FERC has approved a plan by California's grid operator to deal with natural gas price spikes for must-run gas-fired generation plants in the state, setting aside an earlier request from the generators for a waiver of existing tariff rules (see Daily GPI, March 7).

The California Independent System Operator (CAISO) countered the generators' plea for help with a proposal of its own (see Daily GPI, March 14) that the Federal Energy Regulatory Commission (FERC) on Friday decided was a better solution, noting that it found "good cause" to grant the CAISO request.

Generators argued that the grid operator's approach did not provide enough to make them whole from gas price spikes they encountered during recent harsh winter weather.

FERC's action will allow CAISO's waiver to remain in effect until April 30 or when the federal regulatory panel acts on a second, broader waiver request that the state grid operator is seeking by Wednesday. The approved waiver is aimed at overcoming a two-day lag between posted and actual gas prices used in the CAISO tariff methodology.

With the FERC-approved system, when a predetermined price increase threshold is reached, CAISO would update all resources' (registered and proxy cost) start-up and minimum load costs for generators to reflect the most recent prices in the IntercontinentalExchange Inc. (ICE) index.

In taking its action, FERC indicated it agreed with CAISO that its waiver "addresses a concrete problem because it seeks to adequately compensate resources in the event of significant spikes in gas prices, and will not have undesirable consequences."

Besides allegedly failing to meet FERC's waiver standards, the suppliers' request could have adverse market consequences, according to CAISO, which said it could hurt the California power market's efficiency and create gaming opportunities for market participants.

"The waiver reduces the number of pricing indices used to set the gas price for the purpose of settling transactions, but continues to use the ICE index, a gas price index that is already approved in CAISO's tariff," FERC said.

"Further, the waiver addresses a concrete problem that must be remedied by allowing gas-fired generators the opportunity to recoup their start-up and minimum load costs based on data that more accurately reflects contemporary natural gas pricing. We find that this limited waiver will not have undesirable consequences."