Comments on workshop

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

The California Community Choice Association (CalCCA) appreciates the opportunity to comment on the California Independent System Operator’s (ISO) Capacity Procurement Mechanism (CPM) Enhancements Track 2 Workshop (the Workshop). This track of the initiative will evaluate the CPM Soft Offer Cap (SOC), per the ISO’s tariff requirement to do so every four years. CalCCA supports using the fixed cost outputs from the California Energy Commission’s (CEC) cost of generation model using a 550 megawatts (MW) combined cycle reference resource and with the 2023 updates to include updated labor rates and inflation.

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

It is reasonable for the ISO to continue to use a 550 MW combined cycle resource as the reference resource for this year’s SOC update as most of the recent CPM designations still come from gas units.[1] This may change in the future as storage and other new technologies come online, but at present, it does not appear necessary to change the reference resource.

CalCCA supports using the fixed cost outputs from the CEC’s cost of generation model with the 2023 updates. These updates include updated labor rates and inflation since the 2019 update. During the workshop, the CEC indicated that labor rates and inflation are the major drivers of changes in fixed O&M costs. The CEC also indicated that it did not expect other costs to change significantly between the 2019 update and the present because the reference resource used is a relatively new resource that came online in 2021 and is a mature technology. For these reasons, the CAISO should adopt the $7.34/kW-month SOC from the CEC’s 2023 update.

[1]             ISO Presentation at Slide 16: http://www.caiso.com/InitiativeDocuments/Presentation-Capacity-Procurement-Mechanism-Enhancements-May112023.pdf.

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

CalCCA supports the ISO’s proposed scope and schedule in which this track 2 will consider updating the CPM SOC based upon the CEC’s cost of generation model and the ISO’s tariff-defined formula and a future track will consider ideas for improving the SOC and/or related aspects of the ISO’s CPM processes.  

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

CAISO started this initiative to review the soft offer cap (SOC) on a 4-year interval basis (at the latest) as required by the tariff. CAISO intends to update the SOC based on the latest California Energy Commission’s (CEC) cost of generation model study result indicating about 20% increase in the SOC based on levelized cost of generation. CDWR notes that actual 2021 CPM designation data shows roughly 50% of CPM designations happen to be from resources such as storage and other fuel types. Information on whether CPM designation occurred at the SOC or at the higher rates (subject to FERC approval) could support the need for an increased SOC apart from the increased levelized cost estimated in the CEC’s cost of generation model.

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

CDWR appreciates the detailed report. However, levelized cost of generation for storage resources is not included (which seems to be one of the resources that were designated for CPM in 2021).

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

The initiative scope is limited to the tariff requirement on a reference resource (combined cycle gas turbine). However, 2021 CPM designations indicate resources such as storage and other fuel types (non-gas) take up about 50% of the volume of CPM  designations. It would be interesting to know the impact of gas turbine-based SOC on other resources that received CPM designation.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

The Public Advocates Office (Cal Advocates) at the California Public Utilities Commission (CPUC) appreciates the opportunity to comment on the May 11^th CPM Enhancements Track 2 Stakeholder Workshop (May 11 Workshop).  Cal Advocates provides comments on the following topics:

• The California Independent System Operator (CAISO) should provide additional information on the California Energy Commission (CEC) Cost of Generation Study and Model update in the upcoming Straw Proposal; and
• The reference unit used to determine the CPM Soft Offer Cap should represent the technology and characteristics of a resource most likely to receive a CPM designation.

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

The CAISO should provide additional information on the CEC’s Cost of Generation Study and Model update

At the May 11 Workshop, the CAISO explained that the CEC has not published an updated Cost of Generation Study and Model since the 2018 CEC Study.[1]  The CAISO instead coordinated with the CEC to create a special run of the 2018 CEC Study using minor updates to create a set of fixed costs to be used in the determination of a new CPM Soft Offer Cap (the special run is referred to here as “2023 CEC Update”).  CAISO presented the 2023 CEC Update values at the May 11 Workshop.[2]

The CAISO intends to publish a straw proposal for this initiative on July 3, 2023.[3]  In that straw proposal, the CAISO should describe all inputs and assumptions used to create the 2023 CEC Update values and say how the inputs and assumptions differ from the 2018 CEC Study.  The CAISO Tariff requires the present initiative to consider the final results from the CEC cost of generation study, or a similar study that the CAISO administered or commissioned.[4]  The May 11 Workshop lists results from the 2023 CEC Update; however, it is unclear how these results were generated.  Namely, the CAISO should clarify if the 2023 CEC Update results used precisely the same inputs and assumptions as the 2018 CEC Study, how any inputs and assumptions were adjusted, and for what reason.  Given that the 2023 results are up to 25% higher than the 2018 results,[5] it is especially important for stakeholders to vet and understand those results. 

Complete information on the 2023 CEC Update is also necessary to evaluate whether to continue using the CEC Study to inform the CPM Soft Offer Cap or use a new study.  The CAISO’s Department of Market Monitoring (DMM) previously performed a comparison of operations and maintenance (O&M) costs from various sources, copied below, and stated, “DMM’s analysis provided further indications that the CEC report data used by the ISO significantly overestimates the actual going forward costs of gas-fired generating units.”[6]  

Table 1: DMM Comparison of O&M Costs[7]

The DMM recommended that CAISO reassess the accuracy of costs reported in the CEC Study, which has not occurred.[8]  Comparing the 2023 CEC Update to other studies may be warranted given the gap between Lazard’s 2023 fixed O&M assumption for an existing combined cycle plant of $9.25-$14.00/kW-year[9] and the 2023 CEC Study’s value of $50.95/kW-year.[10]  

[1] CEC Staff Report, The Estimated Cost of New Utility-Scale Generation in California: 2018 Update, May 2019.  Available at: https://www.energy.ca.gov/sites/default/files/2021-06/CEC-200-2019-005.pdf.

[2] CAISO, Capacity Procurement Enhancements – Track 2, May 11, 2023 (May 11 Presentation) at “CEC Cost of Generation Model: Fixed Costs Study for CAISO’s CPM Soft Offer Cap” slide 5.  Available at: http://www.caiso.com/InitiativeDocuments/Presentation-Capacity-Procurement-Mechanism-Enhancements-May112023.pdf.

[3] The Proposal Development milestones are noted on this initiative’s webpage, accessed by Cal Advocates on June 1, 2023.  Available at: https://stakeholdercenter.caiso.com/StakeholderInitiatives/Capacity-procurement-mechanism-enhancements.

[4] CAISO Tariff 43A.4.1.1.2.

[5] May 11 Presentation at “CEC Cost of Generation Model: Fixed Costs Study for CAISO’s CPM Soft Offer Cap” slide 4-5.

[6] Capacity Procurement Mechanism Soft Offer Cap Draft Final Proposal Comments by Department of Market Monitoring, January 24, 2020 at 2.  Available at: http://www.caiso.com/InitiativeDocuments/DMMComments-CapacityProcurementMechanismSoftOfferCap-DraftFinalProposal.pdf.

[7] Capacity Procurement Mechanism Soft Offer Cap Draft Final Proposal Comments by Department of Market Monitoring, January 24, 2020 at 4.

[8] Capacity Procurement Mechanism Soft Offer Cap Draft Final Proposal Comments by Department of Market Monitoring, January 24, 2020 at 1-4.

[9] Lazard, 2023 Levelized Cost of Energy+, April, 2023 at 40.  Available at: https://www.lazard.com/media/2ozoovyg/lazards-lcoeplus-april-2023.pdf.

[10] May 11 Presentation at “CEC Cost of Generation Model: Fixed Costs Study for CAISO’s CPM Soft Offer Cap” slide 5.

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

The reference unit used for the Soft Offer Cap should represent resources that are qualified for CPM procurement and reasonably expected to receive CPM designations

CAISO Tariff 43A.4.1.1.2 establishes the process to determine and update the design of the CPM Soft Offer Cap using the levelized going-forward fixed costs of a reference unit.  The reference unit currently is a “merchant-constructed mid-cost, 550 MW combined cycle with duct firing or similar advanced combined cycle resource.”[1]  The CAISO should continue to use a reference unit representing a generation technology that is both typically qualified for CPM designations and expected to bid for CPM designations through the Competitive Solicitation Process (CSP).

At the May 11 Workshop, the CAISO noted that actual CPM designations were issued largely to natural gas resources, but that storage resources and imports received designations in 2020 and 2021 as well.[2]  The designations of energy storage calls into question whether storage should be used as a reference resource for the CPM Soft Offer Cap.  Storage resources are increasing in number on the CAISO grid, driven largely by the CPUC’s Integrated Resource Plan (IRP).[3]  Continuous storage procurement, along with the inability of fossil-fueled resources to count towards IRP targets,[4] will increase the proportion of storage resources in the resource fleet compared to natural gas. 

However, the storage resources procured through the IRP include a requirement that the new resources be contracted for resource adequacy (RA) for at least a ten-year term.[5]  A resource’s RA capacity is not eligible to be designated as CPM.[6]  Portions of the energy storage designated as CPM in 2021[7] were from resources procured for IRP targets but had come online prior to their contract’s commercial operation date.[8]  Once that commercial operation date occurred, additional CPM designations were no longer possible until the contract terminated in ten years or more.  For these reasons, the CAISO should not consider using energy storage as a reference resource for the Soft Offer Cap at this time.

In order to further evaluate changing the reference unit used to determine the CPM Soft Offer Cap, the CAISO should summarize CSP offers from recent years.  A summary of the offers received at the CSP would provide stakeholders with information of what types of resources are likely to receive a CPM designation.  If the information is market sensitive, an aggregated summary showing numbers of offers and sum volumes of capacity for different technology categories and average size of offered units may avoid market sensitivity concerns.  CAISO already reports CPM designations and includes the CAISO ID of the designated resource, but this does not provide information on other resources offered at the CSP that were not given CPM designations.

[1] CAISO Tariff 43A.4.1.1.2.  Available at: http://www.caiso.com/Documents/Section43A-CapacityProcurementMechanism-asof-Aug15-2022.pdf.

[2] May 11 Presentation at 16.

[3] The CPUC plans for 3,097 MW of energy storage to come online to meet IRP requirements from 2023 to 2026, and 81% of the initial 3,300 MW procurement target is being met by stand-alone or paired energy storage resources. CPUC, Summary of Compliance with IRP Order D.19-11-016 and Progress Toward Mid Term Reliability D.21-06-035 Procurement, February 2023 at 9, 21, 33.  Available at: https://www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/documents/integrated-resource-plan-and-long-term-procurement-plan-irp-ltpp/d1911016andd21.pdf.

[4] Decision (D.) 23-02-040, Decision Ordering Supplemental Mid-Term Reliability Procurement and Transmitting Electric Resource Portfolios to California Independent System Operator for 2023-2024 Transmission Planning Process, February 23, 2023 at 28.

[5] D.21-06-035, Decision Requiring Procurement to Address Mid-Term Reliability, June 24, 2021 at 70.  Available at: https://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M389/K603/389603637.PDF.  See also D.19-11-016 Decision Requiring Electric System Reliability Procurement for 2021-2023, November 7, 2019 at Conclusion of Law 28 and Ordering Paragraph 3.

[6] CAISO Tariff 43A.2.5.2.4.  See also Draft Tariff Language – CPM Enhancements, February 9, 2023.  Available at: https://www.caiso.com/InitiativeDocuments/Draft%20TariffLanguage-CapacityProcurementMechanismEnhancements-Feb9,%202023.docx.

[7] May 11 Presentation at 16.

[8] E.g., Genesis McCoy received a CPM designation on July 9, 2021 lasting until July 31, 2021.  Genesis McCoy is contracted with Southern California Edison Company (SCE) with a planned-for commercial online date of August 1, 2021.  A CPM designation would not have been possible after the commercial online date due to the contract with SCE.  For CPM information, see: CAISO, 2021 Annual Report on Market Issues & Performance, July 27, 2022 at 271.  Available at: http://www.caiso.com/Documents/2021-Annual-Report-on-Market-Issues-Performance.pdf.  For contract information, see CPUC Resolution E-5101, Approves Southern California Edison’s plan submitted in Advice Letter 4218-E to procure 770 megawatts of resources to satisfy requirements of D.19-11-016, and as modified by Supplemental Advice Letter 4218-E-A, August 27, 2020 at 3.  Available at: https://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M344/K058/344058591.PDF.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

Calpine continues to believe that the going-forward fixed cost (GFFC) of a reference resource creates an inappropriately low price for a reliability backstop. As highlighted on the recent stakeholder call, setting CPM at GFFC interferes with bilateral trading by creating a false cap on what some parties may deem as a reasonable market price.  In effect, CPM becomes an attractive alternative for buyers to attempt to avoid higher-priced market transactions and could drive primary procurement away from bilateral transactions and to the CAISO’s backstop.  Also, given that market prices are currently well-above the CPM price, sellers are discouraged from submitting bids to any CPM Competitive Solicitation Process – and they may refuse to accept designations at the CPM soft cap if offered.  The CAISO may not obtain the capacity it needs in times of scarcity, particularly as out-of-state prices rise. 

Indeed, the Western Resource Adequacy Program proposed, and received FERC approval of a capacity deficiency charge that can be as high as 200 percent of the full cost of new entry (CONE) of a gas-fired peaking unit.  Even though the binding nature of WRAP has yet to begin, it is reasonable to assume that longer-term capacity prices outside of California are being influenced by potential exposure to a deficiency charge (i.e., backstop) that is higher than the GFFC-based CPM soft offer cap. 

Resources not contracted within California will look to export to regions where the value of their opportunity is potentially higher. Similarly, resources that were historically willing to send imports into California will prefer to contract with entities outside California, especially in times of scarcity. 

The bottom line is that the CAISO’s use of GFFC in an attempt to control prices may frustrate the CAISO's ability to attract uncommitted internal resources or imports when it needs them most.     

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

Calpine defers comment on the adjustments made to the CEC model until those revised assumptions are shared in detail with the stakeholder community.  As such we ask the CAISO and CEC to include the model and changed input assumptions in the next iteration of this initiative.

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

Several parties on the stakeholder call voiced concern that the CAISO was not delivering the promised “holistic” review of CPM. Calpine certainly agrees with those concerns, particularly with respect to the unintended consequences created by a GFFC-based CPM price.

That said, while it may be too early to prescribe changes necessary to CPM processes or structure, (e.g., the Competitive Solicitation Process reflecting the CPUC’s approved Slice of Day RA mechanism) it would be helpful to chronicle the issues that must be addressed over time in the next version of an Issue Paper or Straw Proposal.     

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

Middle River Power LLC (“MRP”) appreciates this opportunity to comment on the May 11, 2023 CPM Enhancements Track 2 Workshop (“Workshop”).  The CAISO’s overview of the CPM reinforced several principles underlying the CPM.  First, the default CPM Soft Offer Cap (“SOC”) should provide a meaningful amount of fixed cost recovery for existing resources, because it is impossible to CPM new resources.  Second, the level of the CPM SOC impacts Load-Serving Entity (“LSE”) procurement decisions and should discourage LSEs from failing to meet all their Resource Adequacy (“RA”) obligations and leaning on the CPM mechanism.  

In that vein, MRP supports CAISO’s proposal to focus the CPM Enhancements Track 2 process on updating the cost components of the current reference resource. 

One of the participants in the May 11 workshop offered that the CAISO should implement two SOCs – one for new and one for existing resources.  This participant expressed concern that the existing SOC was too low to encourage the Central Procurement Entities (“CPEs”) to enter into contract for new battery energy storage.   While MRP agrees that CPEs should have the right financial and regulatory incentives to satisfy their procurement objectives, MRP does not support different SOCs for new aqnd existing resources.  CPM designations are not intended to promote new resource development, but instead to secure capacity from existing resources to address shortfalls in RA procurement. 

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

While MRP finds reasonable the California Energy Commission’s preliminary 2023 update for reference resource costs (slide 5 of the May 11 presentation), MRP notes, however, that Section 43A.4.1.1.2 of the CAISO Tariff sets forth:

If the CEC has posted a new draft of its Cost of Generation Study and Model (or similar study or model) that includes results for the reference resource in the forty-six months since the last draft of the Cost of Generation Study and Model (or similar study or model) was published, then the stakeholder process will commence within 10 days of that posting. If the CEC has not posted draft results within that 46-month period, then the CAISO shall commence the stakeholder process by the end of that four-year review period and administer or commission a study of the levelized going-forward fixed costs of the reference resource.

MRP’s understanding of the costs presented by the California Energy Commission at the CAISO’s May 11 call is that those costs are costs from the 2018 Cost of Generation study aged to 2023 and are not from a new Cost of Generation study.  To that end, MRP respectfully requests the CAISO expressly identify whether it intends to use those aged costs from the 2018 study for this stakeholder initiative or whether the CAISO intends to “…administer or commission a study of the levelized going-forward costs of the reference resource”. 

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

MRP is concerned that the current RA programs and applicable Planning Reserve Margins (“PRMs”), including those set by various Local Regulatory Authorities (“LRAs”) and the default 15% PRM set forth in the CAISO Tariff,[1] do not ensure 0.1 Loss of Load Expectation (“LOLE”). The current default 15% PRM was calculated many years ago when the supply mix was significantly different than it is today. 

The CAISO recently stated that an 18.5% PRM for September at 8 pm would be necessary to maintain reliability, however, that 18.5% PRM does not ensure 0.1 LOLE for the entire year.[2]  The CPUC adopted 16% and 17% PRMs for 2023 and 2024 respectively.  It’s unclear, however, if other LRAs have increased their PRMs in a corresponding fashion.  It’s also unclear as to whether those CPUC-adopted PRMs are sufficient to achieve a 0.1 LOLE.  While the focus of this initiative is the level of the CPM SOC, the CPM mechanism is part of an overall framework in place to ensure reliability, MRP respectfully suggests that the CAISO perform a LOLE study to determine the minimum CAISO system PRM necessary to maintain 0.1 LOLE and establish that PRM as the CAISO’s default PRM.  If any LRA establishes a lower PRM, then the CAISO should exercise its Tariff authority to CPM additional capacity up to the CAISO’s default minimum PRM.  This PRM can be a monthly or annual PRM, but if it is an annual PRM, the PRM should ensure 0.1 LOLE for the monthly RA program across the entire year - i.e., the LOLE study should not assume that all rsources are contracted for the entire year..

MRP generally supports the CAISO’s proposed schedule for this initiative, though MRP does not understand the CAISO’s intent to wait until Q1 2024 to take a proposal to update the CPM SOC to the CAISO Board of Governors (“Board”).  The CAISO’s proposed schedule calls for final stakeholder comments on the draft final proposal at the end of September.  This should allow for the CAISO to take the final proposal to its Board at the Board’s meeting either in November or December 2023.  

[1] CAISO Tariff Section 40.2.2.1 (b). 

[2] CAISO May 15, 2023 2023 Summer Loads and Resource Assessment at page 4.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

NCPA supports continued use of existing Tariff 43A.4.1.1.2 requirements to calculate CPM Soft Offer Cap by utilizing the CEC cost of generation model for calculating the levelized going forward fixed cost of energy of a merchant-constructed mid-cost, 550 MW combined cycle with duct firing or similar advanced combined cycle resource.  More specifically, NCPA supports the track 2 scope to continue calculating the CPM Soft Offer Cap based on the updated CEC-provided figures using the ISO tariff-defined methodology and formula: 120% x levelized going-forward fixed costs of 550 MW combined cycle with duct firing.  NCPA does not support using a different reference resource at this time (e.g., storage resources) to calculate the CPM Soft Offer Cap.

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

NCPA supports the fixed cost outputs from the CEC cost of generation model and the levelized going forward fixed cost of energy principle serving as the basis of the CEC model. Using the levelized cost of a 550 MW gas turbine continues to be reasonable. While NCPA recognizes that storage resource CPM procurement has increased during the recent year, a majority of CPM procured capacity is still supplied by natural gas fired generation, and natural gas fired generation still represents a majority of the generation capacity installed in the CAISO BAA.

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

NCPA supports the CPM Track 2 proposed scope which is to consider whether the CPM Soft Offer Cap should be updated based on CEC-provided figures using the ISO tariff-defined methodology and formula: 120% x levelized going-forward fixed costs of 550 MW combined cycle with duct firing.

NCPA supports targeting Board approval in Q1 2024.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

PG&E appreciates the CAISO adherence to the tariff and its methods. We support investigating a potential increase in the Soft Offer Cap given recent inflation.

PG&E also recognizes that much has changed since the last in-depth evaluation of the Competitive Solicitation Process (CSP), Capacity Procurement Mechanism (CPM), and the Soft Offer Cap (e.g., the creation of the central procurement entities, Western Energy Imbalance Market (WEIM) energy assistance program, and California strategic reserves).  Given these changes, and the change we expect with the Extended Day-Ahead Market, PG&E requests that the CAISO open an initiative to evaluate the effectiveness and potential improvements to the CSP, CPM, and soft offer cap within this new environment.

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

PG&E considers the changes proposed by the CEC to be reasonable and consistent with the tariff. PG&E supports this update.  

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

PG&E supports this track 2 scope and schedule.

Given this immense amount of change (see question 1), and the change we expect with the Extended Day-Ahead Market, PG&E would encourage CAISO to open an initiative to evaluate the effectiveness and potential improvements to the CSP, CPM, and soft offer cap within this new environment and commit to revisiting the appropriate level of the CPM soft offer cap should the use of CPM expand.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

Shell Energy North America (US), L.P. "Shell Energy" appreciates the opportunity to submit comments on the CPM Enhancements track 2 stakeholder workshop.  

While the CAISO tariff sets out the process for calculating the CPM soft offer cap (presently $6.31/ KW-month), Shell Energy notes $6.31/KW-month is not reflective of the current prevailing prices for CPUC-jurisdictional RA delivery in California.  In the past, the CPM soft offer cap and prevailing RA market prices were more closely correlated ; however, this is not the case today—RA prices are far above the current CPM soft offer cap.  Shell Energy therefore suggests alterations to the CAISO tariff to bring more alignment between the CPM soft cap price and prevailing RA prices more broadly. 

Specifically, 

• Given CPM is a backstop process, Shell Energy observes the CPM soft cap price would ideally be somewhat reflective of prevailing RA prices as such price signal informs load, demand response and new resources.   This is further warranted because the CPM soft cap price is used to set RAAIM penalties.  
• The calculation of the CPM soft cap price should be reassessed yearly given the accelerating nature of the energy transition, climate change and load patterns;  a four-year cadence leads to stale assumptions about resources during this pace of rapid change. 
• The marginal resource utilized for cost comparison should reflect a either: 1) a 50 MW fast-start peaking unit or 2) a 50MW / 200 MWh 4-hour grid scale battery storage system.  A base-loaded thermal resource is a less relevant proxy for the determining a grid-wide capacity value in CAISO in today's market relative to 2019.  
• Assuming the CPM soft cap price is somewhat reflective of prevailing RA prices, the CPM soft cap should be scaled by month, reflecting the value of RA differs greatly month by month.  One "peanut buttered" price is too blunt an instrument given that most CPM designations are awarded on a monthly basis.  

Thanks for the reading these comments. 

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

As discussed below, the Six Cities do not oppose consideration of a potential update to the soft offer cap based on updated data from the California Energy Commission (“CEC”), nor do the Six Cities oppose the CAISO’s scoping and schedule for this initiative. 

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

Preliminarily, the Six Cities do not oppose consideration of a potential update to the fixed cost elements of the soft offer cap based on the CEC’s cost of generation model as reported to stakeholders during the May 11^th workshop.  The Six Cities request a more complete description of the data sources and methodology used to derive the updated costs as part of the CAISO’s Straw Proposal in this initiative.  The Six Cities reserve comment on whether a change in the soft offer cap is appropriate and, if so, the level of increase to the soft offer cap until such time as the CAISO has issued a Straw Proposal in this initiative. 

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

The Six Cities do not oppose the CAISO’s proposal to limit Track 2 of this initiative to assessing whether a potential update to the soft offer cap using the existing reference resource and methodology (i.e., going forward fixed costs plus a 20% adder) is appropriate at this time, while deferring consideration of other topics pertaining to the CPM program to a future initiative. 

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

SCE appreciates the CAISO providing the opportunity to comment on this initiative.   Please see our comments below.  

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

SCE believes that the numbers presented by the CEC fall within the realm of reasonableness, but there has not been enough information presented to allow verification of how those numbers were developed. The CEC slides only state that in updating their model they “Made minor updates to the model, including labor rate and inflation.” SCE recommends CAISO include in the next proposal a more detailed description of how the model was updated.  

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

SCE agrees with the narrowly defined scope proposed for this initiative to only consider whether the CPM Soft Offer Cap should be updated. SCE finds the proposed schedule acceptable.

1. Please provide a summary of your organization’s comments on the Capacity Procurement Mechanism (CPM) enhancements track 2 stakeholder workshop.

When the Federal Energy Regulatory Commission (FERC) approved the CAISO’s filing to implement Capacity Procurement Mechanism (CPM), FERC established principles governing the CPM compensation methodologies, which include a soft offer cap and the flexibility to seek going forward fixed cost recovery for costs that exceed the soft offer cap.[1] FERC explained that CPM compensation methodologies should provide “at a minimum, a meaningful opportunity for CPM resources to recover additional fixed costs”, “support incremental investment by existing resources”, potentially take into account “future variances in price and potential shortages of supply”, and provide “appropriate compensation to resources to ensure that CAISO has the resources it needs to reliably operate its transmission grid”.[2]  Of particular consequence here, FERC also recognized that “compensation for a backstop capacity mechanism should recognize that non-resource adequacy resources are providing similar services as resources procured under the CPUC’s resource adequacy program.”[3]

Vistra is concerned that there is a growing disconnect between the pricing in the Resource Adequacy market and the soft offer cap that limits CPM prices. Resource Adequacy market prevailing prices significantly exceed the existing compensation opportunities under CPM due to the soft offer cap, such that the soft offer cap design no longer meets the CPM Order’s direction. We also recognize that the CPM regulatory proceedings have been contentious and that there may be hesitation by the CAISO to begin a rigorous review of the CPM compensation methodologies given its history. However, from the current market dynamics it is clear that further delaying a comprehensive review of the CPM compensation methodologies, particularly the soft offer cap, only increases the disconnect between the prevailing market prices of Resource Adequacy and CAISO’s lower soft offer cap. A growing disconnect between the market and its backstop mechanism is not in the best interest of a well-functioning, efficient capacity market.

According to the California Public Utility Commission, the value at the 85^th percentile of data collected of all RA in 2021 is roughly $9 per kW-month where local RA is valued around $8.37/kW-month and system RA is valued at around $11/kW-months. These price ranges appear to be for RA procured with a multi-month and likely an annual contract length.[4] While this indicates that the prevailing 2021 RA market prices for system RA were 174% higher than the CAISO soft offer cap, we believe this variance is much more significant for RA procured for a single or two months.

There are two scope items that are crucial to be included in this track, even if a holistic review is not feasible. First, the update to the existing reference unit’s cost of generation estimate. Second, CAISO should explore revising its soft offer cap methodologies to use different caps for the annual Competitive Solicitation Process (CSP) versus the monthly or intra-month CSPs. This is because the monthly CSP or intra-month CSP can offer a CPM designation for a minimum of thirty-days with the option to extend thirty-days to a total of sixty-days. It is critical that resources procured under the CPM construct, whether annually or monthly, are able to recover their annual going forward fixed costs.  CAISO should consider exploring an approach that provides a more granular soft offer cap, given that resources could be procured for thirty or sixty days and will need to recover its annual fixed going forward costs even under that short term procurement.

Vistra also believes a review of CPM compensation methodologies should include important scope items that explore improvements to compensation methodologies that are needed considering the changing resource adequacy landscape. Today, there is potential for supply shortages coupled with multiple RA programs from both California and Western area affecting system RA dynamics.[5] There is also the potential for the Central Procurement Entities to procure new resources to cure local area deficiencies affecting local RA dynamics.[6]  As the Commission noted, CPM compensation methodologies must take into account the potential pricing fluctuations that resource adequacy compensation experiences over time.[7] 

Consequently, Vistra requests that Track 2 scope includes:

1. Considering how to establish a more granular soft offer cap for the monthly or intra-month CSP versus applying an annual soft offer cap to these more granular auction windows to capture the going forward fixed costs more accurately on a $/kW-year basis that would need to be recovered over a sixty-day operating period versus an annual operating period that result from these two different CSP offer windows. This scope could explore a more granular soft offer cap as the division of the $/kW-year value over two months instead of twelve months. This exploration could also explore whether the soft offer cap used in the monthly or intra-month CSP should be a fixed value or vary in different seasons.
2. Considering whether CPM soft offer caps still afford appropriate compensation to resources given the large premiums for RA prices versus the CAISO’s soft offer cap, premiums which are likely resulting from risks of potential system or local capacity supply shortages not being captured in the fixed cost formula. This scope could explore whether due to the risks of potential shortages, both system and local, and in light of the opportunity to sell capacity in the future into the Western RA program that:
   1. It may now be more appropriate to base the compensation methodologies on the opportunity cost of not procuring the new resources (cost of new entry) to cure system or local shortfalls instead of using an existing resource’s going forward fixed costs.
   2. It may now be more appropriate to replace the soft offer cap’s “20% adder” with a bilateral market opportunity costs to allow attracting CSP offers from resources that can offer into both California RA and Western RA programs, for example imports.
3. Consider whether it is more appropriate and/or feasible to allow for the bilateral market opportunity cost of being backstopped through CPM versus a Resource Adequacy market to be recovered through the FERC cost recovery filing process by allowing a seller to support its opportunity cost above the soft offer cap as result of providing CPM capacity.

[1] California Independent System Operator Corp., 134 FERC ¶ 61,211 (2011) (CPM Order).

[2] Id at Paragraph 59.

[3] Id. at Paragraph 58.

[4] 2021 Resource Adequacy Report, California Public Utility Commission, March 2023, Table 6 and Table 7, https://www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/documents/resource-adequacy-homepage/2021_ra_report.pdf.

[5] Specifically, the soft offer cap level may not effectively incentivize import resources to offer into the Competitive Solicitation Processes because its opportunity cost of offering into other programs such as Western RA program cannot be reflected under the existing cap.

[6] As noted on the call, the Central Procurement Entity rules allow CPE to enter into long-term RA agreements with new resources. CPUC Decision 20-06-022 Ordering Paragraph 8 states that “any new local resource that can be brought online in time to meet solicitation requirements…may bid into the solicitation”. CPUC Decision 22-03-034 Ordering Paragraph 10 and 12 state “In its solicitation process, the central procurement entity shall consider bids of any contract term length greater than or equal to one month” and “contracts that exceed a five-year term, the CPE shall submit a Tier 3 Advice Letter for approval.”

[7] CPM Order at 58.

2. Please provide a summary of your organization’s comments on fixed cost outputs from the California Energy Commission’s cost of generation model.

It is premature to provide feedback on the California Energy Commission’s cost of generation model results. It is not clear that the cost of generation of gas is the appropriate reference unit for the CPM soft offer cap update.  CAISO should explore whether the marginal new resource would be a better benchmark given both the need to indicate opportunity cost of supply shortages and multiple uses of the CAISO’s soft offer cap.[1]

Vistra has encountered challenges with the use of compensation based on a gas resource fixed cost method that does not adequately capture market drivers that are increasing RA due to supply shortages and competing RA programs. We have faced these challenges in the CPM CSP where a designation for a single month was awarded at a significantly lower value than the monthly RA price, effectively resulting in CAISO “backstopping” the RA bilateral market at a suppressed price instead of through bilateral trades at the prevailing market price. This deferral to the CAISO backstop is incentivized by it using a soft offer cap that is significantly lower than monthly RA prices, and we do not believe it is in the best interest of a well-functioning RA market.

As a result of these experiences, Vistra recommends the CAISO consider changing the soft offer cap to being based on the cost of new entry of the marginal new resource among the other suggested changes provided above. Vistra requests that the California Energy Commission update its cost of generation model to include the marginal new resource, which we assume is lithium-ion storage, and present these values at the next workshop.

[1] As noted on the call, the Central Procurement Entity Decision 20-06-002 Ordering Paragraph 26 gave “discretion to defer procurement of a local resource to the California Independent System Operator’s backstop mechanisms, rather than through the solicitation process, if bid costs are deemed unreasonably high.”

3. Please provide a summary of your organization’s comments on the CPM track 2 proposed scope and schedule.

The proposed scope is insufficient to cover the observed issues affecting the appropriateness of the existing CPM soft offer cap and FERC cost recovery filing rules. See response to #1.