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Increase in California Rooftop Solar Leads to Conflict Between State and Federal Electricity Regulators

Nov.29.2017

A dramatic increase in rooftop solar has shifted California’s peak load hours, resulting in a disconnect between state and federal regulation. 

Recently, the California Public Utilities Commission (CPUC), which regulates California’s investor-owned retail utilities, implemented a demand response auction mechanism (DRAM), and approved contracts with several demand response resources for 2018. Those contracts require that the contracted demand resources be available in 2018 during the California Independent System Operator’s (CAISO) 2017 “availability assessment hours”. However, the Federal Energy Regulatory Commission (FERC), which regulates CAISO, had approved different “availability assessment hours” for 2018, and CAISO accordingly petitioned FERC for a waiver, seeking to keep its 2017 availability assessment hours unchanged until 2019. FERC refused, leaving CAISO’s and the CPUC’s resource adequacy programs on different schedules.

CAISO sets its availability assessment hours, a five consecutive hour block meant to capture peak load, as part of its resource adequacy availability incentive mechanism. The incentive mechanism provides for payments or charges to system, local, and flexible capacity based on the resource’s availability during that five-hour period. The incentives and penalties are designed to ensure that eligible resources, including demand response, are available to meet peak demand. In 2017, CAISO set those availability assessment hours from 1:00 pm to 6:00 pm April through October, and from 4:00 pm to 9:00 pm November through March.

FERC requires CAISO to update its availability assessment hours annually to reflect historic peak loads. Because of the massive growth in rooftop solar, CAISO’s historic peak during the summer shifted to later in the day, so that for 2018, CAISO’s availability assessment hours would be 4:00 pm to 9:00 pm, year round. CAISO’s availability assessment hours thus no longer coincide with the hours used by the CPUC in its DRAM auction, producing a disconnect between how CAISO and the CPUC assess resource adequacy compliance in 2018.

After receiving input from stakeholders, including CPUC staff, CAISO filed a waiver request at FERC, asking the Commission to waive the requirement to adjust the availability assessment hours for historic patterns until 2019 to allow CAISO and the CPUC time to coordinate their resource adequacy schedules. According to the CPUC, the waiver was needed in order to avoid uncertainty and confusion, or the even greater risk that DRAM participants might terminate or modify offers already made in the CPUC program, or seek exemptions, which would cut the amount of demand response resources in CAISO’s market when they were most needed. Advanced Energy Management Alliance, the California Efficiency and Demand Management Council, and EnerNOC also filed in the docket in support of CAISO.

In denying CAISO’s waiver request, FERC found that the loss of a “relatively small” amount of demand response resources would not have an impact on grid reliability. FERC reasoned that “[i]f the commission were to grant CAISO’s proposed request for waiver, it could result in weakening the incentives for resources to be available at the times of highest anticipated system need. This could potentially cause undesirable consequences in the form of decreased reliability and increased costs.” FERC also found CAISO’s waiver request overbroad, but invited CAISO to seek a narrower waiver which would address the problem of demand response participation “without creating undesirable consequences for the resource adequacy program.” CAISO did not seek rehearing of the order, thus precluding its right to seek judicial review of the FERC order. It remains to be seen whether CAISO will seek a narrower waiver, as FERC suggested.

This situation highlights again the tension created by the overlapping but distinct spheres of state and federal regulation. Since their initiation almost twenty years ago, there have been constant tensions between state regulatory commission actions and FERC regulation and oversight of the independent system operators (ISOs) and regional transmission organizations (RTOs), which operate in the wholesale, interstate electricity markets. State commissions often favor or incentivize particular resources or attributes, such as demand resources, renewable energy, and zero-emission resources such as nuclear power. These state policies create tensions when they impact wholesale electricity rates, which are regulated by FERC. Last year, in Hughes v. Talen Energy Marketing, 136 S.Ct. 1288 (2016), the Supreme Court struck down, on preemption grounds, Maryland and New Jersey programs designed to incentivize the development of new power generation resources, on the ground that those programs “adjust[ed] an interstate wholesale rate” and therefore “invad[ed] FERC’s regulatory turf.” State/federal tensions are often starkest in the two single-state RTOs, CAISO and the New York Independent System Operator.

Historic supply and demand patterns are shifting rapidly, and regulators must adjust to a new normal in grid operations. Distributed energy resources, such as rooftop solar, are no longer a remote or hypothetical idea, but are pervasive enough today to shift California’s peak load hours and require regulatory changes. Going forward, state and federal regulators will have to deal not only with the tensions that have always existed between them, but also with the challenge of effectively and harmoniously addressing the developments that new, disruptive technologies are bringing to the energy industry.

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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Richard Lehfeldt
Partner – Washington, D.C.
Phone: +1 202.624.2882
Email: rlehfeldt@crowell.com

Senior Law Clerk Sophia Browning also contributed to this alert.