On November 19, 2018, FERC denied a complaint filed by CXA La Paloma, LLC (“La Paloma”) requesting that FERC use its jurisdiction over resource adequacy to direct the California Independent System Operator Corp. (“CAISO”) to implement centralized capacity procurement. FERC found that La Paloma failed to meet its burden to demonstrate that CAISO’s tariff was unjust, unreasonable, or unduly discriminatory or preferential under section 206 of the Federal Power Act.

In its complaint, La Paloma argued that California’s current resource adequacy regime increasingly requires participants to provide capacity from existing (often non-renewable) resources, such as the La Paloma gas-fired generating facility, and receive capacity payments that are four to seven times lower than those received by new (renewable) resources, resulting in a revenue shortfall. La Paloma argued that CAISO’s capacity market effectively functions based on a vertical demand curve, which it claimed leads to highly volatile capacity payments and may lead to other market inefficiencies. Previously, in 2016, CAISO denied a request to approve an economic outage for the underlying generating facility, a decision that was later upheld by FERC. According to the La Paloma complaint, such decisions, coupled with the very low capacity payments for existing resources, demonstrate market failures in CAISO that could eventually lead to reliability issues in California.

In response, CAISO argued that granting the complaint would threaten to undo CAISO’s existing bilateral procurement framework for capacity and force changes more in line with the eastern RTO/ISOs. As noted in FERC’s order, PJM Interconnection, L.L.C., New York Independent System Operator, Inc., and ISO New England Inc. have all recently transitioned from a vertical demand curve to a sloped demand curve for capacity.

Ultimately, FERC rejected La Paloma’s arguments for multiple reasons. FERC reiterated that suppliers in a competitive wholesale market are not guaranteed full cost recovery, but simply the opportunity to recover their costs. FERC also noted that La Paloma’s complaint focused mainly on low capacity prices that were attributed to California’s capacity surplus and that low prices do not in and of themselves demonstrate market failure. Similarly, FERC reasoned that an increase in CAISO actions regarding economic outages that require generators to offer capacity did not demonstrate any reliability concerns. With regard to other regional transmission organizations and independent system operators, FERC noted that it has consistently rejected a one-size-fits-all approach to resource adequacy because each region has significant differences that must be accounted for and there can be more than one just and reasonable rate. Instead, FERC expressed confidence that upcoming CAISO and California Public Utilities Commission proceedings would appropriately address the changing grid conditions in California.

A copy of FERC’s order is available here.