Comments on Draft Final Proposal

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

2. Provide a summary of your organization's comments on this proposal:

Alliance Energy Marketing, LLC (Alliance) provides O&M services for (3) different generators located within the CAISO system.  Those specific facilities are Harbor Cogeneration Company, LLC. Colton Power, LP and Ripon Gas Energy, Inc.  Alliance provides similar services for (8) other generators located in the NYISO competitive energy markets.  Alliance is familiar with expected cost recovery associated with operating gas fired generation and appreciates the opportunity to submit these comments on the CAISO’s Variable Operations and Maintenance Cost Draft Final Proposal discussed on the August 19 stakeholder call.

Alliance is deeply concerned with one particular element of the CAISO’s proposal as it will have wide ranging impacts on not only the efficiency of the CAISO’s market but also the ability for the CAISO to maintain a reliable gas fleet as it continues to increase renewable penetration. Specifically, Alliance is concerned with the necessary second condition (below) for if/when a resource can have certain variable maintenance costs reflected in its costs and market offers, especially as it relates to major maintenance events.

“2) Such costs should reflect future maintenance costs that are expected to be incurred within the service life [emphasis added] of the major component of plant or equipment.”

It is Alliance’s understanding that this principal is essentially indicating that once the CAISO determines a resource is “too old” such that its unlikely to incur another maintenance cycle, it can no longer have those costs reflected in the market. Applying this logic to determine whether or not resources can reflect certain costs introduces significant adverse impacts both in terms of reliability and market efficiency, as discussed in more detail below.  

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

The CAISO’s current proposal does not offer any transparency around how the condition above will be applied when the CAISO evaluates whether a resource is more likely to retire before reaching another maintenance event. While the appendix does provide more information as to how the CAISO would determine if the costs are expected to be incurred, it provides an extreme example (e.g., the event will take place in over 100 years). How the “100 year” is determined is still unclear and needs to be more transparent so stakeholders have an opportunity to provide feedback.

Alliance would like to caution the CAISO that basing the evaluation/application of the second condition using historical dispatch patterns is a flawed approach. The historical commitment and dispatch of a resource likely includes market offers that reflect major maintenance costs. If extrapolating that dispatch pattern into the future and subsequently determining the resource will unlikely reach another maintenance cycle results in the costs no longer being reflected in the market, that resource will suddenly appear cheaper to the market. The “cheaper” resource will now (1) be dispatched more frequently that was assumed to be the case when determining the costs are unlikely to be incurred, (2) reach maintenance events earlier and incur costs that it was not allowed to reflect and recover in the market, and (3) risks the reliable operation of the unit as the more frequent use of the resource may result in unplanned maintenance events.

The entity in the best position to attempt at estimating when a resource may retire is the owner operators of each resource; even as an owner operator of a resource its challenging to predict when a resource will retire as it will depend on how the market ultimately uses and dispatches the resource. Over the past decade it has become clear that resources such as base load resources are now being dispatched in a manner that drastically differs from its original intended use. The only assurance as to when a resource will retire is after the CAISO as approved its notification of retirement. Thus, Alliance asks the CAISO to consider a retirement date as what determines the “service life” of a resource.

Alliance is also concerned that this proposal will result in unequitable treatment among resources. Based on the latest proposal the CAISO has a default O&M adders that will be applied to all resources based on technology type, regardless of the age of the resource. If the default values are too low such that a resource then proceeds through the negotiation process, it is Alliance’s understanding that the CAISO will then determine the likelihood of the resource incurring the costs prior to retirement. Thus it seems as though “older” resources for which the default values adequately cover their costs can continue to reflect them in the market offers; whereas “older” resources where the default values do not fully cover the costs may end up not being able to reflect the costs in the market at all because it’s through the negotiation process where the CAISO will determine if the costs are “unlikely to be incurred”.

Fundamentally the concept of not paying a generator for major maintenance expense based on the idea that a specific maintenance event may or may not occur is just flawed.  Every time the unit is called to operate it is incurring costs or future maintenance costs, damage is being done to engine components with every cycle.  The markets should be expected to pay a generator for that damage or wear and tear, regardless of service life.

Lastly, Alliance is unaware of any other ISO that applies this standard to determine which resources can reflect the major maintenance costs in their market offers. Furthermore, even the CAISO’s initial policy that established the current MMA framework lacked any discussion regarding the age of the unit and its ability or inability to reflect what is, and should continue to be, considered marginal costs in the market. Alliance believes that the only definite milestone at which one can determine a resource will not incur another maintenance event is when the CAISO has accepted and approved a retirement notification. If the CAISO continues to propose basing the ability of a resource to reflect maintenance costs in the market on what is clearly a subjective evaluation of how the resource is likely to be dispatched years out, it will result in unreliable operations of gas-fired resources that were developed originally to provide baseload energy. Given the recent events at the CAISO, reliable operation of the gas-fired fleet should be of utmost importance.

Thank you for consideration of these comments. We look forward to working with the CAISO and stakeholders to establish a reasonable application of the proposed policy.

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal:

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

Submitting clarifications just for specific questions.

2. Provide a summary of your organization's comments on this proposal:

N/A

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

N/A

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

N/A

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

N/A

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal:

Escalation

Our Variable O&M process is to submit proposed costs in current year costs.  We do not include any escalation beyond the current year but recognize that the maintenance will be performed in the future at a higher cost.

To maintain accuracy and full cost recovery, our Variable O&M values should be escalated on an annual basis.  Outside of participants negotiating new costs each year, are there any planned mechanisms to enable annual cost escalation?

Minimum Load and Startup Adder Clarification

The Minimum Load and Startup Adder are expressed in terms of $/run-hour/MW and $/start/MW.  To clarify, the run-hour and start terms are at the configuration level as opposed to the component level.  For example, the Minimum Load Adder for a 2x1 combined cycle includes the costs for 2 combustion turbines and a steam turbine.

Negotiation Frequency

APS’s perspective is that we will continue to refine our Variable O&M values based upon a number of factors:

• The market environment is continuing to evolve changing the dispatch patterns for our units
• We are still trying to understand the impact of the significant change in unit operations over the past 4 years as both the macro (starts, hours & MWH) and micro (partial cycles) levels.
• Updated guidance from our Engineering team as they become more familiar with our requirements.
• Updated unit service life forecasts as resource requirements evolve

What are CAISO’s expectations in regards to how frequently participants can re-negotiate Var O&M adders to ensure optimal accuracy?

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

The Department of Market Monitoring (DMM) provides these comments on the ISO’s Variable Operations and Maintenance Cost Review Draft Final Proposal.[1]   DMM appreciates this opportunity to provide comments.  

Comments

DMM generally supports the ISO’s proposal as a reasonable approach.  We support the proposal with the following caveats:

1. We suggest that the ISO consider bolstering the proposed hydro default.  DMM is supportive of the development of a default major maintenance adder for hydro resources, but recommends that the ISO consider additional sources.
2. The proposal includes detailed definitions which will facilitate negotiation of maintenance reference levels.  The definition of service life includes an unfortunate typo that should be corrected before this proposal is submitted to the ISO Board for approval. The ISO proposal states the following:

“For example, a resource may apply for a cost associated with a maintenance activity that would occur very far into the future (e.g. over 100 years). In such cases, the CAISO has determined that such a maintenance activity is unlikely to occur and thus the associated cost of wear-and-tear will never be incurred.”[2]

DMM suggests that the first sentence quoted above should instead be: a resource may not apply for a cost associated with a maintenance activity that would occur very far into the future (e.g. over 100 years).

[1] Variable Operations and Maintenance Cost Review Draft Final Proposal, California ISO, August 12, 2020: http://www.caiso.com/InitiativeDocuments/DraftFinalProposal-VariableOperations-MaintenanceCostReview.pdf

[2] Ibid. p20.  

2. Provide a summary of your organization's comments on this proposal:

See attached.

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

See attached.

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

See attached.

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

No comments at this time.

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal:

1. The proposal includes detailed definitions which will facilitate negotiation of maintenance reference levels.  The definition of service life includes an unfortunate typo that should be corrected before this proposal is submitted to the ISO Board for approval. The ISO proposal states the following:

“For example, a resource may apply for a cost associated with a maintenance activity that would occur very far into the future (e.g. over 100 years). In such cases, the CAISO has determined that such a maintenance activity is unlikely to occur and thus the associated cost of wear-and-tear will never be incurred.”[1]

DMM suggests that the first sentence quoted above should instead be: a resource may not apply for a cost associated with a maintenance activity that would occur very far into the future (e.g. over 100 years).

[1] Ibid. p20.  

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

PG&E still has concerns about the impact and timeline of the proposal.  The proposed Operations & Maintenance (O&M) framework and default O&M adders represent a significant change and may impair the ability of generators to recover commitment costs.  PG&E appreciates the phased implementation approach, but requests the CAISO delay implementation to 2022 to allow adequate time for market participants to prepare, work with their own counterparties to gather data, and to understand the scope of work for negotiations.

2. Provide a summary of your organization's comments on this proposal:

To fully support the proposal, PG&E requests the CAISO:

• Expand the timeframe of phased negotiations and delay putting new O&M defaults into place until 2022
• Clarify negotiation process for resources under power purchase agreements (PPAs)
• Apply inflation adjustments to legacy negotiated maintenance adders in future CAISO default VOM adder reviews

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

PG&E conceptually supports the CAISO’s efforts to clarify and refine variable operations and maintenance costs. Clearly defined Tariff principles will help set expectations during cost negotiations going forward, though application to previously executed Power Purchase Agreements (PPAs)is problematic.  As previously noted by PG&E, gathering data with actual cost data and clear differentiation between operations and maintenance costs is difficult in practice. Cost categorization may vary depending on different stakeholders’ accounting practices and professional judgment. 

On the August 19, 2020, initiative call, a stakeholder raised concerns that the CAISO’s expertise to determine reasonableness of applicable costs may differ from plant operators.  PG&E shares concerns about the possibility of disagreement and requests the CAISO develop a clear appeals process.

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

Based on PG&E’s internal estimates, the proposed default O&M adders can result in significantly less total O&M cost recovery than currently approved negotiated major maintenance adder values (up to approximately 70% less for hypothetical dispatches of some technology types).  The proposed framework adds complexity, and not all stakeholders may fully understand the impacts of the proposal.  PG&E requests the CAISO delay implementation to allow for market participants to understand all implications of the proposal and prepare gathering documentation for potential future negotiations under the new framework.

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

PG&E appreciates the CAISO recognizing this proposal could likely result in significant negotiations and will require a phased implementation approach.  To allow adequate time for stakeholders to prepare, the CAISO should postpone putting new defaults into place until 2022 and allow Phase 1 negotiations (i.e. no 15-day deadline) to occur until the end of 2021.  If negotiations do not lead to satisfactory outcomes, this increased timeframe will allow for appeals and possible resolution facilitated by independent consultants.

The CAISO indicates that resources under PPAs where scheduling coordinators (SCs) do not have rights maintenance data, should “use default values until such a time that the documentation can be provided” (pg. 33 of Variable Operations and Maintenance Cost Review Draft Final Proposal).  The CAISO notes they do not wish to discourage applications, but it is unclear if any PPA data-restricted submissions that are above the conservative defaults will be considered.  PG&E thanks the CAISO for recognizing PPA constraints in the latest proposal and requests some additional clarity on how this type of submission will be reviewed.

If the CAISO applies an inflation adjustment during their next review of default VOM adders, PG&E requests the CAISO apply the same adjustment to any legacy negotiated maintenance adder values.  PG&E considers this treatment reasonable and it could also reduce administrative burden from new negotiations. 

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal:

N/A

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

2. Provide a summary of your organization's comments on this proposal:

PSE appreciates the CAISO’s responsiveness to stakeholder feedback throughout this proposal. The draft final proposal has evolved considerably from the original suggested VOM adders in the December 2018 Nexant report. The draft final proposal now allows generators to recover both variable operations and variable maintenance costs through three part bids in the CAISO markets.

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

PSE believes that the CAISO has arrived at the correct guiding principles to define variable operations costs. PSE generally supports the variable operations definition, and endorses the addition of “…other costs that vary directly with the electrical production…”  This language provides additional latitude for region-, owner-, regulatory-, contractual-, or plant-specific costing differences to be addressed.

PSE supports the variable maintenance definition, with one caveat. In item 5 the draft proposal notes “if the item is a replacement, it cannot be a replacement of an existing major component of the plant or equipment.”  This statement is confusing and PSE proposes a solution in our Section 6 comments.  PSE agrees with item 4, that the cost of a substantial betterment must be excluded from Variable Maintenance Cost, but notes that wear and tear on major components will eventually necessitate replacement as a direct result of run hours or starts. Insofar as the proposed recovery framework includes both minor and major maintenance in its definition of Variable Cost, PSE believes that such a non-betterment replacement of a major component should be eligible for inclusion in the variable maintenance cost adder.

PSE generally supports the definition of Fixed Costs, but recommends the addition of “other costs” similar to the definition of Variable Operations Costs.  The revised definition might read, “Fixed costs include fixed maintenance, general, administrative, and other costs that do not vary with the electrical production (i.e. the run-hours, electricity output, or the start-up/shut-down) of the Generating Facility.”

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

PSE supports the framework proposed by the CAISO to develop default operations and maintenance adders. While the selection of the NYISO maintenance adders (option 1) to guide the development of the maintenance adders may be limiting, it provides an auditable framework and is not reliant on potentially confidential sources. PSE appreciates that costs from NYISO, EPA, and EIA are scaled to account for temporal and geographic differences, thus making them more applicable to resources within the WECC. PSE believes that the technology grouping is appropriate and recognizes that maintenance adders can be negotiated if the value is not sufficient, or the resource can demonstrate that costs are incurred differently e.g., variable maintenance costs incurred as a dollar per run hour rather than a dollar per start basis.

PSE also supports the blended approach to default hydro costs given the wide variation in technical configuration of such facilities, regulatory environments, federal license requirements, flood control requirements, and external stakeholder agreements.  The default costs provided appear to be reasonable for large hydro facilities, although may not be adequate for smaller facilities (less than 50 MW).  Without the efficiencies of scale, smaller hydro facilities may be under-compensated by the defaults and thus, need to engage with CAISO for a negotiated adder.  An alternative to consider would be to filter costs in the blended approach to see if smaller hydro facilities are substantially disadvantaged by the current proposed defaults.  If so, then an adjustment factor (say 1.1x to 1.25x based on the findings) can be applied to the defaults for smaller hydro facilities.  This could provide an option for smaller facilities to reduce the need for negotiated adders.

A similar adjustment factor argument can actually be made for older technology CCGT plants with B-, E-, and EA-class combustion turbines.  CAISO has based its proposed default values on F-class technology.  Again, an adjustment factor may keep older CCGT plants out of negotiated adders.

PSE appreciates and supports the addition of wind technology to the defaults and believe this will reduce uncertainty by wind facility operators on the cost recovery of participating resources.  However, the default VO value of $0.28 per MWh seems to be quite low.  Given PSE’s experience operating the third largest wind power fleet owned by regulated utilities in the U.S., landowner royalties are many times higher than the proposed VO.  While it is understood that each wind facility will have distinct underlying lease agreements with landowners, an increase of the default VO by a factor of 6-10 will result in a much more reasonable adder.  Variable maintenance costs for wind are not proposed at all in Table 1 and should be also recognized.  PSE recommends CAISO take another look at wind VO and VM to validate the proposed default.

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

PSE believes that the implementation approach outlined by the CAISO in Appendix D is reasonable. The approach provides resources with a reasonable amount of time between the expected approval of the proposal and the deadline to update and negotiate variable operations and variable maintenance adders such that the adders are applicable as soon as the initiative is fully implemented. The CAISO’s request for additional time after the cut-off to negotiate and approve variable operations and variable maintenance adders is also reasonable given the potential for a large amount of resources to adjust their existing approved adders.

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal:

The CAISO definition of “major component” is understood to mean complete prime movers (such as the turbine), generators, or related systems (such as the dam, HRSG, or cooling tower).  Plant owner/operators may also use the term “major component” to describe large sub-components like a blade set, rotating exciter, generator stator, gearbox, etc.  This use of the same term can be confusing for all parties.  PSE recommends that CAISO utilize a term that is more consistent with industry standard terminology used in functional location hierarchies. 

Most functional location hierarchies distinguish between a location subdivision and an equipment subdivision in the hierarchy.  Using ISO 14224 as a guide, CAISO might consider replacing the term “major component” in this context with “Section/System.”  That term would refer to a turbine or generator or other large section of a generation plant, and “major component” could be reserved to components in the equipment subdivision.  Using some form of this terminology would relieve the confusion associated with applying “major component” to a section and equipment simultaneously.

The difficulty of establishing betterment costs when associated with major maintenance activities is undeniable.  Sometimes betterments are intentional and sometimes they are simply a consequence of performing maintenance.  PSE supports CAISO’s description, and will apply existing FERC guidance to appropriately bucket these costs. 

Please note that the use of “Service Life” in the scenario examples is a non-sequitur and has no bearing on whether a maintenance activity is a betterment or not.  Major component lifecycles (or Section/System as recommended above) are not set by operational hours, rather are set by the economics of continued service.  A turbine, generator, dam, or HRSG will not reach the end of its service life unless it cannot be economically retained in service, thus the decision to proceed with major maintenance already assumes there is service life remaining.  PSE operates CT facilities that are over 40 years old, CCGT facilities that are nearly 30 years old, and hydroelectric facilities that are 60-120 years old.  Each facility retains its original major components (Sections/Systems) and has had multiple major maintenance events and improvements over time.  Per the CAISO definitions, the cost of restorative major maintenance can be classified as VM, while the cost of the betterment cannot be classified as VM.

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

2. Provide a summary of your organization's comments on this proposal:

The Six Cities do not oppose the Draft Final Proposal.  Below are comments regarding discrete elements of the CAISO’s proposal in this initiative.   

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

As a general matter, the Six Cities do not oppose the principles articulated in the Draft Final Proposal and acknowledge that the CAISO intends to apply the principles, including the defined terms that the CAISO had previously proposed to include in its tariff, with some limited flexibility depending on applicable facts and circumstances.  (See Draft Final Proposal at 9 n.2.)  This proposal strikes the Six Cities as reasonable given that the principles are expected to serve as guidance in development of negotiated adders.  The Six Cities understand that the CAISO does intend to propose certain tariff revisions in connection with this initiative, including to reflect new default values in the tariff, and the Six Cities therefore reserve judgment on whether some portion of the principles or definitions do need to be included in the CAISO tariff pending the tariff development phase of this initiative. 

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

 The Six Cities have no comments on this element of the Draft Final Proposal. 

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

 The Six Cities acknowledge the CAISO’s proposal for an implementation process that would permit parties that currently have negotiated MMA and VOM adders to renegotiate those adders with the CAISO prior to the October 1, 2021 effective date for the new default values; the Six Cities support this approach as reasonable.  The Six Cities also support the CAISO’s proposal to allow for grandfathering of existing MMA and VOM adders pending completion of any renegotiations as described in the proposal and note the CAISO’s confirmation that resource owners may initiate those negotiations at their discretion to shift to the new methodology or the CAISO may do so consistent with existing Business Practice Manual provisions.  (See id. at 31-32.)

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal:

The Six Cities have no additional comments at this time. 

1. Provide your organization’s overall position on the Variable Operations and Maintenance Cost Review draft final proposal:

Sothern California Edison (SCE) provides the following comments on the California Independent System Operator (CAISO) Variable Operations and Maintenance Cost Review (VOMCR) Final Proposal[1].

SCE supports the CAISO proposal to grandfather-in existing values of negotiated adders[2]. Additionally, SCE supports the flexibility to renegotiate values in the future and understands that the CAISO may need processing time as negotiation requests are made. Further, SCE reiterates its prior comments[3], for more accurate and less obsolete cost representation, resources should be allowed the renegotatiation option in the future, with a broader time window to exercise.

[1] http://www.caiso.com/InitiativeDocuments/DraftFinalProposal-VariableOperations-MaintenanceCostReview.pdf

[2] http://www.caiso.com/InitiativeDocuments/Presentation-VariableOperations-MaintenanceCostReview-Aug192020.pdf

[3] http://www.caiso.com/InitiativeDocuments/SCEComments-VariableOperationsandMaintenanceCostReview-RevisedStrawProposal.pdf

2. Provide a summary of your organization's comments on this proposal:

3. Provide your organization’s feedback on the proposed operations and maintenance cost categorization principles as described in section 4 (page 9):

4. Provide your organization’s feedback on the proposed operations and maintenance cost framework and default operations and maintenance adders as described in section 4 (page 10):

5. Provide your organization’s feedback on the proposed implementation details as described in appendix D (page 31):

6. Additional comments on the Variable Operations and Maintenance Cost Review draft final proposal: