FERC on Thursday reversed a previous decision allowing CAISO to include a 20% adder in the compensation formula for energy resource offers that exceed the soft offer cap for the ISO’s capacity procurement mechanism (CPM) (ER20-1075).

The commission instead defaulted to approving an alternative proposal that omits the adder from the formula.

The D.C. Circuit Court of Appeals last December remanded the original May 2020 order approving the adder back to FERC after determining the commission’s decision “was not the product of reasoned decision-making” (20-1388). (See Court Overturns FERC on CAISO CPM Rates.)

The CPM acts as an out-of-market “voluntary backstop” that enables CAISO to purchase backup resources to maintain reliability ahead of potential energy shortfalls, such as those caused by extreme weather or generation and transmission outages.

The ISO’s tariff permits resources that do not already have a resource adequacy contract to submit bids into a competitive CPM solicitation to receive compensation up to the $6.31/kW-month soft offer cap. The soft cap is based on the going-forward costs of a reference unit, which include fixed operations and maintenance costs, ad valorem taxes, and insurance costs.

At issue in Thursday’s order was a February 2020 filing in which CAISO proposed two separate plans for compensating resources that bid above the soft cap. In the ISO’s “preferred” proposal, later accepted by the commission, a resource bidding above the cap could file an offer with FERC that includes its going-forward costs plus a 20% adder.

In arguing for the proposal, FERC noted, CAISO said the methodology: “aligns with how the existing CPM soft offer cap is derived; is consistent with prior commission guidance that CPM compensation should allow for some meaningful contribution to fixed cost recovery and provide incentives for resources to undertake necessary upgrades and long-term maintenance; and reflects the voluntary nature of CPM designations.”

In the ISO’s alternative proposal, a resource bidding above the cap would submit a FERC filing based on the same going forward costs but would not include the 20% adder.

“To date, no resource has ever sought to justify compensation above the CPM soft offer cap,” FERC noted in Thursday’s order.

In approving CAISO’s preferred proposal in May 2020, FERC said “the inclusion of a 20% adder on top of demonstrated going-forward fixed costs is consistent with commission precedent on CPM compensation.” The commission was specifically referring to its 2015 CAISO CPM decision, which found that the soft cap, which itself includes a 20% adder, would allow a resource sufficient recovery of fixed costs plus a return on capital to fund incremental upgrades and improvements.

The commission did not address the alternative proposal in that order.

‘Substantial Differences’

But the California Public Utilities Commission (CPUC) sought rehearing of the May 2020 decision (CPUC v. FERC), contending that FERC erred by relying on its 2015 CPM order in accepting the adder. The CPUC argued that FERC should instead accept the alternative proposal.

The D.C. Circuit agreed with the CPUC in its ruling last year, finding that FERC’s reliance on the 2015 CPM order “was not the product of reasoned decision-making,” the commission said.

“In particular, the D.C. Circuit stated that the commission failed to grapple with the distinction between bids submitted below the soft offer cap, which were the subject of the 2015 CPM order, and bids above the soft offer cap,” the commission wrote. “Thus, the court held that the commission erred by relying on precedent ‘without recognition of the substantial differences between the two cases.’”

In reversing its decision Thursday, the commission acknowledged the D.C. Circuit’s finding that the 2015 CPM order dealt with the derivation of the soft offer cap, “which is a resource-agnostic fixed rate based on the costs of a reference unit.”

“Here, in contrast, we are evaluating resource-specific compensation for a resource with going-forward costs above the soft offer cap,” the commission continued. “We find that the record contains no evidence regarding the actual cost recovery needs of specific resources with going-forward costs above the soft offer cap that demonstrates that an adder is warranted to ensure sufficient cost recovery and conclude that the findings in the 2015 CPM order need not govern here.”

The commission further determined there was no evidence establishing why a 20% was appropriate, even if an adder was “otherwise justified.”

The commission additionally found that the alternative proposal was consistent with FERC precedent, “indicating that compensation for voluntary backstop procurement mechanisms should, at a minimum, provide for recovery of a resource’s going-forward costs.”