CAISO Initiates Broad Cost Allocation Stakeholder Process

Yesterday, the California Independent System Operator Corp. (“CAISO”) issued a straw proposal entitled “Cost Allocation Guiding Principles.” The straw proposal kicks off a new stakeholder process designed to establish a set of guiding principles for cost allocation that can be applied throughout the CAISO’s various markets and services. 

As expected, the stakeholder community has been divided over how to address cost allocation. Recently, the CAISO has reviewed cost allocation issues in several initiatives impacting renewable energy generators in the CAISO balancing authority area, including the Renewable Integration: Market and Product Review Phase 1, the Renewable Integration: Market Vision and Roadmap, and the Flexible Ramping Product. The stakeholder comments in these initiatives and others provided the basis for the CAISO’s current straw proposal. The CAISO plans to apply this new set of guiding principles both new programs (starting with the ongoing Flexible Ramping Product initiative) and, later in 2012, existing programs (CAISO expects to make a broad-spectrum review of existing cost allocations to ensure consistency with the new guiding principles.

Read on for a summary of the guiding principles proposed by the CAISO yesterday, which are similar to the Federal Energy Regulatory Commission’s cost causation principles in Order No. 1000:

  • Causation: Costs will be charged to resources and/or market participants that benefit from and/or drive the costs. For each type of charge in the CAISO market, the CAISO market settlement generally collects payments from one set of market participants that use a product and then allocates these payments to market participants that provide the product. According to the CAISO, this principle has some overlap with the “Incentivize Behavior” principle below, as properly aligning cost with causation provides an incentive for resources and market participants to minimize costs.
  • Comparable Treatment: Similarly situated resources and/or market participants should receive similar allocation of costs. According to the CAISO, this principle is similar to “Causation” above, but is intended to emphasize non-discrimination as well as avoiding special treatment of different types of technologies and market participants. Once the CAISO has identified what caused a particular cost, all similarly situated resources and market participants fitting the causation criteria should be allocated the costs.
  • Policy Alignment: The cost allocation design supports the economically efficient achievement of state and federal policy goals. According to the CAISO, an implementation question will be how to allocate costs in a way that aligns with policy goals and reflects causation? 
  • Incentivize Behavior: Profit maximization by market participants that are allocated the costs should ultimately lead to lower costs being incurred by the CAISO. The market design and cost allocation should also recognize redundant incentives.
  • Manageable: Market participants should have the ability to manage cost causation and the market design should seek to minimize variability and complexity of how costs are allocated and maximize the transparency of the cost drivers.
  • Synchronized: The cost drivers of the allocation should align as closely as possible to the selected billing determinant. For example, if a procurement target is set based upon expected outcomes, the actual outcome in a single settlement interval may not be indicative of the cost driver. In such a situation, the procurement target was not set (and the cost was not incurred) based on the actual outcome and should be more closely aligned.
  • Rational: Implementation costs and complexity should not exceed the benefits that are intended to be achieved by allocating costs, and other market design changes must be identified and considered that can also achieve desired outcomes. 

The CAISO will hold a stakeholder conference call to discuss the straw proposal on February 21.  Comments are due by February 28.  We will be tracking this process closely.

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