Washington (Platts)--24Jan2013/518 pm EST/2218 GMT

A proposal by the California Independent System Operator to create a mechanism to procure capacity that is at-risk of retirement is getting a frosty reception, with numerous protests filed by market participants and California energy regulators.

Under the proposal, filed December 12 to the US Federal Energy Regulatory Commission, the grid operator would give a generation resource a payment to cover annual operating costs if that resource is at risk of retirement and needed for local reliability or system flexibility reasons for up to five years in the future. The payment may be reduced if the generator gets revenue from the ISO market or a bilateral contract.

Cal-ISO said the new "backstop" mechanism is necessary to deal with the changing dynamics of the California grid and the increased need for flexible capacity, such as gas-fired plants that can respond quickly to ISO dispatch instructions.

The California Public Utilities Commission on Wednesday filed a protest, telling FERC that the proposal would preempt and impede the PUC's efforts to develop least-cost, market-based methods to fulfill capacity needs.

"Such preemption of the state's regulatory authority over resource adequacy would be unprecedented, unnecessary, and exceed FERC's jurisdictional authority under Sections 201, 205 and 215 of the Federal Power Act," the PUC said. The PUC described the measure as "bestowing subsidies on resources that are not needed today," and that the proposal would distort California capacity procurement while providing no assurance of benefits to ratepayers.

In a joint protest filed Wednesday, NRG and Dynegy said the ISO has no ability to retain needed generation on a multi-year basis going forward. The PUC's resource adequacy program is not sufficient, the companies said.

"The problem facing California's energy markets is simple; generation resources needed for reliability in the near future find themselves unable to earn an acceptable return from the combination of the Cal-ISO's energy and ancillary services markets and the CPUC's [resource adequacy] market," the companies said. FERC should instead direct the ISO to implement a forward capacity market or raise the compensation to capacity resources, they said.

The Western Power Trading Forum, made up of various market participants including providers, scheduling coordinators, marketers and others, in a Wednesday protest also called for the implementation of a capacity market, saying the proposal "creates an interim mechanism that may, itself, limit progress toward ensuring critical resources are viable and available to meet the flexible resource and reliability needs of the system."

WPTF also said it would be discriminatory to pay less than a reasonable market clearing price for procurement from resources that are marginal units benefitting reliability of the grid. The ISO could also impede bilateral contracts at compensation levels sufficient to maintain the mix of resources that is needed.

Another protest was filed by the Alliance for Retail Energy Markets, made up of California retail suppliers, which said FERC should instead direct the ISO to improve its capacity and energy/ancillary services market designs to make more efficient price signals and be more transparent.

--Jason Fordney, jason_fordney@platts.com --Edited by Katharine Fraser, katharine_fraser@platts.com