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The California Independent System Operator is finalizing its contentious proposal to ensure the grid operator has sufficient generation on hand to meet its reliability requirements. The proposal at issue, the “interim capacity procurement mechanism,” is voluntary and expected to be used only as a “last resort” to ensure CAISO can keep the state’s power grid running. “This is about making sure the ISO has sufficient capacity available so that we’re not in a position when we have fires under transmission lines and they go out that we have to declare an emergency,” said Keith Johnson, grid operator interim capacity mechanism project leader. “When we declare an emergency it puts the whole state on edge.” Tom Delaney, a CAISO account manager, said the hope is to not to use this voluntary capacity mechanism. “The backstop is the last thing you do before you go into a complete system emergency,” he stressed. The mechanism is considered necessary because the current backstop, the Reliability Capacity Services Tariff (RCST), expires December 31. “When we came up with RCST, we thought we would have our new market design by the end of this year,” explained grid operator spokesperson Gregg Fishman. Stakeholders have focused on two main concerns--the interim procurement mechanism pricing and situations that may cause CAISO to use it. “This issue is being made torturously difficult without needing to be,” said Gary Ackerman, Western Power Trading Forum executive director. “If the CAISO needs a stopgap measure until the [market redesign] is active they can just extend the RCST tariff, and they should raise the payment” to generators. Pricing is a particularly contentious issue. The load serving entities want to pay the lowest possible tariff for backstop capacity payments while power suppliers want the highest possible price. CAISO is trying to balance these conflicting interests. “The current proposal has tried to use economic principles to price it,” Johnson said. “Folks even have different ideas about the economic principles we’re using.” CAISO has been meeting with stakeholders to address their concerns and develop final tariff language. The proposed tariff has been substantially revised as a result of feedback from stakeholders, officials said. The interim capacity mechanism would backstop the California Public Utilities Commission’s resource adequacy requirements for utilities. It also would bolster CAISO’s requirements for other load serving entities if they cannot obtain enough capacity or if the power is undeliverable. Power providers are required to show they have procured sufficient capacity in advance for the five-month summer period. The grid operator plans to issue a final interim capacity proposal November 1. Staff hopes the board will adopt it mid-December. The CAISO plans to file its interim capacity tariff application the following month with the Federal Energy Regulatory Commission for the start up of its Market Redesign and Technology Upgrade (MRTU). The long awaited, highly technical market overhaul is said to be still on track for April 1. The grid operator plans to rely on its “must offer” obligation tariff to provide backstop capacity in the interim three months until the new market design is operational. Some stakeholders fear that the RCST could be extended beyond its sunset while others worry more about how an interim tariff would be implemented. CAISO utilized a California Energy Commission study of the number and costs of power plants built in California over the past five years, where new generation is needed, and permitting requirements. Rather than negotiating bilateral contracts with individual suppliers, the grid operator proposes different tariffs for the two situations in which it may exercise its backstop authority. In the first scenario, if additional capacity is needed in an area to ensure adequate resources on a forward basis the price would vary depending on whether that area has surplus capacity or a shortfall. It would use a demand curve to determine the capacity payments and pay more for backstop capacity in areas that have limited resources. The interim capacity mechanism would contain both a price floor and a ceiling. CAISO would request a supplier to make capacity available to the grid and pay them the tariff price. Some parties support the concept of a capacity backstop, but are concerned that the grid operator may seek to expand its use or will object to paying for it. Utilities “are worried we would be too trigger happy and not conservative enough,” Johnson said. However, CAISO’s position as the statewide grid operator is complex, and it is difficult to prescribe all the incidents that could trigger significant events for the backstop, according to Johnson. CAISO must meet the reliability criteria of the North American Electric Reliability Corp. and must maintain prescribed reserves. The grid operator’s reliability criteria entail meeting a battery of complex engineering protocols--including voltage levels and adequate time to recover from contingencies--not just maintaining enough MWs in reserve, Johnson said. “We don’t have carte blanche about how we operate the grid,” he stressed. “If there’s an event that challenges us and makes it so we can’t meet our applicable reliability criteria, that’s a ‘significant event.’” Because of stakeholders’ concerns, CAISO revised the interim capacity proposal to expire in 2010 instead of 2012. By then, the new market designs are expected to be operational and ensure adequate resources for the grid. The grid operator is conducting market simulations and adding functionality as the various software systems are integrated. “We’ve been saying all along it’s more important to get this done right rather than fast,” Fishman stressed. The Federal Energy Regulatory Commission ordered CAISO to implement convergence bidding and scarcity pricing a year after the market redesign is launched. Convergence bidding will enable market participants to hedge their daily market bids to reduce the differential between real-time and day ahead market prices to remove the incentive for gaming. Scarcity pricing will allow prices to reflect the true lack of resources and provide an incentive for additional resources to bid into CAISO’s market. Meanwhile the California Public Utilities Commission in its proceeding on long-term resource adequacy is investigating the prospects for a capacity market, which would be implemented in 2011-2012. Some proposals envision a backstop even under a long-term resource adequacy solution.

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