7. Backstop Mechanism
The Commission has recognized that close coordination of the Local RA program with backstop procurement by the CAISO is necessary to promote cost-effective procurement. Over-reliance on backstop procurement is fundamentally at odds with the LSE-based procurement objective of the RA program. On the other hand, it is widely recognized that the CAISO requires access to some form of backstop procurement opportunities to insure against any capacity shortfall from the RA program.
In this respect, one of the long-term policy objectives of the Commission is to minimize the use of the CAISO's RMR process. In D.06-06-064, the Commission acknowledged that the RMR process would remain in place as a backstop reliability mechanism for 2007. Notwithstanding the long-term objective to minimize RMR reliance, the Commission determined that RMR units should generally qualify as Local RA resources. Another backstop mechanism that the CAISO uses at this time is the Reliability Capacity Services Tariff (RCST). The RCST is scheduled to expire at the end of 2007, although it is generally anticipated that the RCST or a similar replacement would be extended on an interim basis pending implementation of the CAISO's Market Redesign and Technology Upgrade (MRTU). MRTU implementation is currently targeted for 2008.
To address uncertainty regarding the RMR process for 2008 as well as uncertainty about when an RCST extension or a replacement mechanism will be approved by FERC, coordination of the RA program for 2008 and possibly beyond with any backstop mechanism was the subject of extensive workshop discussions. The CAISO discussed a proposal for continuing minimal usage of RMR in 2008 and using RCST as an interim backstop mechanism until MRTU can be implemented. The CAISO also committed to convene a public stakeholder process in April 2007 for development of a new backstop mechanism that would meet the needs of the CAISO's MRTU.
The challenges to coordinating this Commission's Local RA program and the CAISO's backstop procurement activities are significant. They include potential timing issues that, if not carefully addressed, could lead to costly and unnecessary over-procurement. It is also important to ensure that LSEs remain obligated to meet their procurement obligations, and that "free riding" and associated cost shifting are avoided. For the 2007 process, D.06-06-064 established a detailed process for coordination of RA and RMR activities. According to this plan, LSEs submitted preliminary Local RA filings in September and the CAISO then designated RMR units on October 1st. LSEs then procured additional units needed to meet their Local RAR showing in November.
The workshop discussions yielded eight separate proposals for coordinating Local RA and CAISO backstop procurement for 2008. In the wake of post-workshop comments and replies, widespread support has centered on "Proposal 8," which is summarized below:
Proposal 8: Integrate RMR/Local RAR and use the 2007 schedule. On October 1st, the CAISO would only designate units with 2007 RMR contracts that were not under RA contracts as shown in the preliminary RA filings. The CAISO would then address any [Local RA] deficiencies after the final Local RAR filing by using new RMR contracts, RCST, or its successor.
Even those parties who favor one of the other alternatives generally concur that Proposal 8 is a second best alternative. We approve the Proposal 8 approach for 2008. As the CAISO points out, it addresses the concern that, due to the alignment of LARS and LCR study criteria, preliminary capacity showings by LSEs might effectively become final showings with the result that LSEs have no opportunity for supplemental procurement to minimize RMR designations. Also, while it continues the use of RMR unit designations, the Proposal 8 approach also works to minimize those designations. In view of the fact that uncertainty persists regarding the fate of RCST (or its successor) and MRTU implementation, there appears to be little choice but to recognize a minimal role for RMR unit designations in 2008. Proposal 8 does this while it is also consistent with promotion of LSE procurement as the primary procurement vehicle.