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FERC Grants California Grid Operator Gas Pricing Remedy

As an outgrowth of severe natural gas price spikes a year ago, FERC at year-end approved a proposed tariff solution for California's electric grid operator allowing for start-up and minimum load cost recovery for gas-fired generation plants that sometimes can be caught in weather-related gas price spikes.

The California Independent System Operator's (CAISO) tariff amendment was effective last Wednesday, following the action by the Federal Energy Regulatory Commission. The latest regulatory move is consistent with some interim changes FERC allowed the state grid operator to make last March in response to relief sought by a group of California generators (see Daily GPI, March 7, 2014).

"CAISO has demonstrated that its proposal will reduce the potential for inefficient commitment and dispatch of resources due to out-of-date natural gas costs and will help protect [generators] from unrecoverable start-up and minimum load costs during the upcoming winter season," FERC said in its order accepting the state grid operator's approach.

In a market notice on Wednesday to its stakeholders, CAISO said FERC's action on the amended tariff allows:

  • All non-use limited [generators] to use the proxy cost process for recovering start-up and minimum load costs;
  • Increases the proxy price cap to 125%; and
  • Provides for a manual process to address natural gas prices spikes.

Last winter, FERC approved waivers for CAISO to deal with natural gas price spikes for must-run gas-fired generation plants in the state (see Daily GPI, March 31, 2014). At one point, CAISO asked FERC to deny a request by independent power generators for relief from the spiked winter gas prices that they had requested from the federal regulators (see Daily GPI, March 14, 2014).

It was significant price volatility experienced in December 2013 and parts of January and February last year, that prompted CAISO's seeking the limited waiver that FERC granted last year. CAISO's amended tariff now effectively includes what FERC called "a mechanism, similar to the mechanism temporarily accepted in its waiver petition [last year] to use and update the natural gas price in the day-ahead [power] market to deal with unexpected gas price spikes."

A number of generators, including Pacific Gas and Electric Co. and NRG Energy Inc., suggested changes to the CAISO proposed tariff amendment, but FERC agreed with the grid operator that they were not needed at this time.

"However, we expected CAISO and its stakeholders to explore these [added] proposals in the bidding rules stakeholder initiative, and to include a description of the discussion with respect to these proposals in the [subsequently required] informational report," FERC said.

“Based on an analysis of gas price increases and stakeholder information, CAISO has concluded that the increased cap should be sufficient to cover almost all gas price volatility between the day-ahead gas price index and intra-day gas prices,” FERC said. “CAISO explains that resources will be able to recover their natural gas costs in the event of an extraordinary spike in natural gas prices because its proposal includes a provision where CAISO will use the single gas price published [by Intercontinental Exchange (ICE)] in the morning in the day-ahead market when it exceeds the gas price index calculated on the previous evening by more than 125%.”

The price is regularly set each evening for the day-ahead market using a basket of published prices from three publications and ICE. ICE, however, publishes the earliest prices the next day, almost always by 10 a.m. Pacific time.

The revised method of calculating the proxy cap is not expected to be used very often. CAISO said there have been only seven days when natural gas prices have increased by more than 125% from the previous evening’s natural gas price index in the more than five years between April 2009 and the submission of its filing Oct. 1, 2014.

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