By Robert Mullin

FERC on Thursday rejected CAISO’s effort to refund $220 million to scheduling coordinators that the ISO said were misallocated payments to generators operating under must-offer obligations.

The decision rendered moot a complaint filed by energy retailers that contended that the refunds were unjustified because they had not been specifically ordered by the commission (EL14-67, et al.).

While the ISO’s refund report did not specify the beneficiaries of the refunds, other documents related to the proceeding indicate that a portion of the payments were likely destined for Southern California Edison customers in light of a previous FERC decision to reallocate must-offer costs associated with a transmission constraint within the utility’s service territory to all load in CAISO’s SP-15 zone.

At issue was a May 2004 Tariff amendment that changed the allocation of minimum load costs — fuel costs associated with keeping a unit running at minimum levels — for must-offer generation to more accurately reflect cost causation.

Under the design, CAISO allocated minimum load compensation costs to load-serving entities based on whether the generators had primarily fulfilled local, zonal or system reliability requirements.

FERC approved most of the amendment two months later, but the cost allocation provision — which had been contested by Pacific Gas and Electric — was subject to modification and rehearing, with a refund date set for July 17, 2004.

In December 2006, the commission mostly affirmed the reasonableness of the allocation provision, but it found that the South of Lugo Transformer Path in Southern California should be classified as a local — rather than regional — constraint. FERC ordered the ISO to allocate must-offer start-up and emission costs in the same manner as minimum load costs and determined that wheel-through transactions should be excluded from the allocation.

Southern California Edison protested the reclassification of the South of Lugo constraint as local, an argument with which the commission later agreed in a 2007 rehearing. The cities of Anaheim, Azusa, Banning, Colton and Riverside, in turn, contested that decision, but the D.C. Circuit Court of Appeals denied their petition for review in 2013.

Later that year, CAISO submitted to FERC a report outlining refunds the ISO intended to issue based on the reallocation of must-offer costs stemming from the prior rulings. Issuing the refunds would require the ISO to levy surcharges on scheduling coordinators that paid too little in order to make whole those that paid too much.

Shell Energy North America and the Alliance for Retail Energy Markets — representing Constellation NewEnergy, Direct Energy and Noble Americas Energy Solutions — contested the surcharges, saying that they were effectively retroactive rate increases not authorized by FERC. They also argued that, when the commission requires refunds, “its normal practice is to expressly order that refunds be made within a specified time and that a refund report be filed,” neither of which occurred. In any case, FERC was not obligated to require refunds in this case, they said.

Those contentions found support in the commission’s decision last week.

“CAISO’s filing of the refund report is not tied to any commission compliance directive in this proceeding,” the commission wrote. “While the commission initially accepted CAISO’s filing subject to refund, at no point did the commission direct CAISO to make refunds or file a refund report.”

The commission also found that the ISO at no time overcharged its customers and that it had appropriately revised its Tariff on compliance so that a just rate was allocated to customers on a going-forward basis.

Furthermore, the commissioners pointed out that none of its prior orders stated that the ISO had failed to follow any directives by not issuing refunds.

“Even if it were arguably unclear whether refunds should have been ordered for past periods, we note that neither CAISO nor any other party sought rehearing or clarification of the orders in this proceeding on this issue,” the commission said.

FERC went on to state that “surcharging of market participants was improper for any past periods” and that its power to order refunds is “discretionary” under the Federal Power Act.

The commission said the complaint by the alliance and Shell “has been rendered moot as a result of our rejection of the refund report.”