CAISO Announces New Stakeholder Process to Address Reliability, Including Possible Market-Based Capacity Backstop; First Meeting is February 4

by Latham & Watkins LLP

The California Independent System Operator (CAISO) has announced that it is starting a new “Reliability Services” stakeholder process.  In a January 14, 2014, Market Notice the CAISO said that the new stakeholder process would address three related issues: (i) the development of a replacement proposal for the backstop capacity procurement provisions of CAISO’s Tariff; (ii) the design of a market-based mechanism to replace the CAISO’s current backstop capacity procurement authority, and (iii) updates to the standard must-offer requirements for local, flexible, and system resource adequacy capacity. 

The initiative would, among other things, replace the CAISO’s existing backstop capacity procurement mechanism which is set to expire in 2016. The ultimate outcome of this process may mark a significant shift in the mechanisms for resource adequacy and capacity procurement in California.


The Reliability Services initiative comes at a time of two fundamental changes in California’s bulk power system—namely, unprecedented levels of renewable generation resources reaching commercial operation, and the expected retirement of thousands of megawatts of natural gas-fired generation that use once-through cooling. The simultaneous increase in intermittent, non-dispatchable renewable generation resources and decrease in flexible, fast-ramping gas-fired generation poses novel operational challenges for the CAISO. In response to these challenges, CAISO intends to develop a replacement proposal for its backstop resource adequacy procurement mechanism, consider the design of a market-based backstop procurement mechanism, and consider any needed updates to the standard must-offer requirements for local, flexible, and system resource adequacy capacity.

The CAISO’s initiative also follows on the heels of a March 29, 2013, FERC order rejecting an earlier interim flexible capacity and local reliability resource retention proposal. In that proceeding, the CAISO had proposed Tariff revisions authorizing the CAISO to offer financial support to generation resources at risk of retirement that are determined to be necessary for flexible capacity or local reliability needs in the near-term. FERC rejected the CAISO’s proposal and directed it to develop a market-based mechanism in consultation with stakeholders.

Following these developments, the CAISO and the California Public Utilities Commission (CPUC) adopted a Joint Reliability Plan. As discussed in a December 11, 2013, memorandum issued by CAISO management, the Reliability Services stakeholder process is CAISO’s first step toward implementing the Joint Reliability Plan, while also addressing the emerging operational and planning challenges for the bulk power system in California discussed above. The Joint Reliability Plan committed the CAISO and CPUC to work jointly on three independent initiatives.

Initiative 1: Multi-year Resource Adequacy Requirements. This initiative is primarily under the purview of the CPUC and will involve possible expansion of the current resource adequacy requirements (limited to one-year ahead compliance) to include two- and three-year forward resource adequacy provisions.

Initiative 2: Unified Long-Term Reliability Planning Assessment. The CPUC and CAISO (with potential input from the California Energy Commission) will coordinate to develop and publish a joint long-term reliability planning assessment on an annual or biennial basis. The assessment would focus on local, flexible, and system needs over a four to ten year planning horizon.

Initiative 3: Replace CAISO’s Backstop Capacity Procurement Mechanism. The third initiative of the Joint Reliability Plan specifically addresses the CAISO’s need to develop a market-based backstop procurement mechanism to replace or augment the existing capacity procurement mechanism (which pays generation resources for capacity using an administratively-determined price).

The January 14 Market Notice

The Reliability Services stakeholder initiative focuses on the third of these initiatives. In doing so, it appears for now that the CAISO is attempting to address jurisdictional concerns of the CPUC regarding bulk power resource adequacy markets in California. For example, the CAISO’s December 11, 2013, memorandum acknowledged that the CPUC had expressed concern that “the [CAISO’s] administration of a forward procurement mechanism would create a FERC jurisdictional market that may not recognize state policies for public utilities to procure preferred resources.” The CAISO’s memorandum emphasized that any backstop procurement mechanism would only be used to cure capacity deficiencies and would not be expanded to replace CPUC-directed procurement of preferred resources (e.g. energy efficiency, demand response, or energy storage).

The CAISO has, however, indicated that this stakeholder process will include other issues beyond merely focusing on a market-based backstop procurement mechanism. In particular, the CAISO will consider updates to must-offer requirements for all types of resource adequacy resources and the availability standards contained in the CAISO Tariff. Thus, the scope of this stakeholder process could have broad implications for any planned or existing generation resources that provide resource adequacy products to load-serving entities in California.

The CAISO expects to release an issue paper on these topics on January 28, 2014, and the first stakeholder meeting is scheduled shortly thereafter, on February 4, 2014.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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