California ISO Proposes to Expand Generator Downsizing Opportunities

by Orrick, Herrington & Sutcliffe LLP

On May 29, 2014, the California Independent System Operator Corporation (CAISO) submitted to the Federal Energy Regulatory Commission (FERC) proposed changes to its "generator downsizing" policies.  The revised policy would provide an annual opportunity for an interconnection customer to reduce the capacity of its generation facility by any amount and for any reason, if it satisfies the proposed eligibility requirements and pays the applicable restudy costs.  CAISO also proposes to clarify that an interconnection customer will not be in breach of its interconnection agreement if it fails to develop the full capacity of its planned generating facility, provided that the customer downsizes its project in the next available annual downsizing window following the scheduled commercial operation date of the generation, as specified in the interconnection agreement.

When requesting to interconnect a generating facility to the CAISO transmission system, a developer must specify the capacity of its planned generation facility.  CAISO will study the effects of interconnecting the proposed generating facility to the transmission grid, and the parties will negotiate an interconnection agreement detailing the costs for any new facilities or upgrades necessary to accommodate the request, and for providing interconnection service.  Developers often negotiate interconnection agreements before they have secured contracts for the purchase of power to be generated by their planned generating facility.  Developers that are unable to secure contracts for all of the proposed project capacity might determine that it is no longer economical for them to develop the full capacity of the proposed project.  Instead, they may choose to downsize the project capacity and develop a smaller version of the project.

CAISO's existing procedures for interconnecting new generating facilities include several options for developers to reduce the capacity of their projects, but these downsizing opportunities are subject to limitations.  Under the CAISO's current downsizing policy, there are eligibility requirements for developers wishing to downsize, time limits on when a developer can exercise its downsizing rights, and other limits on the size of and acceptable reasons for a proposed downsizing.  As a result, CAISO's existing downsizing opportunities are not available to all interconnection customers, or for any desired amount of reduced generation capacity.

In response to numerous requests from interconnection customers, CAISO proposed and FERC accepted a one-time generator downsizing opportunity that was implemented in early 2013.  In its filing with FERC, CAISO explained that the purpose of its proposal was to facilitate the completion and commercial operation of generation projects that would be viable but for the inability of a developer to construct the full capacity stated in its interconnection request.  The process also offered CAISO an opportunity to reduce non-viable megawatts from its interconnection queue, thereby facilitating more efficient interconnection planning.  The one-time downsizing opportunity resulted in a reduction of nearly 4,000 megawatts in CAISO's interconnection queue.  CAISO indicated to FERC that it would consider future downsizing opportunities through its stakeholder process.  

Like the one-time downsizing window implemented in 2013, CAISO's proposed yearly downsizing opportunity is intended to balance the need for interconnection customers to eliminate non-viable megawatts from the CAISO's interconnection queue while protecting non-downsizing interconnection customers from any downsizing-related harm.  In order to be eligible to participate in a yearly downsizing process, an interconnection customer must demonstrate that it has a generating facility that either (1) has not achieved the commercial operation date specified in its interconnection agreement, or (2) has achieved commercial operation, but with a total capacity that is lower than the planned amount specified in the interconnection agreement.  If the latter, the interconnection customer's opportunity to downsize will be limited to the next downsizing window that closes on a date following the commercial operation date specified in the interconnection agreement.  The interconnection customer also must demonstrate that it is in good standing with respect to the requirements of the CAISO Tariff and the terms of its interconnection agreement. 

CAISO proposes a 30-day window that will open on October 15 and close on November 15 of each year, during which eligible interconnection customers can submit a generator downsizing request.  The first downsizing window would open on October 15, 2014.  Interconnection customers that request downsizing will be required to pay a $60,000 deposit to be used by CAISO, and participating transmission owners, to pay for prudent costs incurred in administering the downsizing process.  Interconnection customers also will be responsible for an equal share of all actual costs in connection with studying the generator downsizing requests, and for all costs related to amending their respective interconnection agreements.  If actual study costs incurred are less than the generator downsizing deposit, the interconnection customer will be refunded the balance of its deposit, with interest. 

The downsizing study will evaluate the effects of the reduced capacity on the interconnection queue and identify any necessary modifications to upgrades identified in the original interconnection studies.  It is expected that a reduction in capacity will result in the identification of lower-cost upgrades, or the elimination of upgrades altogether.  However, in order to protect interconnection customers that choose not to downsize their generating facilities from any effects caused by downsizing requests, CAISO proposes to continue to require downsizing customers to finance the costs of (1) network upgrades identified in their original interconnection studies, and (2) alternative network upgrades identified in the downsizing study.  CAISO's language suggests that a downsizing generator will be responsible for the costs of two alternative sets of upgrades; however, language elsewhere in the proposed tariff revisions states that the downsizing generator will not be responsible for any costs in excess of its original cost responsibility as identified in its original interconnection agreement.  Even with this understanding, the rationale for requiring the generator to be responsible for two alternative upgrades is not clear.  This topic would be appropriate for comments seeking clarification.

CAISO also proposes to revise the existing "safe harbor" provisions of its pro forma interconnection agreement to offer all interconnection customers an opportunity to make de minimis reductions in generator capacity without risking breach of the interconnection agreements, and without participating in the annual generator downsizing process.  Currently, CAISO allows interconnection customers to reduce the capacity of their generating facility by up to five percent for any resource up to its commercial operation date.  CAISO proposes to expand this safe harbor by amending its interconnection agreements to permit an interconnection customer to reduce the capacity of its generating facility by the greater of five percent of its capacity or ten megawatts.  As proposed, reductions of generator capacity under the expanded safe harbor provisions must not exceed 25 percent of the capacity of the facility. 

Finally, CAISO proposes to eliminate the ability for interconnection customers to use the CAISO's "material modification" review process to reduce the capacity of their generating facilities without having to submit new interconnection requests.  In its filing letter to FERC, CAISO explains that the material modification review process is inefficient because it requires a piecemeal evaluation of individual downsizing requests, which often involves significant restudies of proposed interconnection requests.  CAISO also suggests that the material modification review process will be unnecessary if interconnection customers have an annual downsizing opportunity, as proposed to FERC.

Comments on CAISO's proposal are due by 5 PM Eastern on Thursday, June 19. 

Click here for a copy of CAISO's FERC filing and proposed CAISO Tariff language. 

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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