United States of America Before the Federal Energy Regulatory Commission
ISO New England Inc. | Docket No. ER20-739-000
Answer of the New England States Committee on Electricity
Pursuant to Rule 213(a)(3) of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission (“Commission” or “FERC”), 18 C.F.R. § 385.213(a)(3), the New England States Committee on Electricity (“NESCOE”) files this answer in the above-captioned proceeding. ISO-NE has requested the Commission’s acceptance of its proposal to implement a mechanism to facilitate the recovery of certain specified Critical Infrastructure Protection (“CIP”) costs by facilities that ISO-NE designates as critical to the derivation of Interconnection Reliability Operating Limits (“IROL”). ISO-NE proposed the addition of a new Schedule 17 to the OATT for this cost recovery mechanism, with those Tariff revisions referred to as the “IROL-CIP Cost Recovery Rules.” NESCOE provides here a limited response to comments seeking clarification regarding the use of a formula rate approach and recovery of the costs of past investments.
A. The Commission Should Decline Requests to Alter the Schedule 17 Process But Should Consider Encouraging ISO-NE to Explore Changes to the Process After Having the Benefit of Experience Implementing the IROL-CIP Cost Recovery Rules.
The Facility Owner Comments recount that stakeholder discussions preceding the ISO-NE Filing included consideration of a formula rate construct instead of the Section 205 approach reflected in the proposed Schedule 17. ISO-NE also considered whether it could adopt a “proxy rate” mechanism similar to its method for compensating for black start services under Schedule 16 of the OATT. ISO-NE ultimately rejected both of these potential approaches. Regarding use of a formula rate, ISO-NE explained that its rationale for using the Federal Power Act (“FPA”) Section 205 approach included “minimiz[ing] future refund uncertainties that could be introduced by potential [FERC] proceedings challenging informational rate updates” as well as providing greater “regulatory certainty over IROL-CIP Costs before” transmission customers are charged. ISO-NE elected not to move forward with a proxy rate approach because, among other reasons, ISO-NE lacked sufficient information to identify an appropriate proxy facility and estimate representative IROL-CIP compliance costs.
The Facility Owners request clarification that facilities ISO-NE has designated as IROL-Critical can use a formula rate approach to recovering costs under Schedule 17. These commenters note the potential for numerous individual Section 205 filings in connection with Schedule 17, potentially on an annual basis. They express concern about the administrative burden that these filings could impose and the potential resources required for participation, both for the IROL-Critical Facility owners and interested parties. The Facility Owners prefer an approach where IROL-Critical Facility owners could make “informational filings with data on actual costs incurred.”
NESCOE generally shares the administrative and resource concerns that the Facility Owners have expressed. NESCOE appreciates the structure ISO-NE has developed to reduce the likelihood of contested issues once a Section 205 filing is made, such as a pre-filing review process and limiting recovery to actual costs. These are important features of Schedule 17. However, there is no experience with the IROL-CIP Cost Recovery Rules and little experience in the New England region with cost-of-service ratemaking for electric generation and other merchant resources. As of the ISO-NE Filing, ISO-NE had designated as IROL-Critical 27 generation units at 15 separate plants locations and one merchant transmission facility. If all of these facilities initiate the Schedule 17 process, NESCOE and other interested parties would need to consider dedicating substantial resources to scrutinizing closely, potentially within the same short timeframe, the IROL-CIP Costs of over two dozen individual generating units and one merchant transmission facility. Once the Section 205 filings are made, the Commission would shoulder a significant burden as well in its review of multiple cost-of-service type filings.
Another factor adding to this burden is that Schedule 17 presents a novel cost recovery mechanism. Like others in New England, NESCOE has limited experience with cost-of-service ratemaking for resources participating in the ISO-NE wholesale markets. Those competitive markets were expressly designed to provide revenue opportunities for participating resources while, at the same time, requiring these resources to assume the risk of their participation including, as a general matter, “ordinary costs of doing business.” Reviewing IROL-CIP Costs would present a particular challenge because, like ISO-NE, NESCOE (and likely many other interested parties) do “not have expertise regarding the types of direct costs commonly associated with IROL-Critical Facilities’ compliance” with mandatory CIP standards. Schedule 17 also provides IROL-Critical Facilities the opportunity to recover certain indirect costs, such as administrative and regulatory costs, that will require close scrutiny.
Nonetheless, while NESCOE appreciates and generally shares the administrative and resource concerns that the Facility Owners expressed, it respectfully cautions the Commission against taking any action at this time that would modify the Schedule 17 process. With the benefit of experience implementing the IROL-CIP Cost Recovery Rules, ISO-NE can and should consider the need for changes to the Schedule 17 process to improve transparency and meaningful review around cost recovery while mitigating the burden on participants in that process. But it is premature to begin those discussions.
To be clear, NESCOE does not at this time take a substantive position on the merits of eventually moving Schedule 17 toward a formula rate process. Experience with Schedule 17 will inform what, if any, enhancements to the process are needed. At that time, ISO-NE and stakeholders can revisit the formula rate approach, proxy rate approach, or other alternative or complementary constructs. To help facilitate future discussions, the Commission could encourage ISO-NE to evaluate its Schedule 17 construct after having the benefit of experience implementing the process.
B. The Merchant Group Comments Confirm the Need for Commission Guidance on the Scope of Cost Recovery for Past Investments and Appropriate Application of the Filed Rate Doctrine.
The Merchant Group Comments request “Commission clarification that facilities are entitled to seek recovery of all historic costs since designation as IROL-Critical in their individual requests for compliance cost recovery.” The Merchant Group Comments appear to seek certainty from the Commission that facility owners can recover investment costs as far back as 2014 or 2015 when, according to the comments, ISO-NE informed some facilities of the IROL-Critical medium impact designation.
The NESCOE Comments likewise requested the Commission’s clarification on cost recovery requests for past investments, asking the Commission to “provide clear guidance that only going-forward costs are eligible for recovery under Schedule 17.” NESCOE discussed how the FPA prevents the Commission from allowing a retroactive rate change and, accordingly, that Schedule 17 cannot provide for recovery of IROL-CIP Costs that preceded an IROL-Critical Facility owner’s Section 205 filing. However, NESCOE recognized that such facility owners may have made capital investments directly related to ISO-NE’s designation that are not yet fully depreciated and stated that it did not intend to challenge cost recovery of the undepreciated portion of these capital expenses as of the date of the owner’s Section 205 filing.
Stakeholders similarly sought clarity on the scope of cost recovery early in the stakeholder process. As NEPOOL counsel recounted, stakeholders inquired at a February 20, 2019 technical committee meeting whether CIP-related costs “incurred prior to [the Commission’s] acceptance of cost recovery provisions would be recoverable through rates.” Counsel summarized the lens through which the Commission may review such cost recovery requests:
For costs that are operating expenses incurred before the effective date for rates permitting such recovery, the filed rate doctrine and the rule against retroactive ratemaking would preclude recovery. If the costs, however, are properly considered capital expenditures amortized over the useful life of the asset, a reasonable case can be made for recovery through rates of those costs not yet fully amortized as of the effective date of the rates permitting such recovery.[]
NEPOOL counsel stated that the treatment of past capital investments “should be addressed in the initial Section 205 filing of rate schedules allowing for the recovery of such costs.” ISO-NE declined to take a position on the issue of cost recovery for prior investments, leaving for the Commission to decide those questions in adjudicating a facility owner’s Section 205 filing.
NESCOE respectfully requests that the Commission provide clarity in this proceeding on the scope of cost recovery rather than defer the issue to individual Section 205 filings. As discussed above, there is a potential for numerous individual Section 205 filings within a short timeframe. The Commission’s clarification up front would greatly help to reduce the potential for contested issues in connection with those filings.
The Commission is well-positioned to provide this clarification based on the record in this proceeding. As discussed in the NESCOE Comments, the filed rate doctrine and the prohibition on retroactive ratemaking preclude the Commission from authorizing rates that exceed those on file or that are adjusted to account for a prior period of over- or under-collection. Schedule 17 is a novel cost recovery mechanism. The Commission has not yet authorized the recovery of IROL-CIP Costs as a general matter through an ISO-NE funding mechanism let alone reviewed actual rates that a facility owner has filed with the Commission regarding its specific costs. The Section 205 filings would trigger that review. Activities preceding those filings, such as meetings with ISO-NE to discuss the potential development of a cost recovery mechanism or ISO-NE’s commitment to work on a mechanism, fall short of the clear legal standard that the FPA requires for cost recovery.
For the reasons discussed above, NESCOE respectfully requests that the Commission consider its answer in this proceeding, and if necessary, grant NESCOE leave to file this answer.
/s/ Jason Marshall
New England States Committee on Electricity
655 Longmeadow Street
Longmeadow, MA 01106
Tel: (617) 913-0342
/s/ Phyllis G. Kimmel
Phyllis G. Kimmel
Phyllis G. Kimmel Law Office PLLC
1717 K Street, NW, Suite 900
Washington, DC 20006
Tel: (202) 787-5704
Attorneys for the New England States Committee on Electricity
Date: February 11, 2020