United States of America Before the Federal Energy Regulatory Commission
ISO New England Inc. | Docket Nos. EL18-182-000 and ER20-1567-000
Motion for Leave to Answer and Third Answer of the New England States Committee on Electricity
Pursuant to Rules 212 and 213 of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission (“Commission” or “FERC”), 18 C.F.R. §§ 385.212 and 385.213 (2020), the New England States Committee on Electricity (“NESCOE”) moves for leave to answer and files this third answer in the above-captioned proceeding. NESCOE submits this answer to respond to the answer that ISO-NE filed on June 15, 2020.
- MOTION FOR LEAVE TO ANSWER
NESCOE respectfully seeks leave to respond to the ISO-NE Answer. While the Commission’s rules generally do not allow an answer in response to answers or protests, the Commission can allow such an answer where good cause is shown. See 18 C.F.R. §§ 385.213(a)(2) and 385.101(e) (2020). NESCOE’s answer meets this standard because it provides the Commission with a more complete and accurate record upon which to base its decision. NESCOE’s answer corrects inaccuracies and clarifies the record in this proceeding. Accordingly, there is good cause for the Commission to accept this answer.
- ISO-NE Tries Unsuccessfully to Reframe the Scope of the July 2018 Order
Like ESI’s other supporters, ISO-NE seeks to extend the Commission’s directives to address issues that were not the subject of the July 2018 Order. ISO-NE makes several arguments in support of this expansion. It asserts that a year-round ESI program is justified because “emerging energy supply risks,” which ISO-NE’s Operational Fuel Security Analysis (“OFSA”) identified, will “increasingly challenge the reliability of the” region’s power system. ISO-NE argues that reliability standards require a program extending across all months and that recent system events demonstrate that need. It also contends that improving price formation is required under the July 2018 Order and that ESI is needed to address an influx of renewable resources. None of these attempts to rewrite the July 2018 Order are successful.
Of course, NESCOE agrees that it is critical to address emerging reliability risks, whether related to supply constraints or other issues. But such a broad mandate is not reflected in the July 2018 Order. ISO-NE’s answer acknowledges that the Commission’s directives are expressly tied to the OFSA and subsequent “Mystic Reliability Studies,” analyses that identify fuel security concerns solely in the winter period. ISO-NE does not meaningfully explain how Commission directives that are cabined by fuel security concerns during the winter provide the license ISO-NE seeks to address broad categories of emerging risks on a year-round basis. As NESCOE previously explained, ISO-NE can propose market rule reforms to address emerging needs but those proposals should take place in a different proceeding and not in response to a narrower Commission directive within the confines of a section 206 order.
NESCOE has also previously discussed why assertions that reliability standards require the year-round ESI products are without merit. NESCOE appreciates ISO-NE’s efforts in responding to the most recent system events it identifies in May and June 2020, ensuring that it “operated the system within all applicable reliability standards and no operating reserve deficiencies were realized.” But the fact that ISO-NE operators needed to dispatch some resources out-of-market to address one of the May 2020 events, as ISO-NE states, does not establish or further support the need for ESI. Presenting ESI as a choice between addressing reliability through out-of-market actions or not is a false premise, as NESCOE has already explained. These out-of-market commitments are also infrequent. Examining the two years ISO-NE isolates in its answer, 2018 and 2019, those commitments were on average less than 0.5% and 0.4% of total system generation, respectively.
Moreover, ISO-NE presents no evidence to demonstrate that any of the system events it identifies implicated a third contingency event that would have warranted procurement of Replacement Energy Reserve (“RER”)—an outlying product that no other region appears to view as needed to meet reliability standards. Indeed, despite ISO-NE’s repeated efforts to normalize ESI by citing to the Commission’s recent approval of a PJM reserve product, the differences in ESI’s design and objectives—and the respective markets in which they would be implemented—set those products apart.
Regarding its discussion on price formation benefits, ISO-NE employs a strategy it reverts to at various points in its answer, building a straw man to argue a point that is not in controversy. No party, including NESCOE, has opposed the relationship between “good price formation” and a “functioning market.” To the contrary, NESCOE identified in its protest a series of price formation reforms that ISO-NE has made as well as NESCOE’s support for those changes. The point is, no matter the shared interest in proper price formation, that was not what the Commission directed ISO-NE to reform. ISO-NE’s reference to various proceedings related to price formation are inapposite to its specific compliance obligations here.
Similarly, ISO-NE’s reliance on an “influx of renewables” to support the need for ESI should be given no weight. NESCOE has previously explained that “ISO-NE never analyzed an increased integration of clean energy generation in designing ESI and blanket statements that the program is needed to address an evolving resource mix are not substantial evidence.” Moreover, when ISO-NE included in its OFSA the expected growth in renewable and clean energy resources pursuant to the requirements of state laws, the reliability risks identified in the OFSA were significantly diminished by the influx of non-gas-fired resources in the modeling. The growth of clean energy resources that contribute to the region’s resource adequacy should not be leveraged as rationale for supporting an ESI program that is oversized to address the Commission’s specific fuel security concerns.
- ISO-NE’s New Data on “Replacement Energy” Fails to Demonstrate a Need for RER
According to ISO-NE, “[w]hile contingency reserve and its restoration requirements form the basis for the proposed RER product definition and quantities to be procured[,]” RER is intended to “serv[e] a broader purpose of enabling the system, as part of its next-day Operating Plan, to manage uncertainties in both supply and demand that arise during the operating day . . . .” ISO-NE presents data from 2018-2019 in an attempt to support its contention that “replacement energy” is needed routinely and, specifically, outside the winter months.
As far as NESCOE is aware, this is the first time ISO-NE has presented this data. It is unfortunate that ISO-NE did not present this information in support of a “replacement energy” service during the long stakeholder process to allow states and stakeholders an opportunity to ask questions to better understand the data. At this late stage, it appears that ISO-NE is attempting to justify the need for RER—and by extension its need outside the winter period—by lumping together real-time balancing services, unexpected supply reductions (also known as generator contingencies), and unexpected demand increases (load under-forecast error) into one broad category of “replacement energy.” To the extent ISO-NE is representing the total real-time dispatch as “replacement energy” and not disaggregating into the type of underlying event, it is overstating the need for and value of RER by season.
In any case, what the newly provided information clearly shows is that the amount of “replacement energy” needed on average is small, the need for larger amounts is infrequent, and the current market incentives are keeping the lights on in New England. Moreover, ISO-NE’s latest data continues to provide no nexus between system events and the failure of suppliers to make advance fuel arrangements.
It is also misleading for ISO-NE to refer to so-called “replacement energy” as the result of unexpected supply and demand deviations. The “replacement energy” illustrated in Figure 1 of the ISO-NE Answer reflects the day-to-day operation of the real-time market, which has the objective of providing least-cost dispatch while meeting load and reliability requirements. ISO-NE implies that all of the “replacement energy” in Figure 1 is the result of unexpected supply decreases or demand increases. But “unexpected” supply reductions that occur approximately 99.97% of the time, as ISO-NE presents earlier in the data, cannot by definition be unexpected. It is the norm. ISO-NE cannot justify RER on the basis of a normal pattern of real-time dispatch that exceeds day-ahead commitments. There is nothing extraordinary about that deviation, and it plainly does not establish the need ISO-NE asserts it does.
- ISO-NE Undermines Its Own Claims Regarding a Market Power Assessment and Cites No Relevant Cases Supporting Its Request
ISO-NE takes issue with NESCOE and other protesters citing to a 2007 order where the Commission rejected a proposed new ancillary services market for operating reserves because a market power assessment had not been completed. ISO-NE argues that “the instant proceeding and the [ESI Proposal] differ materially from the circumstances of the” 2007 Order. ISO-NE also asserts that the 2007 Order is not controlling because that proceeding arose out of a Federal Power Act (“FPA”) section 205 filing while ESI responds to an FPA section 206 compliance directive. The Commission should reject these claims, which are undercut by ISO-NE’s own filing.
ISO-NE first put the 2007 Order into play. In explaining that it needs more time to complete a market power assessment for ESI, ISO-NE cited to the 2007 Order in recognition that such analysis “is a necessary component of a market-design proposal.” ISO-NE did not distinguish between ESI and the market design proposal reflected in the 2007 Order nor did it otherwise seek to qualify the order as procedurally different from this proceeding. ISO-NE fails to reconcile how the 2007 Order can be both relevant and misplaced at the same time.
Nonetheless, despite ISO-NE’s new attempt to distance ESI from the 2007 Order it introduced, its request for conditional acceptance of the program pending the outcome of a market power assessment is deficient for the same fundamental reason the Commission identified in its earlier order. Without a market power assessment to accompany ISO-NE’s request to approve an entirely new market, the Commission cannot “undertak[e] a full evaluation” of ESI. ISO-NE fails to identify any Commission precedent to support its claim that ESI, an entirely new market construct, can be approved subject to further compliance. The one case it cites, ISO New England Inc., 149 FERC ¶ 61,009 (2014), contains no further compliance directives related to power market assessments or mitigation rules.
ISO-NE never grapples with, and simply ignores, the line of cases NESCOE cites that require the Commission to determine that market power does not exist or that it is adequately mitigated prior to approving market-based rates. To the extent ISO-NE suggests that this threshold requirement can be deferred in section 206 proceedings in contrast to those initiated under section 205, it provides no support for that assertion. In addition, if the Commission credits ISO-NE’s argument, its ability to accept any portion of the ESI Proposal under section 205 would be constrained by the Commission’s more limited authority to condition acceptance of a proposal under that procedural posture.
Furthermore, ISO-NE’s reliance on NRG in claiming that the Commission would have been constrained in its authority to condition acceptance in the 2007 Order is unfounded. The Commission adjudicated the 2007 Order a decade before NRG became controlling. And prior to NRG, the Commission understood and regularly exercised its authority under section 205 to conditionally accept a utility’s filing subject to directed modifications. The Commission elected not to do so in the 2007 Order, rejecting the proposal without prejudice.
- Concerns About the Exercise of Market Power Are Both Timely and Borne Out in the Wilson Testimony
ISO-NE argues that it is premature to address market power concerns. That is incorrect as a matter of law. As discussed above, the Commission cannot approve market-based rates for ESI before market power issues are evaluated and, if necessary, addressed.
ISO-NE has been aware of concerns regarding market power and mitigation in connection with ESI at least since early 2019. NESCOE and others continued to express concerns through the remainder of the stakeholder process. Despite its awareness of these concerns over many months, ISO-NE failed to perform even a scoping analysis regarding the potential exercise of market power.
ISO-NE now seeks to shift the immediate task of performing an analysis to NESCOE’s witness and incorrectly charges that the Wilson Testimony was conclusory on the issue of market power. In fact, though the burden is on ISO-NE to analyze and address market power, Mr. Wilson did provide economic analysis of the market power concerns he identified. His testimony includes discussion of the relevant product and geographic market and explains why this relevant market raises significant market power concerns—concerns which are different and more problematic than under other regions’ more conventional approaches to day-ahead ancillary services.
ISO-NE’s attempt to downplay NESCOE’s concern about market power is unavailing. It claims that the ISO-NE Filing contained “summary data” that raises questions about Mr. Wilson’s testimony that “ESI is relatively susceptible to market power[.]” But this “summary data” shows only ancillary service quantities and not energy or total capacity quantities. As the Wilson Testimony explained, total ancillary service demand is not the relevant market in assessing market power here: due to co-optimization of energy and ancillary services, the relevant market is “the total capacity [ISO-NE] seeks to acquire for energy and [day-ahead ancillary services] [.]”
- ISO-NE Fails to Justify the Extreme Mismatch Between Revenues and Holding Costs Reflected in the Impact Assessment
ISO-NE complains that NESCOE mischaracterizes net revenues in the Impact Assessment and, bizarrely, that NESCOE is collaterally attacking competitive market dynamics. Neither assertion is true. Here, ISO-NE pivots back to its straw-man tactic, serving up a didactic defense of uniform clearing prices that is far afield. There is no quarrel in the record on the workings of inframarginal rents. The Commission need not be lured down that rabbit hole.
ISO-NE never contests NESCOE’s observation, based on the Impact Assessment results, “that resources would be rewarded with net earnings that may be dozens to hundreds of times more than their costs to hold fuel.” Instead, ISO-NE responds that “NESCOE fails to acknowledge that these figures reflect the most profitable generation,” conceding that NESCOE has accurately characterized the results for those scenarios. ISO-NE fails to explain why resources must receive so much revenue relative to their incremental holding costs—in ISO-NE’s words, why those revenues must “far outweigh” or “far exceed” those costs at such potentially staggering levels—to incentivize advance fuel supply arrangements.
In failing to offer such an explanation, ISO-NE provides the Commission with no record support to justify revenues that ISO-NE has itself described as far more than is needed to compensate resources for the incremental costs they would incur. This absence of record support precludes the Commission from finding that ESI’s costs to consumers would be commensurate with the reliability benefits provided. ISO-NE acknowledges that this assessment of costs and benefits is an inquiry that is distinct from a cost-benefit analysis.
Further, it is misleading to accuse NESCOE of cherry picking these scenarios: ISO-NE highlighted these same high profit opportunities for the Commission as a basis for approval of its program. And contrary to ISO-NE’s claim, NESCOE noted the range of conditions that the Impact Assessment considered and described projected net revenues over a mild winter.
- ISO-NE Distorts the Record Regarding How ESI Overbuys Reserves and the Potential for a More Conventional Approach to Ancillary Services to Help Address Fuel Security Concerns
ISO-NE replays a portion of NESCOE’s quotation to an External Market Monitor (“EMM”) analysis regarding ESI, where the EMM concludes that:
. . . use of the option style contract would require loads to take day-ahead positions in energy that substantially exceed their expected real-time energy needs, since loads would be required to purchase “at the money” call options for an amount of operating reserves that is extremely likely to exceed the amount that would be converted to energy in real-time. Ultimately, it is difficult to predict the extent to which the option style contract will allow [ISO-NE] to maintain reliability more efficiently than it would using the conventional forward contract for ancillary services.[]
ISO-NE omits the last sentence of this block quote. Then, in a strange turn, ISO-NE implies that NESCOE purposely left it out. According to ISO-NE, the EMM repeated the first sentence of the quoted passage in its filed comments in this proceeding, “but [the sentence] is followed by the concluding observation that ‘it is difficult to predict the extent to which the option style contract will allow the ISO to maintain reliability more efficiently than it would using the conventional forward contract for ancillary services.’” ISO-NE claims that the two sentences read together “simply highligh[t] an empirical question about the option construct” and that it fails to support NESCOE’s argument that ESI overbuys reserves.
ISO-NE misunderstands the EMM’s conclusion. The only question the EMM raises is whether the novel ESI design will succeed in meeting its objective compared to a more established market design for ancillary services. That conclusion draws from the EMM’s earlier comments: “Many elements of the [ESI Proposal] have been implemented in other markets, but one novel element is the call option-style reserve product as opposed to the more commonly used forward-style ancillary service contract.”
ISO-NE’s specious claims snowball from there. It incorrectly characterizes NESCOE’s summary of the EMM’s analysis, where NESCOE notes that “ISO-NE is making consumers buy more reserves in a day-ahead market than the system would typically need in real-time.” ISO-NE argues that this statement misconstrues why reserves are procured. NESCOE won’t take the bait and neither should the Commission. NESCOE never defined or described the standard for buying reserves. It was simply underscoring what the EMM said: ESI would procure “an amount of operating reserves that is extremely likely to exceed the amount that would be converted to energy in real-time.” NESCOE’s summary seeks to give ISO-NE some benefit of the doubt, acknowledging that the amount procured might not be oversized across all hours of the day, i.e., what “the system would typically need in real-time.” Tellingly, ISO-NE never meaningfully addresses the merits of NESCOE’s argument or the EMM’s supporting analysis.
On the other hand, the new data that ISO-NE provides for the first time in its answer appears to confirm NESCOE’s point. As discussed above, for 2018 and 2019, ISO-NE shows the average hourly net need for “replacement energy” to be only 188 MW and such net need in five percent of all hours to be 819 MW or greater. The maximum amount needed, 3,821 MW, occurred only one time in 2018. With the exception of a single event over the two year period, these amounts are well below what appears to be ISO-NE’s stated cumulative ESI demand of roughly 4,000 MW. ISO-NE’s new data supports a finding that the full freight of ESI products is not needed the vast majority of the time.
ISO-NE similarly misstates Mr. Wilson’s testimony regarding a more conventional approach. Contrary to ISO-NE’s claim, Mr. Wilson was clear that such a conventional approach, together with a seasonal or other forward construct, could potentially provide energy security more effectively and at a lower cost.
ISO-NE pivots to complaining about a lack of analysis supporting a more conventional approach as part of the region’s energy security solution. To the extent ISO-NE suggests that parties submitting a protest in this proceeding were obligated to provide an alternative market design, that claim is unsupported and is inconsistent with the Commission’s rules and the FPA. The Commission should give no weight to attempts to shift a compliance obligation onto regional stakeholders or other participants in this proceeding.
In any event, ISO-NE’s argument overlooks NESCOE’s entire point. ISO-NE leaves a gap in the record the Commission must rely upon in considering ESI:
ISO-NE never fully examined the potential for a seasonal forward market, together with more established approaches to ancillary services, to provide the incentives it believes are needed to promote advance energy supply arrangements because it instead elected to focus on the ESI design. ISO-NE fails to justify the risk premiums and other costs associated with implementation of such a novel and untested design. To the extent ISO-NE now commits to developing a seasonal forward procurement, it appears that such a program would be layered upon an unproven ESI experiment.[]
These more established market design constructs stand in contrast to an experimental ESI design that, as explained, exposes consumers to costs inherent in the energy call option.
- ESI Creates Risks that Do Not Exist in Other Market Designs
ISO-NE misrepresents NESCOE’s position on the connection between ESI and risk premiums. It argues about the role that risk premiums generally play in markets. NESCOE takes no issue with the economic theory that ISO-NE posits here. It never did. The point is that ESI, and the energy option approach in particular, creates new risks for suppliers that they do not face under the current market design or under a conventional approach to day-ahead ancillary services. These new risks, as ISO-NE notes, must be compensated for and ESI therefore increases total costs. This results in a loss in efficiency relative to other designs.
ISO-NE also suggests that the risks inherent in the ESI design already exist because suppliers of day-ahead energy are exposed to the real-time energy price if they fail to perform. ISO-NE’s conflation of existing and new risks obfuscates NESCOE’s point. The issue here is the new risk that ESI’s novel energy option approach creates for suppliers of day-ahead ancillary services. ESI does nothing to change the current risks and settlement of day-ahead energy sales.
- ISO-NE Fails to Explain Why ESI Departs from Past Approaches to Marginal Reliability Value and Conflates NESCOE’s Position on Price Impacts with Quantities Procured
In its protest of ESI, NESCOE questioned why ISO-NE failed to reflect a diminished marginal reliability value (“MRV”) in pricing ESI when it has taken such an approach regarding its Forward Capacity Market demand curve and in its first winter reliability program. ISO-NE never explained the reason for that departure. It still has not. Instead, ISO-NE attempts to shift the burden, suggesting that it is NESCOE, and not ISO-NE, that owes a greater explanation of the MRV approach. Consumers deserve a response on the merits.
ISO-NE also plainly misstates NESCOE’s position, arguing that our challenge went to quantities procured instead of price. This claim is flatly wrong. The Wilson Testimony is clear that the MRV approach takes no issue with the day-ahead quantities. Its focus is on the maximum prices ISO-NE is willing to pay for them, which exceed the MRV to consumers of the full quantities of these services. The underlying premise of ISO-NE’s response is factually untrue.
For the reasons discussed herein, NESCOE respectfully requests that the Commission grant its motion to answer, accept and consider its answer in this proceeding, and provide the requested relief that NESCOE sought in its protest to the ESI Proposal.
/s/ Jason Marshall
Senior Counsel & Analyst
New England States Committee on Electricity
655 Longmeadow Street
Longmeadow, MA 01106
Tel: (617) 913-0342
Dated: June 30, 2020