Cal. Pub. Utilities Comm'n v. Fed. Energy Regulatory Comm'n
| Decision Date | 17 December 2021 |
| Docket Number | No. 20-1388,20-1388 |
| Parties | CALIFORNIA PUBLIC UTILITIES COMMISSION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent California Independent System Operator Corporation, Intervenor |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Candace J. Morey argued the cause for petitioner. With her on the briefs were Arocles Aguilar and Aaron R. Jacobs-Smith.
Elizabeth E. Rylander, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were Matthew R. Christiansen, General Counsel, and Robert H. Solomon, Solicitor,
Ashley C. Parrish was on the brief for amicus curiae Calpine Corporation in support of neither party.
Before: Henderson and Katsas, Circuit Judges, and Ginsburg, Senior Circuit Judge.
The Federal Energy Regulatory Commission (Commission) approved California Independent System Operator Corporation's (CAISO) proposed revision to the compensation structure for its Capacity Procurement Mechanism (CPM), a voluntary program designed to provide electric capacity necessary to maintain grid reliability within CAISO's network. The California Public Utilities Commission (CPUC), which participated in the Commission's proceeding, challenges the Commission's approval of CAISO's proposal. We grant the petition and remand with vacatur.
The Federal Power Act, 16 U.S.C. §§ 791a et seq. , governs the transmission and wholesale marketing of electricity in interstate commerce and grants the Commission jurisdiction to regulate these activities in the public interest, see id. § 824(a), (b). Section 205 of the Act requires that "[a]ll rates and charges ... by any public utility for or in connection with the transmission or sale of electric energy" must be "just and reasonable" and not "undu[ly] preferen[tial]." Id. § 824d(a), (b). A public utility seeking to change its rate structure must file the proposed changes with the Commission and bears "the burden of proof to show that the increased rate or charge is just and reasonable." Id. § 824d(d), (e). "When acting on a public utility's rate filing under section 205, the Commission undertakes ‘an essentially passive and reactive role’ and restricts itself to evaluating the confined proposal." Advanced Energy Mgmt. All. v. FERC , 860 F.3d 656, 662 (D.C. Cir. 2017) (per curiam) (quoting City of Winnfield v. FERC , 744 F.2d 871, 875–76 (D.C. Cir. 1984) ).
CAISO is the regional independent system operator that controls (but does not own) the transmission grid in California. See generally Sac. Mun. Util. Dist. v. FERC , 474 F.3d 797, 798–99 (D.C. Cir. 2007). In this role, CAISO has a responsibility to ensure sufficient independent generating resources—such as nuclear power plants, solar farms and natural-gas-fired power plants—are in place to meet California's present-day and future electricity demands. This is accomplished through the supply and purchase of electric "capacity," whereby a generating resource "commit[s] to produce electricity or forgo the consumption of electricity when required" by a load-serving entity—usually the public utility that delivers electricity to end users—creating "a kind of options contract" between the two parties. Advanced Energy , 860 F.3d at 659.
CAISO, working in conjunction with the CPUC, administers a resource adequacy program designed to ensure that there is sufficient electric generation in CAISO's markets to meet consumer demands under all but the most extreme conditions. The resource adequacy program requires utilities to procure enough capacity to meet their forecasted peak load plus a reserve margin set by the CPUC. Resource adequacy obligations are generally met through voluntary bilateral agreements between utilities and generating resources.
Backstop measures come into play if voluntary arrangements turn out to be insufficient to meet resource adequacy obligations. When CAISO determines that there is an unmet resource adequacy or reliability need, it may rely on its capacity procurement authority under the CPM provisions of its tariff to designate specific generating resources to provide additional capacity. Generating resources seeking a CPM designation can enter into a competitive solicitation process. Entry into the CPM solicitation process is voluntary but if a resource submits a bid, and CAISO accepts the bid, the resource must accept the CPM designation. If CAISO unilaterally offers a CPM designation to a resource that did not participate in the solicitation process, that resource has the discretion to decline. The term of a CPM designation can range from a minimum of 30 days up to 12 months.
The central issue before us involves compensation under the CPM. When CAISO initially proposed the CPM program in 2010, it sought to compensate resources at a minimum price of $55 per kilowatt-year (kW-year), which was derived from the going-forward costs—defined as fixed operations and maintenance costs, ad valorem taxes and administrative costs, including insurance—of a reference resource plus a 10% adder.1 A resource with costs above that price would have been permitted to submit a cost-justified bid to the Commission. The Commission declined to approve CAISO's proposal, citing concerns that the use of going-forward costs alone could "deny resources a reasonable opportunity to recover fixed costs" and that CAISO had not sufficiently explained "how the use of going-forward costs for CPM compensation will provide incentives or revenue sufficiency for resources to perform long-term maintenance or make [environmental] improvements." Cal. Indep. Sys. Operator Corp. , 134 FERC ¶ 61,211, ¶ 57 (2011) (hereinafter 2011 CPM Order). The Commission instructed its staff to convene a technical conference to address the Commission's concerns and discuss alternative compensation methodologies. Id. at ¶¶ 55, 58–59. In 2012, after the technical conference, CAISO proposed, and the Commission approved, a fixed CPM capacity price—subject to a four-year expiration date—of $67.50 per kW-year for two years, which increased by five per cent to $70.88 for the remaining two years. See Cal. Indep. Sys. Operator Corp. , 138 FERC ¶ 61,112, ¶¶ 10, 18–19 (2012).
In 2015, as the 2012 order was set to expire, CAISO proposed the now operative CPM compensation structure, which relies on competitive bidding. Under this structure, a resource can bid up to a "soft-offer cap" of a fixed-dollar amount—$6.31 per kW-month (or $75.68 per kW-year). The soft-offer cap is based on the going-forward costs of a reference resource plus a 20% adder.2 CAISO reasoned that the 20% adder would allow resources with costs higher than the reference resource to recover their going-forward costs and additional fixed costs, as well as providing investment incentives. In the event that the soft-offer cap does not allow a resource to recover its going-forward costs, that resource can submit a cost-justified filing to the Commission for a higher rate. For these "above-cap" bids, CAISO proposed using the compensation formula applicable to Reliability Must-Run resources,3 which compensates a resource for its full annual cost of service, including a return on and of capital. A Commission-approved, resource-specific CPM price remains in effect for the remainder of the calendar year, and for the subsequent two calendar years, unless superseded by a subsequent Commission-approved price during that period. In addition to their CPM compensation, all CPM resources, no matter whether they bid below or above the soft-offer cap, retain their market revenues. The Commission approved this compensation structure, finding that the soft-offer cap "should allow sufficient recovery of fixed costs plus return on capital to facilitate incremental upgrades and improvements by resources." Cal. Indep. Sys. Operator Corp. , 153 FERC ¶ 61,001, ¶ 29 (2015) (hereinafter 2015 CPM Order).
But in 2018, while CAISO sought approval for a related CPM tariff amendment, several interested parties—including the CPUC and CAISO's Department of Market Monitoring (DMM), its independent market monitor—raised concerns about whether above-cap CPM resources should be compensated for their full annual cost of service given they retain all market revenues. Rejecting CAISO's proposed amendment, the Commission "strongly encourage[d] CAISO and stakeholders" to "revisit[ ] the issue of the adequacy of CPM ... compensation." Cal. Indep. Sys. Operator Corp. , 163 FERC ¶ 61,023, ¶ 48 (2018).
In February 2020, after conducting a two-year stakeholder review of the CPM process, CAISO filed a tariff amendment with the Commission reflecting two mutually exclusive proposals for compensating above-cap resources. The first option (Option A) would allow an above-cap resource to submit a cost-justified bid based on the resource's demonstrated going-forward costs plus a 20% adder. The second option (Option B) would provide the same going-forward cost recovery as Option A but without the adder. Under either option, an above-cap resource would still retain its market revenues. CAISO indicated that it favored Option A because it aligned with how the existing soft-offer cap is calculated and would be consistent with the Commission's guidance—namely its 2011 and 2015 CPM Orders—that the CPM compensation scheme should include some meaningful fixed cost recovery beyond going-forward costs and provide incentives for resources to make upgrades and undertake long-term maintenance. Accordingly, CAISO requested that the Commission review Option B only if it did not accept Option A.
Numerous parties filed comments to CAISO's proposal, including the CPUC, DMM and Pacific Gas and Electric Company (PG&E). The CPUC and DMM argued that CAISO's proposal misapplied or misinterpreted earlier Commission orders regarding the soft-offer cap, the 20% adder and the need for recovery of fixed costs beyond going-forward costs. All three parti...
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