Under its Resource Adequacy (RA) program, the California Public Utilities Commission (CPUC) requires load-serving entities—both independently owned utilities and electric service providers—to demonstrate in both monthly and annual filings that they have purchased capacity commitments of no less than 115% of their peak loads. These purchase requirements are intended to secure sufficient commitments from actual, physical resources to ensure system reliability.

As with most aspects of the California markets, the RA program is still evolving. RA is often referred to as the replacement for the Reliability Must Run (RMR) commitments entered into between generators and the California Independent System Operator (CAISO). From calendar year 2006 through calendar year 2007, CAISO was able to reduce its RMR purchases from approximately 10,000 MW to approximately 4,000 MW.

There also seems to be some acknowledgement by policy makers that RA is an important source of revenue to generators in a mitigated energy market. The revenue-generating ability of power generators in energy markets has been limited by price caps and must-offer requirements as well as by discrimination against existing generators in the utilities’ long-term procurement programs.

Recently, the CPUC convened workshops addressing a number of issues related to the future of the RA program. Principally, the stakeholders are grappling with whether RA should ultimately evolve into an East coast–style centralized capacity market or instead continue as a bilateral market. In addition to the high-level policy issues, the CPUC workshops also touched upon the seemingly pedestrian topic of how to contract for RA.

Convoluted contracts

Over the past two years, load-serving entities and generators have contracted for RA with the load-serving entity acquiring the right to claim the contracted megawatts as RA capacity in its compliance filing at the CPUC upon the generator’s commitment to make such capacity available to CAISO. Both Pacific Gas and Electric Co. and Southern California Edison Co. have filed form contracts with the CPUC. From a contracting perspective, these forms establish an odd relationship. That is, the load-serving entity acquires performance commitments from the generator for the benefit of CAISO. CAISO rarely enters into the contracting fray, yet it is relying on the results of this contracting to provide it sufficient rights to generation capacity to preserve reliability in a manner no less meaningful than the RMR agreements.

There is nearly universal agreement that the current contracting structure is inefficient and, arguably, ineffective. Load-serving entities and generators are spending excessive time negotiating provisions that try to reconcile the showing requirements of the CPUC and the current CAISO tariff requirements. But given the rather incomplete articulation of the generator’s performance obligations associated with such a commitment within the CAISO tariff, load-serving entities and generators frequently get stalled on determining the performance obligations, the associated remedies, and the appropriate level of compensation for taking on such obligations. As a result, RA contracts are overly complicated and RA capacity has not evolved into a liquid, tradable product. And, perhaps more troubling, CAISO may not be securing the type of generator commitments that it needs for the reliable operation of its system.

The capacity tag solution

The industry is responding with a two-faceted approach. First, a diverse group of industry participants has urged the CPUC to approve a proposal that would simplify RA contracting while enhancing reliability commitments. To do this, industry proposes to reduce the contracting between the load-serving entity and the generator to the sale of a "capacity tag." A capacity tag is simply the right of the holder to claim such capacity in a showing at the CPUC. At the same time, such capacity, once committed, becomes subject to performance commitments and associated remedies specifically set forth in the CAISO tariff.

To put it another way, the generator’s performance obligations to CAISO would be fully and exclusively established in the CAISO tariff—not in a contract between the load-serving entity and the generator, and not in the CPUC orders. This allows CAISO to enforce more directly and effectively the generator’s performance obligations. It also removes from the contracting process the need for the load-serving entity and the generator to guess what CAISO would require or for the load-serving entity to enforce such performance obligations on behalf of CAISO.

Focusing discussion of the generator’s performance obligations for RA commitments in the CAISO tariff puts back to CAISO the question of what specific services it needs from generators to ensure system reliability. We hope that approach—as a move away from the blank check of the must-offer requirement—will lead to greater efficiency and reliability in the operation of the transmission grid and a sustainable market design in California.

Alex Makler is Calpine’s vice president and assistant general counsel.