BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 1277 - Steinberg Hearing
Date: April 29, 2014 S
As Amended: April 2, 2014 FISCAL B
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DESCRIPTION
Current law recognizes the California Independent System
Operator (CAISO) and requires it to manage the transmission grid
and related energy markets and make the most efficient use of
available energy resources including energy, capacity, ancillary
services, and demand bid into markets administered by the CAISO.
(Public Utilities Code � 345.5)
Current law requires the California Public Utilities Commission
(CPUC), in consultation with the CAISO, to establish resource
adequacy (RA) requirements for all load serving entities which
are defined as an electrical corporation, electric service
provider, or community choice aggregator. (Public Utilities Code
� 380)
This bill requires the CAISO to obtain the concurrence of the
CPUC before submitting any tariff to the Federal Energy
Regulatory Commission (FERC) to implement a new auction- or
market-based mechanism for ensuring that sufficient resources
are procured to meet California's electricity needs. Before
concurring the CPUC would be required to open a formal
proceeding and would be precluded from concurring unless it
finds a de minimus risk that the tariff would preempt or
frustrate the electric resource procurement policies or just and
reasonable electric rates.
BACKGROUND
Resource Adequacy - The energy crisis which occurred in the
early 2000s resulted in the establishment of two critical
programs to ensure that California could "keep the lights on,"
and that the CAISO has sufficient electricity available for the
safe and reliable operation of the electric grid in real time.
In addition to long term procurement planning, the RA program
annually establishes minimum capacity obligation requirements
for CPUC jurisdictional load-serving entities (LSEs) on a one
year-ahead basis at both the system and local level. The current
RA program identifies the amount of capacity resources needed to
maintain reliability and requires LSEs to supply that amount of
capacity resources to the CAISO energy markets. In order to
identify the amount of capacity needed, the CPUC undertakes a
process with cooperation of both the California Energy
Commission (CEC) and the CAISO. The CEC forecasts the amount of
load that is expected in a year and the CAISO forecasts the
amount of resources that are needed system-wide and in local
areas. The CPUC considers both inputs, determines the
appropriate level of reliability, and then orders load serving
entities to procure capacity resource to that level. The
forecasted need for system and local resources is split as RA
procurement obligations among LSEs in proportion to their
coincident share of utility service area annual peak demand.
LSEs are required to supply capacity resources to meet the
forecast needs. The key RA obligation is that a resource counted
as "RA capacity" must bid into the CAISO energy markets and be
available to produce electricity when needed. Each day, the
CAISO runs a day ahead integrated network model and dispatches
resources efficiently to meet expected demand. All capacity
designated as RA capacity can be scheduled to deliver energy by
the CAISO if needed to maintain reliability. Each year, the RA
program requires LSEs to submit year-ahead filings (due in
October) and twelve month-ahead filings (due monthly) during the
compliance year. The year-ahead filings show that load serving
entities have procured capacity to meet 90 percent of the
forecast system need (the system need equals the forecast plus
the 15 percent reserve) during the five summer months
(May-September) and 100 percent of the forecast local needs. The
month-ahead filings require load serving entities to show 100
percent of system need (again the system need equals the
forecast plus the 15 percent reserve). The CPUC staff and the
CAISO staff evaluate annual and monthly filings to ensure
adequate reserves.
Backstop Procurement - Generally, the LSEs contract with
generation facilities and procure capacity so that it is
available to the CAISO when and where needed. The CAISO also
operates a backstop procurement mechanism for unexpected events
not anticipated by the RA program (e.g. the shutdown of SONGS)
or in the event that the RA program leaves a capacity
deficiency. Under the Capacity Procurement Mechanism (CPM) the
CAISO can issue a "CPM designation" to a generation resource for
a defined period of time (up to one year) for six specified
reasons (a significant event, a capacity deficiency, a retiring
resource, etc.), and during that period of designation, the
resource receives a capacity payment of $67.50 kW/month. The CPM
is a tariff approved by the FERC and expires in 2016 at which
time the CAISO will need a new or extended backstop procurement
mechanism to supplement the CPUC's RA program.
CAISO Reliability Services - The CAISO has opined that there is
a gap in future forward procurement processes and proposed
several changes to its reliability framework to accommodate the
shift toward meeting electricity needs with more use-limited and
variable electric resources. One initiative being pursued is to
replace its existing backstop capacity procurement mechanism
that expires in 2016 with a market-based, backstop procurement
mechanism as part of its Reliability Services Initiative.
Assuming that the FERC approves the most minimal capacity market
contemplated in this initiative, the CAISO would initially
manage a backstop mechanism for a monthly basis (or the length
of any forward RA obligation) in which participation by IOUs and
other LSEs is strictly voluntary. Even under this limited
approach, there is a risk that many features of the initial
capacity market could change and that FERC could end up
preempting the role of the CPUC and Legislature in order to
preserve the effectiveness of this market mechanism.
COMMENTS
1. Author's Purpose . The staffs of the CAISO and the CPUC
developed a "Joint Reliability Plan" (JRP) to modify the
various mechanisms by which the CPUC and the CAISO ensure
that there is sufficient capacity available to meet
California's future electricity needs. The CPUC and CAISO
Board both approved further steps to implement the JRP at
their November 14 and December 18 meetings.
One element of the JRP advocates a "Reliability Services
Auction" (RSA) that would create a new auction-based
mechanism for California's utilities to procure at least
some of the electricity to meet anticipated needs in future
years. The new auction would resemble "capacity markets"
that have been implemented in varying forms in other parts
of the United States, such as the mid-Atlantic states, New
England, and certain Midwestern states. Before the CAISO
could implement such an auction in California, the CAISO
would need to present its detailed auction proposal to the
FERC and gain FERC's approval. If and when the new auction
is adopted, the CAISO could also ask FERC to modify the
regulations governing the operation of the auction.
Ultimately, FERC would have final authority over how the
auction operates in California.
The capacity markets that have been adopted in other
regions of the country have been controversial. Regulatory
commissions that are the analogs to the CPUC in some of the
states where capacity markets are operating have found that
the FERC-controlled capacity markets have overridden state
energy policies, including policies to promote the
deployment of renewable and other state-preferred resources
and to meet local reliability needs. FERC sees its
mandate as ensuring "nondiscriminatory" markets and
generally objects, in the name of competitive equity, to
state policies that favor procurement of any particular
type of generating resource. For this reason, some of the
members of the CPUC have voiced concern that implementation
of a FERC-controlled auction in California could
potentially allow FERC to preempt California's longstanding
policies favoring procurement of resources designed to
minimize carbon emissions and promote the development of
new technologies. There is also concern that market rules
could cause substantial increases in customer costs over
current state capacity procurement policies.
In 2014, the CAISO will hold a "stakeholder process" to
inform its development of a detailed auction proposal to
present to FERC. In parallel with this CAISO process, the
CPUC will hold a proceeding to consider the elements of the
JRP, including developing a recommendation for any auction
proposal that the CAISO will make to FERC. However, the
CAISO has no obligation to follow the CPUC's
recommendations nor does it have to wait for the CPUC's
proceedings to conclude before it submits the new tariff to
FERC.
Requiring the CPUC's concurrence in any proposal the CAISO
makes to FERC helps to ensure that the CPUC and CAISO work
cooperatively toward a proposal that balances all of
California's goals and preserves California's ability to
lead the nation in battling climate change.
2. Collaboration or Barrier ? The fundamental controversy
ensuing around this bill is whether requiring that the CPUC
and the CAISO agree on whatever mechanism and tariff is
submitted to FERC creates a barrier to the CAISO's work or
is in some way illegal. Or does the bill merely ensure
collaboration (that the CAISO states it intends to secure
from the CPUC anyway) between the energy entities on an
issue of tremendous magnitude in which significant
procurement decisions are made?
Supporters of this bill argue that caution is needed on an
issue which presents a risk that many features of the
initial procurement market could change. They opine that
FERC could preempt the role of the CPUC and the Legislature
in order to preserve the effectiveness of this market
mechanism. The result could be capacity market rules
structured in a manner that hurts California electricity
customers and the state's ability to pursue its
environmental goals.
Some parties express concern that the required
collaboration would:
?replace our successful collaborations with a CPUC
process for obtaining state approval of
FERC-jurisdictional matters. The result would be to
subject market participants from across the West,
including municipal utilities, federal power marketing
associations, and neighboring utilities to the
jurisdiction of a California state agency. This is a
clear violation of the Federal Power Act, which makes
these markets the exclusive jurisdiction of FERC and
could lead to costly legal disputes and undermine our
efforts to meet our important energy and environmental
objectives.
3. Tail Wagging the Dog . The CAISO was created as part of
the state's failed effort to deregulate the sale and
delivery of electricity in the state. Although many
features of deregulation scheme have long since been
eliminated, the CAISO remains but without oversight
features originally intended by creation of the Electricity
Oversight Board which was intended to oversee the
electricity market and the activities of the CAISO.
Consequently, a nonprofit entity which is subject to
federal law remains in control of much of the state's
transmission grid, the dispatch of electricity, and some
procurement decisions. The state's oversight of the CAISO
is limited to the Senate's confirmation of the five CAISO
board members which are appointed by the Governor.
4. Every Market ? This bill requires that the CAISO secure
concurrence from the CPUC on any "new auction or
market-based mechanism for forward procurement of
electricity or capacity products." The CAISO operates
several markets including a day-ahead market, a 15-minute
market, and is in the process of creating an energy
imbalance market. It is possible that this language could
be broader than intended by the author and pick up nearly
every market tariff and tariff revisions in the CAISO's
operation. To ensure that the bill is focused on the
procurement mechanisms of primary concern, the author and
committee may wish to consider narrowing this provision to
the backstop procurement market at issue.
5. Predetermined Outcome ? In order to concur with a
proposed or revised CAISO market, the CPUC would be
required to conclude that the mechanism has a de minimus
risk of preempting or frustrating California's green
programs, rates and electric reliability. The
determination may be impossible to make and therefore
predetermine the outcome of the CPUC's consideration which
would be rejection of the CAISO market. Any market, if it
also includes fossil-fueled generation, is likely to impact
green programs. The author and committee may wish to
consider amending the bill to strike the "de minimus risk
that the proposal could preempt or otherwise frustrate any
of the following" and add "reasonably conclude that the
following principles of the state will not be diminished:"
6. Ratepayer Impact . The Utility Reform Network opines
that California consumers face the potential of significant
cost increases due to FERC policies regarding the prices at
which resources must be bid into an auction.
POSITIONS
Sponsor:
The Utility Reform Network (TURN)
Support:
Bay Localize
Emerald Cities Collaborative Bay Area
Office of Ratepayer Advocates
Sierra Club California
Oppose:
California Wind Energy Association
Independent Energy Producers Association
Pacific Gas and Electric Company
San Diego Gas and Electric Company
Southern California Edison
Kellie Smith
SB 1277 Analysis
Hearing Date: April 29, 2014