NESCOE

Protest Regarding NEPGAs Complaint on FCM Auction Rules – IS/IC and Carry Forward

Legal Document

Dated: November 27, 2013

Posted in:

Authored by:

United States of America Before the Federal Energy Regulatory Commission
New England Power Generators Association, Inc. v.  ISO New England Inc.
Docket No. EL14-7-000
Motion to Intervene and Protest of the New England States Committee on Electricity
November 27, 2013


 

Table of Contents

  1. EXECUTIVE SUMMARY.. 1
  2. Communications. 3

III. BRIEF DESCRIPTION OF THE COMPLAINT.. 3

  1. IS/IC: Current Rules and NEPGA’s Alternative. 4
  2. Capacity Carry Forward Rule and NEPGA’s Alternative. 6
  3. MOTION TO INTERVENE. 7
  4. PROTEST.. 7
  5. NEPGA Has Not Shown Why the Commission’s February 2013 Findings – That the Revisions that Are Now the Subject of the Complaint were Just and Reasonable – Are No Longer Valid. 10
  6. The Commission’s Actions. 10
  7. Without Evidence of Changed Circumstances, NEPGA’s Complaint Amounts to a Collateral Attack on the Commission’s February 12 Order. 11
  8. NEPGA Has Failed to Meet Its Burden to Demonstrate that the IS/IC Rules are Unjust and Unreasonable and that Its Proposed Alternative Is Just and Reasonable. 14
  9. NEPGA Does Not Make the Required Showing that the IS/IC Rules Are Unjust and Unreasonable. 14
  10. NEPGA Has Not Shown That Its Proposed Alternative Is Just and Reasonable. 17
  11. The Complaint Fails to Demonstrate That the Capacity Carry Forward Rule Is Unjust and Unreasonable or That the Proposed Replacement Is Just and Reasonable. 22
  12. NEPGA Does Not Establish That the Pricing Provisions in the Capacity Carry Forward Rule Are Unjust and Unreasonable. 24
  13. NEPGA Fails To Demonstrate That Its Proposed Replacement Pricing Provision Under the Capacity Carry Forward Rule is Just and Reasonable. 27
  14. The PJM Order Upon Which NEPGA Relies Is Not Applicable in the Context of ISO-NE’s Different Market Rules. 28
  15. Fast-Track Processing Should be Denied and, to the Extent Rule Revisions are Required, the Stakeholder Process is a More Appropriate Forum to Address the Issues Raised by NEPGA. 31
  16. CONCLUSION.. 35

 Pursuant to Rules 211, 212, and 214 of the Federal Energy Regulatory Commission’s (“Commission” or “FERC”) Rules of Practice and Procedure (the “Rules”), 18 C.F.R. §§ 385.211, 385.212, and 385.214 (2012), the Commission’s November 1, 2013 Notice of Complaint, and the Commission’s November 19, 2013 Notice of Extension of Time, the New England States Committee on Electricity (“NESCOE”) hereby files this Motion to Intervene and Protest in response to the Complaint and Request for Fast Track Processing filed by the New England Power Generators Association, Inc. (“NEPGA”) against ISO New England Inc. (“ISO-NE”) on October 31, 2013 (the “Complaint”).[1]

  1. EXECUTIVE SUMMARY

The Commission should reject NEPGA’s last minute attempt to impose on consumers new and unjust and unreasonable administrative pricing provisions on the eve of the next Forward Capacity Auction (“FCA”).[2] Pursuant to the Commission’s directives, the upcoming eighth FCA (“FCA 8”) is the first auction in which the administratively-set price floor will be removed.[3] Through this proceeding, NEPGA would have the Commission order a new suite of administrative pricing revisions at the same time the capacity market is to move away from a long-standing administrative pricing construct. Further, it would have the Commission do so under a Fast-Track process that would allow states, stakeholders and the Commission an unreasonably short time frame to analyze and understand the full implications of changes that could result in billions of dollars in additional costs to consumers in FCA 8 alone.[4]

The Commission accepted changes to the pricing provisions that are the subject of the Complaint less than one year ago. NEPGA did not seek rehearing of that order. Yet, NEPGA now asks the Commission to expedite its decision-making process so that pricing rules that are materially more advantageous to capacity resources, and materially more burdensome to New England consumers, are in place before the next auction. The Commission should deny the Complaint. NEPGA has made no showing that the pricing provisions have failed to work as intended and that they are unjust and unreasonable. Additionally, NEPGA has not shown changed circumstances since the Commission’s approval of the pricing provisions at issue less than a year ago, and its Complaint seeking changes to rules that have not had the opportunity to be triggered in a single auction constitutes a collateral attack on the Commission’s order approving the rules. Nor has NEPGA met its burden to demonstrate that its proposed replacement provisions are just and reasonable. The Commission should not direct ISO-NE to adopt NEPGA’s further administrative changes, which, as shown below, would impose substantial costs on consumers and cannot withstand scrutiny.

In the event the Commission finds that some revisions to the FCM rules are warranted, it should direct ISO-NE to conduct a meaningful stakeholder process to explore a range of solutions that, unlike the NEPGA Complaint, consider consumer costs. That ISO-NE has recently identified what it refers to as a “gap” in the Insufficient Competition rule, as discussed below, reinforces the need for a stakeholder process to consider holistically NEPGA’s proposed changes. Alternatively, if the Commission neither denies the Complaint nor establishes a stakeholder process to consider the issues raised by the Complaint, given the complexity of these issues, the Commission should set the Complaint for hearing under Track II time standards and establish settlement procedures.

  1. Communications

Pursuant to Rule 203, 18 C.F.R. § 385.203 (2012), the person to whom correspondence, pleadings, and other papers in regard to this proceeding should be addressed and whose name is to be placed on the Commission’s official service list is designated as follows:

Jason R. Marshall
Senior Counsel
New England States Committee on Electricity
655 Longmeadow Street
Longmeadow, MA 01106
Tel: (617) 913-0342
Email: jasonmarshall@nescoe.com

  • BRIEF DESCRIPTION OF THE COMPLAINT

The Complaint focuses on the price setting mechanisms in two areas of the Forward Capacity Market (“FCM”) rules: (1) Inadequate Supply or Insufficient Competition (collectively, “IS/IC”), and (2) the Capacity Carry Forward Rule. NEPGA alleges that these rules create price discrimination between new and existing resources and result in artificially low prices being paid to existing resources that are far below what new entrants receive. NEPGA asks the Commission to find that the rules are unjust and unreasonable and requests that the Commission direct ISO-NE to adopt its alternative provisions. NEPGA also requests that the Commission Fast-Track the proceeding, contending that changes should be made in advance of FCA 8, thereby effectively eliminating the opportunity for sufficient time for state, stakeholder, and Commission review of multiple complicated rules.

  1. IS/IC: Current Rules and NEPGA’s Alternative

Under the Tariff provisions currently in effect, Inadequate Supply occurs when “there is less new capacity offered . . . than the amount of new capacity required to satisfy the needs of that zone.”[5] Insufficient Competition is present when “1) there is a need for new entry to meet the forward capacity requirement; and 2) a limited number of new entrants make offers to enter and provide the needed capacity.”[6] ISO-NE recently summarized the intended design of these two rules and the Capacity Carry Forward Rule, noting that all three pricing mechanisms were driven by concerns over seller market power:

[T]he Inadequate Supply provision was intended to address the situation where the total of existing and all new resources was less than the Installed Capacity Requirement (“ICR”). . . . [T]he Insufficient Competition provision intended to address the situation where there were less Existing Resources than ICR and not enough eligible new resources to assure competition in the auction (although when combined, the eligible existing and new resources exceeded ICR).[7]

When Inadequate Supply occurs in a zone or system-wide, existing resources are paid 1.1 times the Capacity Clearing Price for the most recent FCA not having Inadequate Supply, with new resources receiving the FCA starting price for that auction.[8] During Insufficient Competition in a zone or system-wide, existing resources are paid the lower of (i) the Capacity Clearing Price for that auction, or (ii) 1.1 times the Capacity Clearing Price for the most recent FCA where there was not Insufficient Competition.[9]

NEPGA asserts, inter alia, that these prices “are not a reasonable proxy for the competitive cost of new entry, are a fraction of the prices paid to new entrants and do not begin to approach the benchmark prices designed to reflect the cost of new entry.”[10] NEPGA proposes that the Inadequate Supply rule be revised so that, rather than setting the price for existing resources based on the Capacity Clearing Price in a prior FCA, the prices would be set to 1.1 times the Offer Review Trigger Price (“ORTP”) for a combustion turbine (“CT”) (referred to together herein as “ORTP-CT”).[11] For the Insufficient Competition rule, NEPGA proposes that, rather than setting the price for existing resources to the lower of the Capacity Clearing Price or based on the Capacity Clearing Price in a prior FCA, the price would be set to the lower of the Capacity Clearing Price or 1.1 times the ORTP-CT.   The ORTP-CT is set at $10.00/kW month for FCA 8.[12] It must be recalculated no less than once every three year period.[13]

  1. Capacity Carry Forward Rule and NEPGA’s Alternative

The Capacity Carry Forward Rule “was intended to address the . . . situation where a large resource met a zonal need, but eliminated any need for new resources in the subsequent auction.”[14] This condition would occur where a new entrant’s resource is “lumpy,” i.e., significantly larger than the amount of new capacity needed in the zone to satisfy capacity obligations in that year, and where the new entrant has elected to receive a multi-year pricing option under the FCM rules.[15] Pursuant to these rules, eligible new resources may elect to receive new entry pricing, effectively locking-in for a five-year period the capacity clearing price from the FCA in which the new entrant first clears.[16] When these conditions are met and a new entrant elects this multi-year pricing option, the Capacity Carry Forward Rule requires ISO-NE to establish the clearing price for existing generators in a manner that will mitigate the price suppressive effect that the lumpy new capacity may have on the auction clearing price in the next auction. The mitigated price under the rule is the lesser of (i) $0.01 below the price at which the last offer from a new resource withdrew from the FCA; or (ii) the ORTP-CT.[17]

NEPGA complains that the Capacity Carry Forward Rule requires the “lumpy” new entrant to be a price taker, i.e., to submit a $0 bid in the four annual auctions subsequent to the first auction in which the new entrant clears the market,[18] and that the “last ‘new’ capacity offer that is withdrawn in the FCA is not a reasonable proxy for a competitive market outcome” because it will set prices for existing resources far below the cost of new entry.[19] NEPGA requests that the Commission change the pricing provision to instead “establish a shadow de-list bid for such resource at the lower of (i) the [ORTP-CT] . . . or (ii) the Capacity Clearing Price in the Capacity Zone for the FCA in which the New Capacity Resource electing a multi-year commitment initially cleared.”[20]

  1. MOTION TO INTERVENE

NESCOE is the Regional State Committee for New England. It is governed by a board of managers appointed by the Governors of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont and is funded through a regional tariff that ISO-NE administers.[21] NESCOE’s mission is to represent the interests of the citizens of the New England region by advancing policies that will provide electricity at the lowest reasonable cost over the long-term, consistent with maintaining reliable service and environmental quality.

The Complaint has system reliability, consumer cost and environmental implications. NESCOE has a direct, immediate, and substantial interest in this proceeding, which will not be adequately represented by any other party. In addition, NESCOE’s participation in this proceeding as the representative of the New England Governors will serve the public interest. NESCOE respectfully requests leave to intervene in this matter.

  1. PROTEST

The Commission should dismiss the Complaint on both procedural and substantive grounds. As a threshold matter, the Complaint is a collateral attack on a recent Commission order accepting modifications to the very same provisions NEPGA now challenges. In addition, NEPGA has failed to meet the requirements of Section 206 of the FPA. In bringing this Complaint, NEPGA bears a dual burden under Section 206. First, it must demonstrate that the existing rate, rule, or practice is “unjust and unreasonable, unduly discriminatory or preferential.”[22] Then, NEPGA must demonstrate that its proposal is a just and reasonable alternative.[23] As set forth below, NEPGA has not met either requirement under Section 206.

NEPGA has not demonstrated that the pricing provisions, which the Commission approved less than one year ago, are not operating as intended and are unjust and unreasonable. NEPGA has also not satisfied its burden to show that the replacement provisions it proposes are a just and reasonable alternative. Appended to this protest is the Testimony of James F. Wilson in Support of the Protest of the New England States Committee on Electricity (“Wilson Testimony”). As Mr. Wilson explains in his testimony, NEPGA’s alternative proposal, if implemented, would: impose an administrative price far exceeding a reasonable estimate of a competitive price, result in market distortion and substantial increases in consumer costs without a clear connection to resource adequacy or other value, create regulatory uncertainty through an additional administrative intervention, and have other unintended consequences.[24]

Should the Commission find that rule changes may be warranted, ISO-NE, states, and stakeholders must have a reasonable opportunity to analyze the asserted problem and to develop revisions, as appropriate. If the Insufficient Competition rule is triggered in FCA 8, NEPGA’s unilateral proposal to modify the rule could result in as much as almost $3 billion in additional costs to consumers but with no demonstrated reliability benefit.[25] To date, there has not been reasonable time or a meaningful stakeholder process to allow states and stakeholders to consider the issues that NEPGA alleges in its Complaint. Additionally, as explained below, ISO-NE has recently identified what it believes is a gap in the Insufficient Competition rule, underscoring the need for a thorough stakeholder process to vet both the current rules and the range of potential solutions. Such a stakeholder process is consistent with Commission policy strongly encouraging stakeholder consideration before an issue is brought to FERC. In this case, where one entity has proposed one potential solution that could cost consumers billions of dollars more than under current FERC-approved rules, a meaningful opportunity for states and stakeholders to analyze the assertions and discuss the range of potential solutions is essential. Alternatively, the Commission should set the Complaint for hearing using a Track II schedule and establish settlement procedures.

  1. NEPGA Has Not Shown Why the Commission’s February 2013 Findings – That the Revisions that Are Now the Subject of the Complaint were Just and Reasonable – Are No Longer Valid.
  1. The Commission’s Actions

Not even nine months prior to the date of the Complaint, the Commission accepted as just and reasonable the very provisions that NEPGA challenges.[26] In its February 12 Order, the Commission found that ISO-NE’s proposed revisions to the IS/IC rules and the Capacity Carry Forward Rule complied with its prior orders.[27] The Commission also noted that “no party has objected to them or otherwise questioned their compliance with prior Commission orders.”[28] Neither NEPGA nor any other generator interest sought rehearing of the February 12 Order.

In addition, the Commission explicitly rejected effectively the same proposal to revise the IS/IC rules that NEPGA now submits as an alternative mechanism to pay existing generators when the rules are triggered. The February 12 Order followed a lengthy proceeding regarding significant changes to the FCM rules. As part of that proceeding, the Commission addressed ISO-NE’s proposal to eliminate or replace use of Cost of New Entry (“CONE”) as a reference point in the market rules.[29] ISO-NE proposed to replace the then-effective mechanism for setting the price that existing capacity would receive in the case of Inadequate Supply or Insufficient Competition (1.1 times CONE) with a new pricing provision, 1.1 times the Capacity Clearing Price from the last competitive FCA.[30] However, NEPGA proposed to the Commission that existing resources should instead be paid “slightly above the benchmark cost of a peaker, so as to provide the proper incentive for new entry.”[31]

In general, the Commission found ISO-NE’s proposal to eliminate or replace uses of CONE in the Tariff to be just and reasonable.[32] After accepting the elimination altogether of the use of CONE relative to certain mitigation rules, the Commission found that replacing CONE “in its remaining functions with the starting price or clearing price of the FCA to be just and reasonable, because such values reasonably reflect market conditions.”[33] The Commission rejected NEPGA’s proposed modification to the IS/IC rules, finding it “unnecessary” in light of the revised mitigation rules.[34]

  1. Without Evidence of Changed Circumstances, NEPGA’s Complaint Amounts to a Collateral Attack on the Commission’s February 12 Order.

The Commission’s acceptance less than a year ago of the very same pricing provisions at issue in the Complaint establishes clearly that the Commission viewed these rules as just and reasonable. Perhaps intending to present evidence of changed circumstances, NEPGA states that over 3,000 MW of capacity resources have announced their exit from the market in advance of FCA 8, that there is the potential for significant price differences between new and existing resources in FCA 8, and that this may lead to additional premature retirements and risks to the region’s reserve margin.[35] However, NEPGA produces no evidence to support its conclusory assertion that the recent retirement announcements are tied to the pricing provisions at issue in this proceeding. Nor could it provide such evidence. NEPGA may attempt to establish a causal connection between these rules and resources exiting the market, but there are myriad conditions and factors that could individually or collectively motivate retirements, including, for example, the removal of the price floor in FCA 8, low natural gas prices leading to lower marginal energy revenues, and environmental regulations. In fact, a majority of the retirements that NEPGA references appear to be in direct response to the mitigation of certain Static De-List Bids, as demonstrated by the conversion to Non-Price Retirement Bids of 1,907 MW initially submitted into FCA 8 as Static De-List Bids.[36] Generating resources may have consternation over falling gas prices, market changes and the dynamics that drive prices down (or costs up), but that does not amount to evidence of changed circumstances or a demonstration that the pricing mechanisms are failing to work as intended.

NEPGA’s inability to make a showing of relevant changed circumstances substantially undermines its Complaint when assessed in light of the fact that the next FCA will be the first in which the pricing provisions approved in the February 12 Order may actually be triggered.[37] In other words, NEPGA is asking the Commission to require ISO-NE to modify these pricing provisions before ISO-NE has even had the opportunity to apply them in a single auction. In light of the Commission’s recent order approving the pricing provisions, it is incumbent on NEPGA to demonstrate that there has been a significant change in circumstances that warrants the Commission revisiting its February 12 Order and finding that the rules it approved just over nine months ago are no longer just and reasonable. As explained herein, however, NEPGA has made no such demonstration.

The Commission has indicated that it will not tolerate complaints that are brought without the requisite support. In an analogous proceeding involving the California market, the Commission dismissed a complaint brought by the California Electricity Oversight Board (“CEOB”) against the California ISO’s (“CAISO”) Automatic Mitigation Procedures (“AMP”), explaining that:

The CEOB, like all other interested parties, had the opportunity to object to the CAISO’s AMP procedures, both in comments preceding our July 17 Order approving the CAISO’s AMP, as well as in its request for rehearing of that July 17 Order. The CEOB, however, did not object to the timing of AMP’s operation in either its comments or its rehearing request. In its current complaint, the CEOB fails to raise any change in circumstances that could indicate that AMP is not functioning as it was expected to operate when the Commission approved the CAISO’s AMP in its July 17 Order, and upheld in it in [sic] the October 11 Rehearing Order; nor does the CEOB present sufficient evidence to demonstrate that, even though AMP is operating the way it was expected to operate when approved, it is producing unjust and unreasonable prices….Accordingly, the CEOB’s argument that AMP should not be based on a predictive price — raised years after the CAISO implemented AMP — is an impermissible collateral attack on our prior orders adopting the CAISO’s AMP. Consequently, such collateral attack warrants dismissal of this issue in the complaint.[[38]]

Although NEPGA speculates about ways in which the rules may be unjust and unreasonable, even putting unsubstantiated numbers to its speculation, NEPGA has not demonstrated that a substantial change in circumstances has occurred since the Commission accepted the modified rules on February 12, 2013. Accordingly, NEPGA’s Complaint amounts to an impermissible collateral attack on the Commission’s February 12 Order approving the modifications.

Moreover, the extent to which NEPGA or others may have viewed the rules as temporary or interim measures[39] is irrelevant under a Section 206 proceeding. The FPA does not allow the Commission to accept provisions that are unjust and unreasonable merely because they are going to be in effect for only a temporary period. Nor did the Commission do so in its February 12 Order. There is no indication that the Commission applied a lesser level of scrutiny to the rule revisions that NEPGA challenges in the Complaint, and the Commission’s determination in the February 12 Order was clear. In any case, even if the current provisions were considered “interim” or “temporary,” that is no justification for asserting that they should never be applied in the very circumstances for which they were designed, which would be the consequence of granting the Complaint.

  1. NEPGA Has Failed to Meet Its Burden to Demonstrate that the IS/IC Rules are Unjust and Unreasonable and that Its Proposed Alternative Is Just and Reasonable.
  1. NEPGA Does Not Make the Required Showing that the IS/IC Rules Are Unjust and Unreasonable.

 NEPGA asserts that the IS/IC rules “result in capacity prices that are well below any reasonable approximation of a competitive market outcome and which do not begin to approach the prices paid to new entrants.”[40] According to NEPGA, the IS/IC pricing provisions are not a reasonable proxy for the cost of new entry.[41] The Commission should reject these arguments and find that NEPGA has failed to establish that the current market-based proxy is unjust and unreasonable.

In its April 2011 Order, the Commission made the finding that, in addition to eliminating CONE from certain market rules, replacing CONE “in its remaining functions with the starting price or clearing price of the FCA” was just and reasonable “because such values reasonably reflect market conditions.”[42] In the absence of adequate supply or sufficient competition, it is of course impossible to know what the competitive auction price would have been. However, to the extent possible and as reflected in the current pricing provisions, the resulting administratively set price should be based on a competitive market outcome. Use of the last prior competitive auction achieves this objective, and the Commission appears to have shared this view in its April 2011 Order. While there may be other proxy values that could “reasonably reflect market conditions,” the Commission’s acceptance of the prior competitive auction as that proxy indicates that it considered such a value a reasonable approximation for market conditions in the absence of competition. In fact, Mr. Wilson confirms that the current rules would set an administrative price that falls within the range of competitive price outcomes experienced over past PJM capacity auctions.[43]

NEPGA provides insufficient support for its assertion that the rules result in price levels that do not reflect the cost of new entry.[44] Market conditions will, of course, dictate the price signal for new entry in the FCM—i.e., set a lower price when there is surplus capacity in the system and a higher price when new resources are needed. NEPGA points to the potential for a prior auction to reflect capacity surplus prices as evidence that the current proxy value is flawed.[45] It does not acknowledge the other possibility, i.e., that new resources were needed in the last competitive FCA. Under that scenario, if the Inadequate Supply or Insufficient Competition rule is triggered, consumers might have to pay existing resources considerably more than what NEPGA views as the appropriate proxy for the cost of new entry, ORTP-CT. Accordingly, in some years, existing resources might be paid less than NEPGA’s view of the cost of new entry, but in other years, existing resources could receive a consumer-funded windfall. Imperfect as any proxy value may be, NEPGA’s contention that the current market-based mechanism will pay existing resources below the cost of new entry ignores the potential for more favorable pricing in some years. NEPGA itself appears to assert that the average price over time should approximate the cost of new entry, not the price in any particular auction, and the current rule meets that test.[46]

Moreover, just because existing resources may earn less than new resources in the context of an uncompetitive auction does not make the pricing provisions unduly discriminatory. There is no justification for existing resources to be paid the same as new entrants year-on-year when competition—and a competitive market price—does not exist. In fact, as Mr. Wilson explains, there may be a rational basis for paying new resources a high, uncompetitive price (e.g., added incentive for new entry), but that does not make it appropriate to pay the same price to existing resources.[47] Instead, the market should “attempt to ensure that all resources are paid prices that reflect competitive circumstances, which prices can at times be quite high, rather than to extend supra-competitive pricing to all resources.”[48]

NEPGA’s challenge to the existing market-based mechanism rests upon an assertion that it is unjust and unreasonable to pay an existing resource more (i.e., 110%) in an uncompetitive auction than the same resource willingly accepted to assume a Capacity Supply Obligation (“CSO”) in a prior competitive auction. This reasoning is illogical. Furthermore, the replacement pricing provisions that NEPGA itself submits could similarly lead to the new entrant being paid more than existing resources, so it does not eliminate the alleged discrimination.

NEPGA’s claims that the current rules result in price suppression that leads to premature retirements and myriad other adverse system conditions rest on the flawed foundation that the rules at issue in the Complaint are to blame for what NEPGA characterizes as “artificially low” capacity prices.[49] As discussed above, the current market-based pricing provisions are a reasonable approximation for a competitive outcome. They are not precise. No administratively-set price can be. Where there is insufficient competition, it is not the use of a proxy price per se that would cause the price to be lower than what it “would have been” under competitive conditions. The relationship between the theoretical competitive price and the price paid depends, as described above, on whether the proxy price was established in a period of surplus or shortage. NEPGA is simply dissatisfied that the proxy price in this instance happens to be based on the competitive price set in a surplus market, but over time, the proxy price should, on average, provide a reasonably accurate estimate of the market value of capacity.

  1. NEPGA Has Not Shown That Its Proposed Alternative Is Just and Reasonable.

In addition to failing to demonstrate that the IS/IC rules are unjust and unreasonable, NEGPA fails to offer a sufficient justification for using ORTP-CT as the appropriate benchmark value for the price needed to support new entry and to retain existing resources. Indeed, as Mr. Wilson explains, ORTP-CT is an administrative estimate and a poor proxy for a competitive price, is not borne out by the long experience in PJM, and will result in consumers paying unreasonable and excessive prices to existing resources.[50]

Using ORTP as a proxy value may be a simple alternative to administer, but it would be an unnecessarily and unreasonably costly one for consumers. In his testimony, Mr. Wilson details the results of ten years of PJM Reliability Pricing Model (“RPM”) base residual auctions (“BRAs”), finding that this decade of auctions offers a “wealth of experience regarding how capacity is offered and prices formed” in that capacity market.[51] As context, Mr. Wilson details PJM’s benchmark reference point representing the cost of new entry:

The analogous price [to ORTP] is called Net CONE, an administrative, levelized construction cost estimate for a new power plant net of a historical average of estimated earnings in energy and ancillary services markets. Net CONE values are calculated for combustion turbines and combined cycle units and are used as parameters of the RPM capacity demand curves and as a screen within the [Minimum Offer Price Rules].[52]

Over the course of ten capacity auctions in PJM, “the auction clearing prices nearly always remain far below” Net CONE levels.[53] Additionally, “1.1 times ORTP-CT is far above nearly all RPM clearing prices, and far above Net CONE estimates for combined cycle units,” which are “the vast majority of the new power plants” that have recently cleared the PJM auctions.[54]

Mr. Wilson details the results of RPM BRA auctions in “Figure 1” of his testimony, which he describes as follows:

The figure shows that while Net CONE for [PJM] is presently $330.53/MW-day ($10/kW-month), RPM prices have generally been in the $100/MW-day to $250/MW-day range ($3.0 to $7.6/kW-month), with one price spike to $357/MW-day ($10.86/kW-month).[55]

There are numerous factors that Mr. Wilson points to as contributing to price levels that persist below Net CONE:

  • Entry decisions are based on long-term analyses, and once the decision to enter is made, the new capacity is generally offered as a price taker into capacity auctions, or perhaps based on avoided cost, not at Net CONE. Prices are generally set by the types of resources that wish to accept a CSO, or not accept a CSO, based on the auction clearing price.
  • The timing of new entry generally anticipates the need for new capacity rather than delaying until prices rise substantially. For example, a developer that waits for higher prices may never proceed because competing capacity is already committed and under construction.
  • Entry that is occurring is generally not the reference combustion turbine resource, but more cost-effective resource types such as combined cycle and demand response. Over ten RPM delivery years, combustion turbines have represented only six percent of the total incremental capacity cleared through RPM BRAs.
  • The administrative Net CONE calculations systematically overstate the values that the proxy is attempting to estimate—by a quite substantial margin at times.[56]

PJM’s experience undercuts NEPGA’s claims as to the justness and reasonableness of its proposed alternative. As described above, over ten years of competitive auctions, the clearing price has almost always been below Net CONE for a new CT. In addition, over that long time frame, only six percent of the new capacity that cleared through the auction was a CT. Recent auction results for the 2016/2017 delivery year continue this trend, with almost all new generation comprising gas-fired combined cycle units.[57] Based on the experience in PJM, setting the IS/IC pricing mechanism for existing capacity at a level above the ORTP-CT price would amount to an unsupported, costly experiment thrust on consumers at the last minute and without reasonable stakeholder process.

Moreover, NEPGA fails to support its premise that the proxy cost of new entry for these pricing provisions should be set to the estimated cost for one resource type rather than to a market-based pricing mechanism. In seeking to hard-wire a particular technology into the IS/IC rules, NEPGA does not account for technological changes over time and assumes incorrectly that a new CT will always be the appropriate benchmark for the cost of new entry. This is overly simplistic and myopic. It is no more evident than in the dramatic change in the ORTP for CT, Combined Cycle, and On-Shore Wind resources recently calculated by ISO-NE for FCA 9.[58] As Mr. Wilson explains: “Whatever the ‘cost of new entry’ might be today, we know it will be different in three or five years, and may reflect quite different incremental resources. One need only look back five, ten, twenty or thirty years, and contemplate the types of resources that were being built and their costs at the time, to understand that the notion of ‘equilibrium’ is a fiction, and that conditions are constantly changing.”[59] NEPGA’s proposal implicitly asserts that a CT will always be the appropriate benchmark for cost of new entry in New England, but it does not provide a sufficient basis to fix the rules in favor of one resource type.

Furthermore, to adopt NEPGA’s proposal would ignore the inevitability that a new resource type will displace a CT as a more appropriate benchmark and require another rule change, then yet another, as even newer incremental resources come on-line. A market-based pricing mechanism, as is in place today, avoids this confusion, inefficiency, and future ad hoc petitions to increase costs to consumers.

Finally, NEPGA’s proposal fails to consider whether there are less costly ways to address the pricing shortcomings it identifies. This is not surprising, given the eleventh hour Complaint before the Commission that effectively eliminates any reasonable process for states and stakeholders. As support for its assertion that the current rule is flawed, NEPGA alleges that the prior FCA price resulted from an auction in which there was surplus capacity and, therefore, new entry was not needed.[60] NEPGA argues that in such a case, “there is no nexus between the mitigated price and what a competitive price for new entry would be.”[61] NEPGA also expresses concern that the rules could lead to an inconsistent and problematic result when de-list bids clear at a price higher than the current pricing mechanism allows. According to NEPGA, a resource would receive a CSO under such a scenario but at the lower IS/IC administratively-set price, even though this would be “directly at odds with the tariff requirement that a resource cannot be forced to accept a CSO at a price below its delist bid.”[62]

To purportedly remedy these concerns, NEPGA proposes the use of ORTP-CT as the new proxy value, set to $10/kW-month in FCA 8 and potentially rising in FCA 9 and subsequent auctions. However, NEPGA does not appear to have considered whether less extreme rule changes would address its concerns while reducing consumer costs. For example, to address concerns about surplus capacity without entirely foreclosing reference to past auction prices, NEPGA might have proposed that the price be set at the lower of (i) the ORTP-CT, (ii) the ORTP for a combined cycle gas turbine, or (iii) the capacity clearing price in the last competitive auction where a new generating resource cleared. Similarly, to address concerns in the context of delist bids, NEPGA could have suggested provisions that set the price at the higher of 1.1 times the last competitive FCA or the highest static delist price in the current auction.

These examples are simply illustrative and are not exhaustive. NESCOE is not proposing alternative rule changes, nor does it ask that the Commission direct the adoption of these or any other rule revisions. Indeed, because the current rules are just and reasonable, no change is required. Nevertheless, as detailed below, to the extent that the Commission finds that revisions to the pricing mechanisms are warranted, the Commission should require ISO-NE to convene a meaningful stakeholder process. But the fact that the Complaint would propose such a sweeping change to the current rules without considering a more narrowly tailored change evidences a fundamental failure in the development of the alternative proposal. Without a reasonable stakeholder process and consideration of a range of alternatives that could solve the alleged problem at far lower consumer costs, the Commission should not find that NEPGA’s replacement revisions will result in just and reasonable rates.

  1. The Complaint Fails to Demonstrate That the Capacity Carry Forward Rule Is Unjust and Unreasonable or That the Proposed Replacement Is Just and Reasonable.

The Commission should reject NEPGA’s request to modify ISO-NE’s Capacity Carry Forward Rule approved less than one year ago in the February 12 Order. NEPGA has not demonstrated that the pricing provisions of the existing Capacity Carry Forward Rule are unjust and unreasonable or that NEPGA’s alternative would be just and reasonable.

The basic premise of NEPGA’s Complaint is that use of the “last new” offer to establish a clearing price for existing resources will not sufficiently mitigate the potential price suppression that allegedly could occur in the wake of new entry by a “lumpy” resource because that price may be below the level needed to attract new entry. However, the fact that the first auction in which a new entrant clears the market results in a surplus of capacity within the zone does not mean that the appropriate mitigation measure is one that will always set the clearing price for existing resources at a level needed to attract new entry. To the contrary, the existence of a capacity surplus should appropriately cause capacity prices in future auctions to decline.

The Capacity Carry Forward Rule is an administrative fix to address the possibility that prices may be suppressed when a new entrant elects new entry pricing and brings surplus capacity into the market. That administrative fix properly relies on a market outcome to determine the price to be paid to existing suppliers—the “last ‘new’ capacity offer that is withdrawn in the FCA.”[63] The use of the “last new” offer to determine market clearing prices in the subsequent four-year period properly relies on competitive market conditions within the current FCA to address concerns of potential price suppression.

NEPGA would have the Commission reject the current market-based solution to mitigating the potential for price suppression in favor of another administrative fix that would artificially prop up FCA clearing prices for existing suppliers to the level required by new entry, despite the fact that the change in the supply/demand balance should result in prices that decline for all capacity in the zone to reflect the surplus capacity. By setting the capacity clearing price based on a shadow price that reflects either the ORTP-CT or the clearing price from the first auction in which the lumpy new resource cleared the market, NEPGA’s complaint would mean that existing generators always receive a price that reflects the need for new entry despite the fact that new entry is no longer required. This is plainly unjust and unreasonable and would send the wrong price signals to existing capacity. As Mr. Wilson explains, NEPGA’s proposed administrative fix would distort price signals in the zone, could result in excessive new entry, and could require that consumers pay enormous and unnecessary costs to encourage new entry notwithstanding the significant surplus of capacity likely to exist.[64]

  1. NEPGA Does Not Establish That the Pricing Provisions in the Capacity Carry Forward Rule Are Unjust and Unreasonable.

The only argument NEGPA advances in support of its complaint against the Capacity Carry Forward Rule is that there is no nexus between the type and size of the “last new” resource submitting an offer to withdraw from the FCA and the existing generators that will receive the clearing price established by this rule.[65] However, NEPGA does not explain why any such nexus is necessary. Rather, NEPGA contends only that there is no connection between the resource making the “last new” offer and the resources that are paid based on that offer price, and that this lack of nexus somehow produces unjust and unreasonable prices.[66] NEPGA’s rationale is that “small amounts of new energy efficiency or demand response with very low offer prices could represent the last ‘new’ capacity offer that failed to clear in the FCA.”[67]  However, the fact that there is a possibility that a low-priced new resource will be the “last offer” to withdraw from the FCA does not demonstrate that the Capacity Carry Forward Rule is unjust and unreasonable.

NEPGA’s “nexus” argument should be rejected for two reasons. First, NEPGA’s argument that a nexus must exist between the type and size of the resource used to determine the price for existing resources and the type and size of the existing resources to be paid under the rule, if it has any merit, should be true of any pricing rule adopted. This would mean that a nexus should also be required between the type and size of resources that set the clearing price under NEPGA’s proposed replacement pricing mechanism and the type and size of existing generator resources receiving that price. But NEPGA does not make that argument, nor does its proposed replacement pricing mechanism require a nexus between the “lumpy” new resource that cleared the relevant FCA and existing resources.

Second, under ISO-NE’s auction design, all capacity is homogenous for clearing price purposes.  In an auction in which new entry is needed to satisfy capacity obligations within the zone, the new resource—regardless of type or size—sets the clearing price for all resources in the auction.  There is no nexus requirement.

Additionally, NEPGA does not demonstrate that the existing rule results in unjust and unreasonable prices simply because a clearing price paid to existing generators could be below the level paid to a new resource. NEPGA posits that new energy efficiency or demand response resources may be the last “new” capacity that fails to clear in an FCA and that offer prices for such resource types “may be as low as $1.00/kW-month for Demand Response or $0/kW-month for energy efficiency.”[68] However, allegation of possible lower competitive prices in a single auction does not justify granting NEPGA’s complaint. The current pricing provision of the Capacity Carry Forward Rule is based on the premise that the last new resource to withdraw did so because of competitive conditions—i.e., that this price properly reflects otherwise prevailing competitive auction outcomes. Moreover, even if NEPGA’s supposition proves true in one auction, the fact that the current rule may result in a low price for existing generators in that single auction does not mean that future auctions will clear in this uncharacteristic manner.

Extreme examples of what could conceivably happen in any given year do not demonstrate actual harm to any existing resource. Nor do these allegations constitute evidence of any existing resource leaving the market because of the Capacity Carry Forward Rule. NEGPA provides no such evidence.

NEPGA also fails to explain why existing resources should reasonably expect to receive a year-on-year new entry price. In his testimony attached to the Complaint, Mr. Schnitzer acknowledges that “owners of capacity resources make decisions based on a multi-year view of capacity prices – not just prices in a single year.”[69] Mr. Schnitzer further states that “when the capacity market rules limit the opportunity for capacity prices to existing resources to approach new entry levels when new entry is required, existing resources will be less likely to wait for recovery and will instead exit the market.”[70] This statement, however, does not support NEPGA’s argument for changing the rule. In a situation where a “lumpy” new resource has entered the market under a new entry pricing option, new entry is no longer required and existing resources under competitive market conditions would not be expecting to earn new entry prices.

NEPGA’s allegation that new entry will not seek to participate in the auction under the current rule, causing the region to fall short of needed new capacity to meet the ICR, is likewise unsupported.[71] The actual experience in FCA 7 does not bear out the speculation that is the basis for NEPGA’s complaint. Footprint Power, a new resource entering the NEMA/Boston Zone that is discussed in the Complaint,[72] participated in and cleared FCA 7. The existing market rules did not deter Footprint Power’s participation in FCA 7. Rather, Footprint Power accepted a CSO, even though the locked-in new entry pricing period it elected to receive would end in year six and Footprint Power would then become an existing resource subject to the Capacity Carry Forward pricing provision that NEPGA challenges in this proceeding.[73] Contrary to NEPGA’s allegations, an actual market participant’s response to the pricing mechanism in the Capacity Carry Forward Rule shows that resources have not been discouraged from investing in the FCM based on the current rule.

  1. NEPGA Fails To Demonstrate That Its Proposed Replacement Pricing Provision Under the Capacity Carry Forward Rule is Just and Reasonable.

NEPGA’s complaint does not satisfy the second prong of its burden of proof—that its proposed alternative pricing mechanism is just and reasonable. As set forth above, even if the current pricing provision in the Capacity Carry Forward Rule could result in a low clearing price in one auction, that does not mean that the rule is unjust and unreasonable or that the result is inconsistent with a competitive market outcome. When there is excess supply in the market, prices should fall below the cost of new entry, thus sending the rational price signal that new entry is no longer required.

When new entry is no longer required in the subsequent years of the multi-year new entry pricing period, clearing prices should not be based on an administrative fix designed to artificially prop up prices to the level needed to encourage new entry, but NEPGA’s proposed replacement provision would do just that. In using a shadow price based on the lesser of the ORTP-CT or the price at which the new resource cleared its first auction, NEPGA would have existing generators paid a price during years two through five of the new entry pricing period at a new entry price that is divorced from the supply/demand balance in those auction years. This makes no sense. The fact that the new entry pricing rule allows a new resource to lock in the new entry price over a five-year period does not mean that existing capacity should also receive a price over the multi-year period based on the hypothetical cost of new entry. As Mr. Wilson concludes, this amounts to a “large transfer of wealth from consumers to the owners of existing capacity without any clear connection to resource adequacy or other value to consumers.”[74] NEPGA’s proposed replacement for the existing provisions would artificially inflate prices for existing resources to a level required for new entry regardless of whether new entry is needed, would send distorted and incorrect price signals to the market and could result in excessive new entry.[75]

  1. The PJM Order Upon Which NEPGA Relies Is Not Applicable in the Context of ISO-NE’s Different Market Rules.

NEPGA’s reliance on the Commission’s order approving a New Entry Price Adjustment (“NEPA”) for PJM is misplaced and premised on an unfounded assumption. NEPGA argues that the ISO-NE approach to mitigating price suppression in the wake of a new entry pricing election by a new resource is akin to allowing this new resource to bid $0 into subsequent year auctions.[76] NEPGA contends that this runs contrary to the Commission’s rejection of such an approach in PJM Interconnection, LLC, 128 FERC ¶ 61,157 (2009) (“PJM Order”).[77]

However, as Mr. Wilson testifies, NEPGA’s proposed replacement for the Capacity Carry Forward Rule’s pricing provisions is not consistent with the policy reflected in the PJM approach.[78] Mr. Wilson explains that, unlike NEPGA’s proposal, the PJM rule has no “shadow” bid.[79] Additional significant differences between the PJM NEPA rule and the FCM include: (1) the PJM NEPA was designed to apply in very limited circumstances, i.e., when a large new resource in a small zone would have a very large price impact on the zone by moving the clearing price from at least 1.125 times Net CONE (the price if less capacity than is required to satisfy the reliability requirement clears) to a low price of no greater than 0.4 times Net CONE; (2) the PJM NEPA rule allows the option for only two additional years of multi-year pricing; and (3) the PJM NEPA resource’s capacity in the two subsequent years of the multi-year pricing period is first offered at the lower of the NEPA resource’s original offer price or 0.9 times the applicable Net CONE in the original auction in which the NEPA resource cleared, and if this offer fails to clear the auction, it then is resubmitted at a price sufficiently low to clear the auction.[80] Mr. Wilson testifies that the PJM NEPA is highly restricted, extremely difficult to trigger and use, has only been used once, and is limited to a three-year period.[81] As Mr. Wilson explains, the PJM NEPA “would not have nearly the distorting impact” of NEPGA’s proposed shadow de-list bid.[82] Mr. Wilson testifies that the one time the NEPA rule was used in PJM, the zonal clearing price in the subsequent year was less than 50% of the applicable Net CONE.[83] The PJM rule does not stand for the broad proposition reflected in NEPGA’s proposed modification that existing resources should receive prices at the level required for new entry over the full five-year election period.

The shadow price approach proposed by NEPGA would be inappropriate in ISO-NE’s market, especially considering the lack of eligibility restrictions comparable to those in PJM’s market rules. That the mitigation approaches approved for the PJM and ISO-NE markets differ does not mean that ISO-NE’s approach is unlawful. Both approaches mitigate the potential for price suppression in the context of their differing capacity auction structures.[84]

Indeed, if the PJM Order provides any guidance relative to the Capacity Carry Forward Rule, it is that different pricing for existing and new resources is acceptable. In the PJM Order, the Commission rejected PJM’s proposal to extend its current three-year NEPA rule to a seven-year period on the basis that PJM’s proposal “goes beyond the justifiable need to protect against lumpy investment.”[85] Although the Commission recognized that “[b]oth new entry and retention of existing efficient capacity are necessary to ensure reliability and both should receive the same price so that the price signals are not skewed in favor of new entry,”[86] the Commission left in place PJM’s existing three-year multi-year payment period along with its different prices for new and existing resources as a reasonable approach to encouraging new investment. Accordingly, contrary to NEPGA’s claim that the Capacity Carry Forward Rule “is at odds with well-established Commission policy,”[87] the PJM Order illustrates that different prices are not dispositive of discrimination and that it may reflect a reasonable approach.

  1. Fast-Track Processing Should be Denied and, to the Extent Rule Revisions are Required, the Stakeholder Process is a More Appropriate Forum to Address the Issues Raised by NEPGA.

Even though NEPGA did not seek rehearing of the February 12 Order approving the modifications to the IS/IC rules and the Capacity Carry Forward Rule contained in ISO-NE’s December 2012 FCM Compliance Filing, NEPGA now asks that the Commission Fast-Track its Complaint. The Commission should reject NEPGA’s request. A Fast-Track process does not allow sufficient time for review and analysis of the multiple complicated rule changes presented in this proceeding. That NEPGA’s proposed changes could impose billions of dollars of unanticipated costs on consumers makes the insufficient time and process to fully evaluate the consequences of the relief NEPGA requests all the more unreasonable.

In addition to the substantial and unexpected cost impact on consumers, as Mr. Wilson explains, “sudden rule changes without stakeholder consensus” have a destabilizing effect on market rules and further enhances a view among some market participants that capacity prices are “unpredictable and not to be relied on.”[88] Mr. Wilson states that “[t]he regulatory uncertainty resulting from granting [NEPGA’s] requested relief after such a brief process would affect not just the FCM,” but also other ISO-NE markets and other regions with similar constructs.[89] Potential new resources would be particularly concerned about regulatory uncertainty and the adoption of NEPGA’s proposal “after such a brief process and without stakeholder support.”[90]

Furthermore, if the Commission finds that changes to the rules are required, it should allow market participants, other stakeholders, and states to work with ISO-NE in developing appropriate and balanced changes that take consumer costs into account.   As discussed below, states and stakeholders have not had the benefit of working with ISO-NE in the development of further changes to the provisions at issue. NEPGA’s own preferred solution now before the Commission might be presumed to satisfy a narrow group of shareholders’ interests. However, there is no reason to presume that NEPGA’s unilateral proposal even considered mitigating consumer costs in reaching its desired end.

The cost implications of adopting NEPGA’s replacement provisions are significant, perhaps as high as roughly $3 billion in FCA 8 alone if the Insufficient Competition rule is triggered.[91] Further, Mr. Wilson testifies that, independent of the proposed IS/IC rule changes, NEPGA’s proposed revisions to the Capacity Carry Forward Rule could result in around $1 billion in increased costs to one zone over the next four years.[92] A litigated FERC proceeding does not provide the same level of flexibility as a stakeholder process to consider the complex interplay between these rules and, among other things, potentially inconsistent tariff provisions, recent announcements of resource retirements, and ongoing discussions around larger structural changes to the FCM (e.g., ISO-NE’s Performance Incentives framework and ISO-NE’s plan to propose next year a sloped demand curve). The Commission should ensure that the process for ISO-NE, states, and stakeholders to consider these issues is not short-circuited.

In other proceedings, the Commission has underscored the importance of proposals being vetted through the stakeholder process. See, e.g., FirstEnergy Solutions Corp. and Allegheny Energy Supply Company, LLC v. PJM Interconnection, L.L.C., 138 FERC ¶ 61,158 at P 46 (2012) (“Given that a sufficient record does not exist for the Commission to resolve this issue, and PJM has committed to providing additional evidence as to such causes by May 1, 2012, we find it would not be an efficient use of Commission or industry resources for the Commission to circumvent PJM’s processes by establishing our own proceedings to evaluate the complaint at this time.”); PJM Power Providers Group v. PJM Interconnection, L.L.C., 135 FERC ¶ 61,022 at P 27 (2011) (“With respect to P3’s request to defer addressing certain issues not raised in PJM’s filing, we find that those issues should first be considered by PJM’s stakeholders. Accordingly, we deny P3’s request without prejudice with respect to the deferred issues as noted above. P3 can file another complaint if these issues are not resolved to its satisfaction.”). There is precedent in New England in particular where the Commission has declined requests to take action so as to ensure that the stakeholder process is not circumvented.[93]

NESCOE agrees with NEPGA that the Tariff provisions at issue in the Complaint have received only brief review in the regional stakeholder process.[94] Despite any best intentions, as NEPGA outlines in its Complaint, ISO-NE never initiated a stakeholder process to consider further changes to the pricing provisions in the IS/IC rules and Capacity Carry Forward Rule.[95] One market participant, Exelon Generation Company, LLC (“Exelon”), subsequently offered modifications to the rules.[96] However, stakeholders were afforded just weeks to consider Exelon’s proposed changes.[97] Exelon’s presentations also focused heavily on the Capacity Carry Forward Rule and its implications, with far less discussion of the IS/IC rules. Moreover, the consideration of Exelon’s proposed revisions took place in the midst of stakeholder discussions regarding ISO-NE’s Performance Incentives proposal, a potential material structural change to the FCM. Exelon’s proposal ultimately failed at the Markets Committee by a vote of 37.66% in support and later failed at the Participants Committee by a show of hands.[98] While NESCOE appreciates NEPGA’s desire to implement changes before FCA 8, the Commission must ensure that the complex issues raised in the Complaint are thoroughly and meaningfully considered—and that the range of potentially less costly solutions are explored—before making changes.

More recent stakeholder meetings on the rules likewise should not be construed as providing a sufficient opportunity for stakeholders to discuss the issues presented in the Complaint. On November 25, 2013, ISO-NE made a filing with the Commission under the Exigent Circumstances provision of the Tariff, proposing rule changes to address a possible “gap” in the trigger provision of the Insufficient Competition rule.[99] This “gap” was not identified in the Complaint, and ISO-NE discovered it and brought it to stakeholders’ attention only after NEPGA’s filing.[100] ISO-NE also proposes a revision to the same IS/IC pricing provisions that are challenged in the Complaint, as well as proposing clarifications to the IS/IC rules and the Capacity Carry Forward Rule.[101] Preceding its filing, ISO-NE presented the proposed changes at two Markets Committee meetings.[102] These two meetings, convened by ISO-NE to discuss matters it identified as exigent, should not be viewed as a substitute for a reasonable and more meaningful stakeholder process on the range of issues presented in the Complaint. In addition to the limited meetings, discussion was narrowly focused on the Insufficient Competition rule and, as is evident in ISO-NE’s filing, the Capacity Carry Forward Rule was only addressed with respect to a rule clarification. Indeed, ISO-NE’s identification of a possible gap in the Insufficient Competition rule after the Complaint was filed is reason alone to ensure that the pricing mechanisms at issue receive the full benefit of the stakeholder process.

Alternatively, if the Commission does not direct ISO-NE to convene a stakeholder process, it should set the Complaint for hearing and settlement procedures. As detailed above, the Complaint involves multiple rules and complex issues warranting a hearing and settlement process.

  1. CONCLUSION

For the reasons stated herein, NESCOE respectfully requests that the Commission (i) grant its Motion to Intervene, (ii) deny the Complaint, (iii) to the extent the Commission finds that rule changes are warranted, direct ISO-NE to convene a meaningful stakeholder process to address issues raised in the Complaint, or in the alternative, set the Complaint for hearing using a Track II procedural schedule and establish settlement procedures, and (iv) take other necessary and appropriate actions consistent with the foregoing protest.

Respectfully submitted,

/s/ Jason R. Marshall

Jason R. Marshall
Senior Counsel
New England States Committee on Electricity
655 Longmeadow Street
Longmeadow, MA 01106
Tel: (617) 913-0342
Email: jasonmarshall@nescoe.com

/s/ Phyllis G. Kimmel
Phyllis G. Kimmel
Denise C. Goulet
Miller, Balis & O’Neil, P.C.
1015 15th Street, NW
Twelfth Floor
Washington, DC 20005
Tel: (202) 296-2960
Email: pkimmel@mbolaw.com

Date: November 27, 2013

 

 


 

[1]     Complaint of the New England Power Generators Association, Inc. and Request for Fast Track Processing, Docket No. EL14-7-000 (filed Oct. 31, 2013).

[2]     Capitalized terms not defined in this filing are intended to have the meaning given to such terms in the ISO-NE Transmission, Markets and Services Tariff (the “Tariff”).

[3]     See ISO New England Inc., 138 FERC ¶ 61,238 at PP 27, 35 (2012).

[4]     See infra n. 25.

[5]     Complaint at 10, citing Tariff § III.13.2.8.1.1.

[6]     Id. at Prepared Direct Testimony of Michael M. Schnitzer (“Schnitzer Testimony”) at 11; see Tariff § III.13.2.8.2.

[7]     Memorandum from Vamsi Chadalavada, Ray Hepper and Anne George, ISO-NE, to NEPOOL Participants Committee and New England State Regulators, ISO Perspective on the NEPGA Complaint on Administrative Pricing Rules; Identification of Additional Problem with Insufficient Competition Rule (Nov. 9, 2013) (“November 9 Memo”) at 1, available at http://www.iso-ne.com/committees/comm_wkgrps/mrkts_comm/mrkts/mtrls/2013/nov13142013/a04_iso_administrative_pricing_rules_memo_11_09_13.pdf.

[8]     Testimony of James F. Wilson in Support of the Protest of the New England States Committee on Electricity (“Wilson Testimony”), attached hereto as Exhibit 1, at 3; see Tariff § III.13.2.8.1.1.

[9]     Wilson Testimony at 3-4; see Tariff § III.13.2.8.2.

[10]    Complaint at 22.

[11]    Id. at 38.

[12]    Tariff § III.A.21.1.1.

[13]    Tariff § III.A.21.1.2. ISO-NE recently proposed to the New England Power Pool (“NEPOOL”) Markets Committee that the ORTP-CT calculation would rise to $13.424/kW-month for FCA 9. See ISO New England Inc., Market Rule 1 Appendix A Redlined Pages 11-13-13, Markets Committee Materials Nov. 13-14, 2013, available at http://www.iso-ne.com/committees/comm_wkgrps/mrkts_comm/mrkts/mtrls/2013/nov13142013/index.html.

[14]    November 9 Memo at 1.

[15]   Complaint at 24-25.

[16]   Tariff § III.13.1.1.2.2.4.

[17]    Tariff § III.13.2.7.9.2; Complaint at 6. The Complaint notes a pricing exception applicable under certain circumstances during Insufficient Competition. Id. at n. 12.

[18]   Id. at 24.

[19]   Id. at 27.

[20]   Id. at 39.

[21]    ISO New England Inc., 121 FERC ¶ 61,105 (2007).

[22]    16 U.S.C. § 824e(a).

[23]    See Blumenthal v. FERC, 552 F.3d 875, 881 (D.C. Cir. 2009), quoting Atl. City Elec. Co. v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002).

[24]    Wilson Testimony at 6-7, 39-42.

[25]    NEPGA asserts that system conditions may cause the Insufficient Competition rule to be triggered in FCA 8. Complaint at 3-4, 19-20. According to NEPGA, existing capacity suppliers are expected to be paid in the range of $1.50/kW-month to $3.50/kW-month in FCA 8 under the current pricing provisions NEPGA challenges in the Complaint. Id. at 4. The cost impact of the rule change NEPGA seeks will depend, of course, on the actual FCA 8 auction results, which will be influenced by the amount of existing supply that enters the auction. However, NESCOE offers the following cost estimate to provide a sense of order of magnitude for FCA 8 if the Insufficient Competition rule is triggered:

32,742 MW* x $7.53/kW-mth** x 1,000 kW/MW x 12 mths = $2,958,567,120

*32,742 MW is assumed for existing supply participating in FCA 8 (35,877 total existing MWs minus possible non-price retirements of 3,135 MW). See ISO New England Inc., Informational Filing for Qualification in the Forward Capacity Market, Docket No. ER14-329-000 (filed Nov. 5, 2013) (“ISO-NE FCA 8 Informational Filing”) at 4 (stating that Qualified Existing Capacity Resources total 35,877 MW for FCA 8); Complaint at 19-20 (detailing ISO-NE memorandum stating that it received a total of 3,135 MW of Non-Price Retirement requests for FCA 8).

** $7.53/kW-mth represents the difference between NEPGA’s Insufficient Competition replacement provision (1.1 times the ORTP-CT, i.e., $11/kW-mth) and the current provision (1.1 times the Capacity Clearing Price for the most recent FCA not having Insufficient Competition, i.e., $3.47/kW-mth (110% of the FCA 7 price of $3.15)).

See also Wilson Testimony at 40 (testifying that the capacity cost to consumers could increase by over $2 billion annually if NEPGA’s proposed alternatives are adopted for the IS/IC rules and that the changes to the Capacity Carry Forward Rule could result in roughly $1 billion in increased costs to NEMA/Boston consumers over the next four years).

[26]    ISO New England Inc., 142 FERC ¶ 61,107 (2013) (“February 12 Order”).

[27]    Id. at PP 127-128. See ISO New England Inc., Forward Capacity Market Redesign Compliance Filing and Request for Waiver of Compliance Obligation, or, In The Alternative, Limited Filing Pursuant to Section 205 of the Federal Power Act, Docket No. ER12-953-001 (filed Dec. 3, 2012) (“December 2012 FCM Compliance Filing”) at 44.

[28]    February 12 Order at n. 120.

[29]    ISO New England Inc. and New England Power Pool Participants Committee, 135 FERC ¶ 61,029 at PP 342-345 (2011) (April 2011 Order), order on reh’g and clarification, 138 FERC ¶ 61,027 (2012).

[30]    See id. at PP 338-339.

[31]    Id. at P 339. Testimony in the proceeding submitted on NEPGA’s behalf indicated that such a “peaker” would be a new gas-fired combustion turbine. See Opening Brief of the New England Power Generators Association, Inc., Docket Nos. ER 10-787-000, et al. (July 1, 2010), Exhibit 2, Testimony of Robert B. Stoddard, at 85.

[32]    April 2011 Order at P 342.

[33]    Id.

[34]    Id.

[35]    See, e.g., Complaint at 4-5, 20.

[36]    See ISO-NE FCA 8 Informational Filing at 4-5 (“A total of 7,851 MW of de-list bids were submitted for the eighth FCA. Subsequently, 1,907.024 MW of these de-list bids were later converted into Non-Price Retirement Requests. In total, 98 existing resources submitted Non-Price Retirement Requests.”) (footnote omitted). As FERC has explained: “A de-list bid represents the lowest price a resource is willing to take. A one-year de-list bid is either a Static De-List Bid, which is submitted well before the FCA takes place and is reviewed by the Internal Market Monitor (IMM) or a Dynamic De-List Bid, which is submitted during the auction . . . . A Permanent De-List Bid also is submitted well before the auction and reviewed by the IMM; this type of bid, however, removes a resource from the FCM permanently.” ISO New England Inc., 140 FERC ¶ 61,088 at PP 4-5 (2012) (footnotes omitted).

[37]    FCA 7 was run on February 4-5, 2013, prior to the February 12 Order.

[38]    Calif. Electricity Oversight Board v. Calif. Independent System Operator Corp., 109 FERC ¶ 61,182 at P 28 (2004).

[39]    See Complaint at 13-14.

[40]    Id. at 19.

[41]    Id. at 22.

[42]    April 2011 Order at P 342 (emphasis added).

[43]    Wilson Testimony at 27.

[44]    Complaint at 22. See also id. at 5-6.

[45]    Id. at 20-22.

[46]    See id. at 23.

[47]    Wilson Testimony at 25-26.

[48]    Id. at 26.

[49]    Complaint at 17. See id. at 4-6, 23, 33. Separately, Mr. Wilson rebuts NEPGA’s predictions of uneconomic retirements if the current rules remain in effect, and explains how NEPGA’s proposed alternative could have the unintended consequence of encouraging uneconomic retirements. Wilson Testimony at 37, 41.

[50]    Id. at 6-7, 22-29, 39-40. Additionally, as Mr. Wilson explains, PJM is an appropriate point of comparison because, among other things, both ISO-NE and PJM use a 3-year forward capacity procurement design. See id. at 9. See also id. at 21-22, 26-27.

[51]    Id. at 9-22.

[52]    Id. at 14.

[53]    Id.

[54]    Id. at 27.

[55]    Id. at 14-15.

[56]    Id. at 15-16. Mr. Wilson also describes RPM rules and other circumstances that contribute to prices rising or falling. Id. at 16-17.

[57]    Id. at 26.

[58]    See supra n. 13.

[59]    Wilson Testimony at 28. Mr. Wilson also rebuts the suggestion that there is a certain price level that is required to attract new resources, emphasizing the long-term revenue analysis underlying the decision to build a new generating unit and concluding that “the notion that there is a certain single-year price that is needed or sufficient to suddenly attract new entry by long-term resources is mistaken.” Id. at 27.

[60]    Complaint at 21-22.

[61]    Id. at 21.

[62]    Id. at n. 36; Schnitzer Testimony at 14. Since the Complaint was filed, ISO-NE has clarified that any static de-list bid that cleared above the IS/IC price would not get a CSO. Rather, ISO-NE would purchase the difference in the next annual reconfiguration auction. See, e.g., ISO-NE, Administrative Pricing Rules for Forward Capacity Auction #8, Nov. 18, 2013, at Slide 12, available at http://www.iso-ne.com/committees/comm_wkgrps/mrkts_comm/mrkts/mtrls/2013/nov182013/index.html. The material differences in understanding of how the rule would operate further underscores the need for a meaningful stakeholder process to consider the rules at issue in a holistic manner.

[63]    Complaint at 28.

[64]    Wilson Testimony at 6-7, 29-35.

[65]   Complaint at 28.

[66]   See id.

[67]   Id. (emphasis added).

[68]   Id. (emphasis added).

[69]   Schnitzer Testimony at 21.

[70]    Id. (emphasis added).

[71]    Complaint at 4 (“Accordingly, if not remedied prior to FCA 8, they [the current rules] will lead to . . . difficulties attracting needed new entry in the future.”); at 36 (“this bifurcated pricing scheme [paying new entrants a higher price than existing resources] is likely to undermine the ability of the ISO-NE capacity market to attract new entry, even at higher prices.”).

[72]    Id. at 26.

[73]    Although the current iteration of the Capacity Carry Forward Rule was not in effect for FCA 7, the current rule’s pricing provision is virtually identical to that in the prior rule that was in effect for FCA 7. In ISO-NE’s own language, the current version of the Capacity Carry Forward Rule “will now incorporate and largely retain the trigger and pricing provisions” of the prior rule. December 2012 FCM Compliance Filing at 24.

[74]    Wilson Testimony at 7, 39.

[75]    See id. at 30-31, 35.

[76]    Complaint at 24.

[77]   Id. at 31.

[78]    Wilson Testimony at 32-33.

[79]         Id. at 32.

[80]   Id. at 33. NEPGA incorrectly characterizes the PJM rule as providing for supply offers at the first-year clearing price or 100% of the cost of new entry.

[81]    Id. at 33. See also id. at 12.

[82]   Id. at 33

[83]   Id. at 34.

[84]    The Commission has consistently recognized and approved the differences in RTO market structures and rules. See, e.g., Wholesale Competition in Regions with Organized Electric Markets, Order No. 719, FERC Stats. & Regs. ¶ 31,281 at P 9 (2008), order on reh’g, Order No. 719-A, FERC Stats. & Regs. ¶ 31,292 (2009), order denying reh’g, Order No. 719-B, 129 FERC ¶ 61,252 (2009) (“Significant differences exist between regions, including differences in industry structure, mix of ownership, sources of electric generation, population densities, and weather patterns. . . . We recognize and respect these differences across various regions.”).

[85]   PJM Order at P 102.

[86]   Id.

[87]   Complaint at 7.

[88]    Wilson Testimony at 42.

[89]    Id.

[90]    Id. at 38.

[91]    See supra n. 25.

[92]    Wilson Testimony at 40.

[93]    See, e.g., ISO New England Inc., 138 FERC ¶ 61,042 at P 114 (2012) (“ISO-NE’s stakeholder process is the appropriate venue for Joint Parties to propose and develop appropriate rules . . . .”); ISO New England Inc., 128 FERC ¶ 61,266 at P 55 (2009) (declining to require ISO-NE to make tariff changes where it would end-run the stakeholder process); New England Power Pool, 107 FERC ¶ 61,135 at PP 20, 24 (2004) (rejecting an entity’s proposed changes because the “suggested revisions have not been vetted through the stakeholder process and could impact various participants.”).

[94]    Complaint at 13.

[95]    See id. at 13-17.

[96]    Id. at 17.

[97]    See id. at 13. See also Minutes of September 10 and 11, 2013 Markets Committee Meeting, at 7-8 (discussion of whether meeting rules allowed for Exelon’s proposal to be voted on only two weeks after it was first presented), available at http://www.iso-ne.com/committees/comm_wkgrps/mrkts_comm/mrkts/mins/index.html.

[98]    See September 24, 2013 Actions of the Markets Committee, available at http://www.iso-ne.com/committees/comm_wkgrps/mrkts_comm/mrkts/actions/index.html; October 4, 2013 Minutes of the Participants Committee, available at http://www.nepool.com/uploads/Minutes_NPC_2013_1004.pdf.

[99]    ISO New England Inc., Exigent Circumstances Filing of Revisions to Forward Capacity Market Rules, Docket No. ER14-463-000 (filed Nov. 25, 2013). NESCOE’s reference to this filing should not be construed as substantive comments in that proceeding, in which NESCOE may seek to intervene separately. The filing is referenced here solely to address the stakeholder process in the context of NEPGA’s Complaint.

[100]   See id. at 4.

[101]   See id. at 4, 10-15.

[102]   Id. at 7.

 


[Wilson Testimony available in downloadable pdf version]