and system requirement. Each MW on this showing counts for both system and local RA and cannot be unbundled. That is, a local MW will always also count toward the system requirement. The ISO will have a separate RA plan for flexible RA that will be used to validate the flexible requirement. Any capacity on the flexible RA plan may or may not also be included on the generic RA plan. A single MW may be counted as generic and flexible, or just generic or just flexible. Each flexible MW therefore may be unbundled from the generic requirement. Although the ISO expects a majority of flexible MWs to also be shown as system MWs (bundled), some LSEs may show a flexible MW that is not on their generic RA plan (unbundled). This could be because the resource itself only wants to comply with the flexible must-offer requirement or because the LSE has already shown sufficient generic RA and does not need to 10 RA type refers to both whether the RA is local, system, and/or flexible as well as the flexible category. 11 Assuming FERC approves the ISO s August 2014 FRAC MOO filing. CAISO/M&IP/C.Bentley 22 September 25, 2014

23 show the underlying generic behind the flexible MW. An LSE may do this because they do not want to take on the additional generic must-offer requirements. The reverse may also occur where a resource that is capable of acting flexible is only shown on an RA plan as generic RA. Local, system, and flexible offers into CSPs The ISO s objective for the offer rules is to allow resources to fully recover their costs while at the same time not setting up a construct that would inherently lead to double payments. A double payment can occur if a supplier receives RA payments from multiple entities for the same capacity, and the total amount of payments received far exceed a reasonable single payment for such capacity. The reasons that double payments could occur in the CSPs can be grouped into two main categories: (1) lack of RA contract transparency; and (2) failure of attribute accounting. Lack of RA contract transparency would occur when a resource has already been paid for RA capacity, but that RA capacity is not visible to the ISO during the CSP. For example, an LSE may have contracted with a supplier for RA capacity, but the LSE does not show that resource in the relevant month. The ISO believes that no CSP structure can address double payments caused by issue (1), and that the contract between supplier and LSE is the appropriate mechanism to address the issue who has the right to offer into the CSP. Double payments can also occur due to the ISO not accounting for payments for different attributes of a MW. For example, the ISO might need both flexible and generic capacity within a single CSP process. The ISO must develop rules to ensure a single resource is not paid twice their required costs for the same MW of capacity by receiving payments both for flexible and generic capacity. Another way double payments could occur is if the ISO needed flexible capacity from a resource in the annual process for March and paid the resource its annual CSP offer price, and then in the monthly March process the ISO needed generic capacity from the same resource and again paid the resource its monthly CSP offer price. This would lead to the ISO making double payments for the same underlying MW. In order to prevent such a double payments and generally simplify the CSP structure, the ISO proposes a single price for capacity and a separate MW value for flexible and generic capacity. This will allow a supplier to sell a single MW as flexible, generic, or both flexible and generic capacity. For all products bid into all CSPs, capacity from a single resource must come with a single $/kw-month offer price. In order to prevent potential double payments, if a supplier individually offers both flexible and generic capacity, the supplier must also do the following: Agree that if it receives an annual or monthly CPM designation for either flexible or generic RA, in any following CSPs that overlap with designated capacity that the ISO will automatically offer in the remaining RA type capacity in at $0/kW-month up to the minimum of the amount available as non-ra capacity and original designation. CAISO/M&IP/C.Bentley 23 September 25, 2014

24 The ISO will calculate the available capacity (NQC shown RA) and automatically offer this into the applicable CSP. Figure 8 illustrates the amount of capacity that the ISO would automatically offer into the associated CPM. The graphic on the left shows the original resource s RA capacity and offer into the annual CSP for March. The resource is committed for system RA for 150 MW, but has offered an additional 150 MW of generic RA and 250 MW of flexible RA. In the annual CSP, the ISO designates the resource for 150 MW of flexible RA. Now, once the March CSP monthly process is run, in order to prevent double payment from the resource, the underlying generic capacity to the flexible RA is automatically offered into the March monthly CSP at $0/kW-month. This is shown the right graphic, by the shaded blue portion. The ISO will calculate the overlapping portion from the bottom down, so if the resource had already been shown on an RA plan for 200 MW of generic capacity, the ISO would not insert an additional 50 MW at $0/kW-month. Additionally, the resource is free to offer in any of the remaining non-ra capacity into the CSP without additional restrictions. Figure 8: Example of capacity that will be automatically offered into associated CSP at $0/kW-month CAISO/M&IP/C.Bentley 24 September 25, 2014

25 Flexible capacity category A supplier may only offer into a single flexible RA category (super-peak, peak, and base). It is up to the supplier to determine which flexible category it offers into, and the ISO will only validate that the resource is physically capable of complying with the must-offer requirements in that category. The ISO does not want to incent resources to offer capacity in categories less than the resource s ability by allowing a supplier to offer capacity from a single resource into multiple flexible categories. In the designation process, the ISO will always consider all categories that can meet the CPM event need, so there is no risk that offering into a higher category will remove capacity from the CPM designation procedure. Local capacity Local resources do not need to submit a separate offer for their local attribute. The ISO will evaluate local capacity in the event there is a shortage separately and will use the resource s generic capacity offer. The ISO will not allow a separate price for local because must-offer requirements are the same for local and system capacity. There is nothing that should change about resources obligations or risks if procured as a local or system resource. The ISO believes that under the current circumstances, allowing a separate local price would essentially encourage resources to offer in a higher price in circumstances where they are more likely to have market power Offer removal In the annual and monthly CSP process, the ISO proposes that scheduling coordinators may remove offers at any time during the offer adjustment period. Suppliers may want to remove capacity because the capacity is under a new contract with another entity, needed for replacement or substitution, or there are mechanical, environmental, or regulatory issues that impact the resource s ability to comply with the relevant must-offer obligations. The ISO recognizes there are a wide range of circumstances that could make capacity no longer available. Upon offer removal, the supplier must submit a reason for withdrawing capacity. The supplier can satisfy this requirement by submitting the reason category described above or Other with an explanation. This will be solely for information tracking and will not be used for any removal approval process. The ISO will review this information to monitor for physical withholding and potentially reassess this rule at that time. 12. Market power mitigation The ISO believes that market power mitigation measures in some form will be necessary in the competitive solicitation process. Market power mitigation can take several arrangements. There can be supply-side or demand-side market power. Mitigation measures can range in complexity and stringency. Ideally, market power mitigation measures would be simple, dynamic, and effective. This is especially true with respect to CPM designations. Given the range in events and time that a CPM designation may cover and the infrequency of use of the CPM designation, the ISO proposes to primarily mitigate market power through the use of a soft offer cap. The CAISO/M&IP/C.Bentley 25 September 25, 2014

26 ISO will also limit bid flexibility within each CSP process so that suppliers must offer in capacity prior to the knowledge that a CPM designation will occur Soft offer cap A single offer cap for all products in all CSPs ensures that offers are in line with what the ISO should expect from existing resources in a competitive environment. The ISO is aware that capacity costs range widely and that no single price will perfectly represent competitive price for every resource. Competitive costs will reflect a number of variables, including, but not limited to: contract details, location, resource-specific costs, maintenance schedules, and term of the CPM designation. These variables are also time- and CPM-event specific. The ISO expects that the set of available resources to meet ISO needs will vary based on when the CPM event occurs, what resource characteristics the ISO needs to resolve the reliability issue, and whether the ISO needs capacity in a specific location. Until a CPM event occurs, there is no way for the ISO to predict the specific marginal backstop resource. Therefore, the ISO proposes a soft offer cap in order to limit any significant exertion of market power, but still allow resources an opportunity to recover their reasonable costs. The analysis to determine the soft offer cap price will be developed using the following principles Soft offer cap principles The soft offer cap should reflect expected market value of residual supply in a competitive environment. In a competitive environment, LSEs will procure two general categories of resources. The first set of resources LSEs must procure are those necessary to meet state mandates. This encompasses renewable resources as well as specific new resources determined through state policy to be needed for reliability or environmental goals. Because these resources must be procured, the ISO assumes that these resource types have RA contracts in place and are unlikely to ever be the marginal resource procured to meet RA deficiencies or respond to a significant event. The second set of resources contains those resources that may be marginal. These are resource types that are often owned by merchant generators and may (or may not) have short- to medium- term contracts with LSEs. Marginal resource type will vary based on CPM event and current system conditions. Although the ISO proposes a single soft offer cap, this is not meant to indicate that only a single resource type is likely to receive a CPM designation. The soft offer cap price should reflect the price of a high likely marginal resource type. Depending on the time, location, and characteristics needed during the CPM event, the marginal resource type can be expected to change. Historical CPMs have been for both steam turbines and combined cycle resource types and the ISO does not expect there to be a single dominant resource type for CPM designations going-forward. Market value can be reflected by estimating the cost of service for a proxy resource. As discussed in section 10, FERC expressed concern that paying going-forward fixed costs plus 10% denies marginal resources a reasonable opportunity to recover fixed costs. Accordingly, the ISO believes it is appropriate to compensate a CPM service provider CAISO/M&IP/C.Bentley 26 September 25, 2014

27 beyond its basic going forward costs and allow for some portion of fixed cost recovery (e.g. for environmental upgrades or other non-depreciated investment). A way to estimate cost of service is to estimate going-forward fixed costs and include an adder to account for additional costs. Estimating the cost of service for a proxy resource type is extremely difficult because of the unique, resource-specific details and characteristics needed to estimate such a cost. A cost of service rate for existing resources will vary widely even among resources that were built around the same time and using similar technology. The difference between going-forward fixed costs and a cost of service rate typically is that the latter also contemplates a return on and of capital. Figure 9 summarizes the difference between going-forward fixed costs and a cost of service rate. Therefore, for purposes of determining the soft offer cap, the ISO proposes to use an estimate of going-forward fixed costs plus an adder, which it believes will serve as a reasonable estimate of the cost of service of an existing, marginal, proxy resource. Figure 9: Summary of difference between going-forward fixed costs and cost of service rates Cost of service fixed O&M, ad valorum taxes, insurance capital and financing costs after any upgrades and depreciation Going - foward fixed costs fixed O&M, ad valorum taxes, insurance Cost of New Entry fixed O&M, ad valorum taxes, insurance capital costs financing (equity and debt) costs Soft offer cap proposal The ISO proposes that the soft offer cap be made up of two elements. First, the soft offer cap should be based on the expected marginal proxy resource. The resource may change seasonally or be the same resource for the entire year. In the appendix (section 19.1) the ISO describes how this proxy resource may be determined. Second, the soft offer cap should be set using an independent calculation of going-forward fixed costs for this marginal resource, plus a CAISO/M&IP/C.Bentley 27 September 25, 2014

28 fixed adder. The ISO also proposes using the going forward cost for a combustion turbine and/or existing combined cycle derived from cost data in California Energy Commission studies, as reported in the DMM annual report. 12 The ISO initially proposes that a 20% adder to going-forward fixed costs as a reasonable compromise between generator and load interests. The ISO believes that this will address FERC s guidance in the CPM order that the CPM price provide for additional fixed cost recovery, as well as incentivize resources to perform long-term maintenance and make necessary improvements to their facilities Offers above soft offer cap The ISO will allow suppliers to go to FERC to cost-justify offers above the soft offer cap. Timing of FERC request A supplier may go to FERC prior to offering the resource into the auction to cost-justify in advance of offering into the CSP. Payments made based on cost-justification The ISO will accept the FERC approved cost-of-service rate for 3 years from the approval date. This rate will be paid in the form of $/kw- year divided by 12 to get a $/kw month payment. The CAISO will make this payment for the term of the designation. The ISO will not deduct bilateral or energy revenues from this value. Again the ISO believes this is a reasonable compromise between load and generator interests. Generators will only be permitted to recover (annual cost of service /12) for each month of their designation, but they will not have any annual or monthly bilateral contracts nor any expected energy rents netted from that capacity payment. A resource cannot file at FERC to recover costs that are higher than its bid into the CSP Limits on bidding flexibility In each CSP a supplier must offer capacity into the competitive solicitation before the ISO determines that a deficiency exists. The supplier will not have the flexibility to increase its original offer price, although it may lower the price. The ISO will allow this functionality in response to a situation where a resource may receive a bilateral contract for a later month in the year that lowers the need to recover costs in the offered CSP month. Additionally, during the period between the initial bid and the bid finalization, if all or a portion of the capacity that the supplier offered becomes unavailable, the supplier may remove such unavailable capacity, subject to rules described in section pages 55-56, referencing the data presented in the March 2013 CEC Workshop on the Cost of New Renewable and Fossil-Fueled Generation in California: CAISO/M&IP/C.Bentley 28 September 25, 2014

29 Some stakeholders suggested that suppliers should only to be able to offer a single price per MW for all solicitation processes within the RA year. The ISO does not propose this as a feature of the revised CPM mechanism. The price at which a supplier is willing to sell RA capacity is likely to be dependent on other contracts the supplier may receive for that capacity at different times during the year and, therefore, the ISO expect that suppliers willingness to provide capacity will change from month to month. Also, locking in bids during the annual timeframe is inconsistent with FERC s intent that the CPM be able to reflect fluctuating market and system conditions. The ISO could impose a rule providing that scheduling coordinators could only lower their offer price successively from the annual to the monthly and finally to the intra-month CSPs; however, this may tend to increase the annual price offers without adding real market power mitigation to the CSPs. Therefore, the ISO is not proposing any rules regarding the link between offer prices in the different CSPs Demand-side market power Traditional demand-side market power issues are unlikely to arise in the competitive solicitation framework contemplated by the ISO. First, under the ISO proposal, market participants bidding capacity would be paid their offer price, not a market clearing price. Additionally, LSEs are not procuring capacity in the CPM. If LSEs are deficient and have available capacity under contract, they could simply cure the deficiency by declaring such capacity as RA. There would be no need to rely on CPM. There is no option to self-supply through the CPM process. This is because there is no requirement that all capacity under contract clear through a market in order to be counted as RA capacity. Thus, there is little, if any, incentive for suppliers that are also LSEs to offer in their capacity at an artificially low price in order to suppress prices. Therefore the ISO only proposes a minimum floor price of $0/kW-month for each of the CSPs. 13. Designation procedure The ISO proposes to create a competitive solicitation process that will price and designate backstop capacity for all existing CPM designation events. An numerical example of how the designation procedure may work is included in the presentation from the July 31 st, 2014 straw proposal meeting. Currently the ISO has tariff provisions regarding the selection of eligible capacity for designation. Section 43.4 states that the ISO shall make designations of eligible capacity as CPM capacity by applying the following criteria, in the order listed: Effectiveness of the eligible capacity at meeting the designation criteria specified in tariff section 43.2, Capacity costs associated with the eligible capacity, Quantity of a resource s available eligible capacity, based on a resource s PMin, relative to the remaining amount of capacity needed, Operating characteristics of the resource, such as dispatchability, ramp rate, and loadfollowing capability, CAISO/M&IP/C.Bentley 29 September 25, 2014

30 Susceptibility of the resource to restrictions as a use-limited resource, and Effectiveness of the eligible capacity in meeting local and/or zonal constraints or other ISO system needs, designated under tariff section The ISO proposes to retain these criteria as a basic framework for designating resources in the CPM competitive solicitation process; however, the ISO proposes certain changes to accommodate daily resource adequacy resources and the competitive solicitation process Designation procedure process description When deciding which resource to issue a CPM designation to the ISO proposes the following process. This will not apply to the risk-of-retirement CPM designation. The CPM designation, as appropriate, would continue subject to tariff section , , and The ISO is not proposing any changes to the current process for risk-of-retirement CPM Ability of the eligible capacity to meet the designation criteria The ISO will first establish the minimum criteria needed to meet the requirements of the specific CPM event designation. The ISO will group the capacity into RA types and categories. If the resource does not meet the minimum criteria needed for the CPM event designation, the ISO will not consider it regardless of its relative qualifications in through If there is insufficient capacity to meet the need within this step, the ISO will not move on to the next step and instead will look toward capacity that was not offered into the CSP to assess this capacity against the minimum criteria. Under the circumstance where the ISO must use capacity that was not offered in to the CSP to meet the minimum criteria, the ISO will insert the soft offer cap for the purposes of the designation procedure. If ISO designates capacity from a resource that was not offered into the CSP, the supplier will have the option to turn down the CPM designation or provide cost-justification for a higher price after-the-fact. In the event there is no capacity from either offered or non-offered resource pools that meets the ISO s initial minimum criteria to satisfy the CPM need, the ISO will reassess and lower the minimum criteria. The ISO will then redo this step using the lowered minimum criteria Assessment of costs Once the ISO has narrowed the pool of capacity to only capacity that will, at a minimum, meet the CPM required needs, the ISO will then compare offered capacity costs. The following subsections describe how the ISO will create equivalent prices between resources with different resource characteristics Capacity costs associated with the eligible capacity The ISO proposes to use the competitive solicitation offers as the foundation for creating equivalent capacity prices across eligible resources. For resources that offered into the relevant CAISO/M&IP/C.Bentley 30 September 25, 2014

31 CSP the ISO will use the offered capacity bids in the following subsection. If it becomes necessary, for capacity that a scheduling coordinator did not offer into the relevant CSP, but has been determined needed in the minimum criteria step, the ISO will use the soft offer cap proposed in section 12.1 If this resource is designated under the CPM, it will have the option to cost justify a higher price after-the-fact at FERC. Quantity of a resource s available eligible capacity, based on a resource s PMin, relative to the remaining amount of capacity needed Using the capacity costs determined in section , the ISO will next use the resource s Pmin and amount of capacity the ISO needs to determine a $/kw-month comparable value. For example, assume a scenario where the CAISO only needs 40 MW of capacity. Unit A has a Pmin of 20 MW and Unit B has a Pmin of 50 MW. If both units offer in at the same price, the CAISO will select unit A because it will have a lower equivalent price, i.e., the CAISO only needs to buy 40 MW from unit A but must by 50 MW from unit B at the same price Quantity of a resource s available eligible capacity, based on planned outages and replacement or substitute daily RA The ISO will take into account known planned outages and days that the resource may be used as replacement or substitute RA in the designation procedure. Using the capacity costs determined in the above sections, the ISO will next use the resource s available capacity after outages and days as replacement or substitute RA, and amount of capacity the ISO needs, in order to determine a $/kw-month comparable value Susceptibility of the resource to restrictions as a uselimited The ISO will then evaluate whether a resource s use-limitations have the potential to not fully satisfy the ISO s expected future needs, and as such, poses the risk of having to make another CPM designation to address the reliability need. Resources already designated for certain days as RA during the CPM designation period will also be considered at this time. The ISO may choose a resource that is more expensive, but available to provide additional capacity throughout the month if the ISO deems that there is a potential that the resource will not fully meet the ISO s reliability needs and there is a risk of an additional future CPM if the ISO designates the resource. Further, if two resources have the same offer price in terms of $/kw-month, then the ISO may take the one that is less use-limited Other considerations Finally, the ISO will also take into account the following in the event offers are within 10% of each other in terms of $/kw-month: Effectiveness of the eligible capacity in meeting local and/or zonal constraints or other ISO system needs CAISO/M&IP/C.Bentley 31 September 25, 2014

32 Operating characteristics of the resource, such as dispatchability, ramp rate, and loadfollowing capability This will be at the ISO s discretion and be based on expected needs beyond the minimum criteria Risk-of-retirement timeline The ISO will use the current tariff rules to designate a resource under the risk-of-retirement CPM. In addition, in order to qualify for a risk-of-retirement CPM, a resource must have offered all qualified RA capacity into all CPM solicitation processes prior to the time of its designation. This includes both the annual, monthly, and intra-monthly processes. This should ensure that any resource asking for a risk-of-retirement designation has done everything possible to get a RA contract. If a resource does qualify to receive a risk-of-retirement designation, the resource will then be compensated using its annual competitive solicitation offer (mitigated if appropriate). 14. CPM designation payments In the event a resource has capacity that is designated under the CPM, the ISO will pay the resource its offer price. In the event multiple resources are needed for a single CPM event, the ISO will pay each resource their individual offer price. In the event a resource is designated for both flexible and generic capacity, the ISO will pay the resource the maximum between the flexible and generic value at the offered price Payment adjustments The ISO will create a daily equivalent price from a designated resource s offer price and net out any days the resource is on planned outage or already shown as replacement or substitute RA. This will be done in accordance with tariff section , Appendix F, and pages of the Reliability Requirements BPM 13 and will be amended to include days under RA contract as well as outages. A resource will not be eligible to increase their CPM offer once designated. Therefore the ISO will not adjust the payment if a resource is designated for a length of time that spans multiple CSPs and offer prices. A resource will only be compensated using the original offered rate regardless of the designation time period. Any new rate will have to be done through a new CPM event (even if it is for a continuing reason) and designation. If the ISO designates a resource that offered above the soft offer cap, the ISO will initially pay the resource at either the FERC approved rate if the resource has a previously approved rate, or in the event FERC has not yet approved an amount above the soft offer cap, the soft offer 13 _Requirements_V18_clean.docx on July 22, CAISO/M&IP/C.Bentley 32 September 25, 2014

33 cap price. The resource then has 60 days to file at FERC approval for the rate above the soft offer cap. Once the FERC rate is received the ISO will adjust the payment to the resource up using that rate. A resource that elects to cost justify at FERC, cannot receive a rate that is higher than the price it bid into the market. The ISO acknowledges there are specific payment rules that will need to be created to prevent double payments to a resource that receives subsequent, overlapping CPM designations. Offer rules have been created with this in mind in section Availability incentive mechanism Any resource designated under a CPM event will be assessed under the availability incentive mechanism at the higher of the price per kw-month paid or the established incentive mechanism price. All other RA rules will continue to apply to the designated resource. 15. Obligations of designated resources Any resource designated under the CPM will have all the responsibilities and must-offer requirements as RA resources of the same RA type and category. 16. CPM designation eligibility FRAC MOO initiated the need to describe RA by type (system, local, flexible) and by category (flexible super-peak, peak, and base). The new flexible RA type and differing must-offer hours by category created the need for the ISO to address the connection between flexible RA mustoffer obligation hours and the general obligations of an RA resource. Previously there was no need to explicitly define the obligations of RA capacity and whether they were connected to must-offer hours because all internal RA resources had a 24-hour mustoffer obligation (or an obligation to be available to the extent possible). Therefore an RA resource could not receive a CPM payment for its RA capacity because that capacity was already secured through RA, was considered a daily obligation, and double payments would not be allowed. An outstanding issue from the FRAC MOO initiative is whether the ISO should move to a construct where RA capacity is an hourly product and therefore a MW can be RA one hour and not the next based on the associated RA must-offer obligations. This has significant operational impacts on exceptional dispatches. The ISO looks first to RA capacity in the event of an out-of-market dispatch need and only to non-ra capacity if no RA capacity is available. Current markets systems capture the RA status of resources on a daily basis and do not incorporate a subset-of-hours capability to enable operator review prior to selecting an out of market resource in an RA-first sequence. The ISO utilizes the RA program in conjunction with market mechanisms to maintain the reliable and efficient operation of the grid. Like all resources that have signed a participating generator agreement, RA resources have an obligation to the grid in the event of a potential emergency. RA resources additionally have daily must-offer obligations (varying by type and category of RA). An hourly must-offer obligation, however, is in addition to and different from the other general obligations of a RA resource. CAISO/M&IP/C.Bentley 33 September 25, 2014

34 The ISO proposes that any resource shown on a supply or RA plan that counts toward the flexible, local, or system RA requirement is considered an RA resource and: Any capacity that is considered RA at any point during an operating day would not receive a CPM payment if exceptionally dispatched outside the must-offer hours Any capacity that is considered RA at any point during an operating day is not eligible for a RUC payment The ISO has an RA program in order to maintain the safety and reliability of the grid. RA resources, regardless of type and must-offer requirements, have an obligation to the grid in the event of a potential emergency. The must-offer hourly obligation, however, is different from a general obligation of a RA resource. The ISO proposes that RA resources have an obligation to be available to provide service to the extent possible in the event the ISO experiences an event that requires out-of-market intervention. The ISO proposes that flexible capacity will come with the same obligation as generic resources- to be available to maintain grid reliability. Therefore all RA capacity is not eligible for a CPM designation or payments in any day the resource is designated as a RA resource. The ISO has must-offer hours in order to verify that, at a minimum, resources are meeting their obligations in the expected load or flexible peak hours. In reality, operational needs including load or flexible peaks shift from day to day and RA resources have an obligation to meet actual grid requirements to the extent possible. Resources on a monthly RA plan will be considered RA for the entire month. This includes flexible and generic resources that are only assessed under the availability incentive mechanism during certain days and hours. Resources not on a monthly plan, but used for replacement and substitution will be considered RA and therefore not eligible for a CPM designation payment on any day they are used as replacement or substitute resources. 17. CPM event transparency Exceptional Dispatch CPM designation of partial-ra resources A policy issue has been raised regarding CPM designations for partial-ra resources. Currently, in the event a non-ra resource receives a post day-ahead exceptional dispatch CPM, the ISO will conduct a reliability assessment in order to identify the capacity needed to meet the reliability need. 14 This ensures that the resource is compensated for the entire capacity amount the ISO is relying on regardless of the actual dispatch level in real-time. For a RA resource, the ISO does not conduct this test because the resource was already paid to provide capacity as a RA resource and does not need to be further compensated. A partial-ra resource may receive a post day-ahead exceptional dispatch that is less than or equal to the amount of its RA 14 BPM section CAISO/M&IP/C.Bentley 34 September 25, 2014

35 capacity. Because the resource does not receive a CPM designation, the ISO does not conduct a reliability assessment. The ISO proposes to institute a post day-ahead reliability assessment for all partial-ra resources that received a post day-ahead exceptional dispatch. This assessment will follow the same process as the post day-ahead reliability assessment for non-ra resources that receive a post day-ahead exceptional dispatch. 18. Next Steps The ISO will discuss this revised straw proposal paper with stakeholders during a meeting on October 2 nd, Stakeholders should submit written comments by Thursday, October 16 th, 2014 to CPMReplacement@caiso.com. CAISO/M&IP/C.Bentley 35 September 25, 2014

36 19. Appendix CPM soft offer cap proxy resource analysis Ultimately, the ISO proposes that stakeholders settle on a simple, easily replicable methodology that could be used to update the soft offer cap every three years. This could either take the form of a study identifying the potential marginal resource or simply deciding on a single resource type that is unlikely to change in the foreseeable future. Every three years the going-forward fixed costs of the proxy marginal resource would be reassessed by the ISO if public data is available or a consultant. The proxy marginal resource could also be reassessed at this time or simply be determined in this initial stakeholder process. The following analyses are intended to help the ISO and stakeholders determine whether the proxy marginal resource should be determined once initially or through an easily replicable methodology as well as determine the initial proxy marginal resource type. The ISO offers two analyses for use in determining the marginal resource generation technology type to use as the basis for the soft offer cap. The ISO is also working with the CPUC to get data on RA contracting and will present these results in a third analysis once the study is finalized (described further in section 19.4). Analysis one establishes a monthly proxy marginal resource by stacking resource adequacy resources by estimated going-forward fixed costs of an average resource and determining the resource type where the RA supply meets RA demand by month. The intent here is to mimic a competitive market across the year. This has the benefit of seeing how the marginal resource type may change seasonally. Analysis two looks at RA from the opposite perspective and summarizes the historical non-ra capacity by month. Non-RA capacity is the difference between the total NQC on each resource and the amount of capacity shown on LSEs RA plans. This analysis shows the ISO s historical potential residual supply. The benefit of this analysis is that it shows the expected resource mix by generation type that is likely to get a CPM designation in the future. The ISO believes that either of these analyses could be used to provide justification for a proxy resource type. They can either be used simply for an initial agreement on a proxy resource type going-forward or are easily replicated and can be repeated every three years. Although not often discussed in this manner, CPM events can be categorized in two general forms. CPM events can occur because of deficiencies- that is, collectively LSEs did not procure enough capacity to meet the local, system, or flexible requirement. Or CPM events can occur despite sufficient capacity being shown to the meet the requirement. Both significant event and exceptional dispatch CPMs bring the amount of RA capacity shown to the ISO above the requirement level. Analysis one shows the RA stack and any deficiency would lead the marginal resource to be included in this sort of analysis. Analysis two shows the non-ra capacity, which an exceptional dispatch or significant event would cause the marginal resource to be pulled from. Therefore, the ISO believes that both analyses could be a justifiable way to determine the marginal resource type and may in fact lead to the same conclusion. CAISO/M&IP/C.Bentley 36 September 25, 2014

37 19.2. Determining the proxy resource using RA data The ISO proposes that one way to estimate the proxy RA resource is to stack all potential RA capacity by generation technology type. Potential RA capacity is capacity that had a net qualifying capacity (NQC) value assigned to the resource in the applicable month and year. The following charts (Figure 10 - Figure 12) show all potential RA in each month, by year. This is the sum of all net qualifying capacity in the ISO. The resource types are first stacked by generation technology types used to meet state mandate as these are unlikely to be marginal resources. This assumption is validated by the following section, which shows remaining generation technology types after the monthly RA showings. Only very small amounts of any of the state mandate resource types are shown as available after RA showings and possibly they were not shown because they were on planned outage so unavailable for the majority of the month. Resources are then stacked by estimated going forward fixed costs. The ISO makes many assumptions in this stacking and recognizes that resources costs and revenues vary widely by generation technology type and location. This is only meant as a general relative position cost estimate for the average resource type. Therefore, the ISO stacks the presumed marginal resources (resources that may or may not be RA in a given month) in least to most GFFC order: gas turbine, steam turbine, combined cycle. Figure 10: 2012 monthly available resource adequacy capacity CAISO/M&IP/C.Bentley 37 September 25, 2014

38 Figure 11: 2013 monthly available resource adequacy capacity Figure 12: 2014 monthly available resource adequacy capacity Footnote: *net estimated DR and RMR CAISO/M&IP/C.Bentley 38 September 25, 2014

39 Using 2014 data, it appears that there is a seasonal trend and the estimated marginal resource is a combined cycle in the summer months (May September) and a steam turbine in the nonsummer months. The ISO proposes that it may be appropriate for a combined cycle resource to be used as the proxy resource in all months, given that the proxy resource is determining a soft offer cap and not an administrative price intended to perfectly capture the monthly marginal resource. Put another way, the soft offer cap does not have to reflect expected monthly market conditions because these conditions will end up being better reflected in the monthly competitive solicitation offers themselves. Therefore using the highest cost resource technology type across the year may be appropriate Determining the proxy resource using non-ra data Figure 13 - Figure 15 summarize the non-resource adequacy capacity each month in 2012 through September Non-RA capacity is defined as capacity on a resource that is not committed as RA at any point within the month. It can be determined by subtracting the resource s monthly maximum RA value shown to the ISO from the resource s NQC. Each chart shows the percentage of each technology type relative to the total non-ra capacity each month. In 2014, combined cycle and steam turbine capacity make up the majority of the remaining capacity available to the ISO in the event of a CPM event. Additionally, from 2012 through 2014 it appears that the percentage of combined cycle resources is making up an increasingly higher percentage of non-ra capacity in each month. CAISO/M&IP/C.Bentley 39 September 25, 2014

40 Figure 13: 2012 Non-resource adequacy capacity CAISO/M&IP/C.Bentley 40 September 25, 2014

41 Figure 14: 2013 Non-resource adequacy capacity Figure 15: 2014 Non-resource adequacy capacity CAISO/M&IP/C.Bentley 41 September 25, 2014