NESCOE

Protest and Comments on ISO-NE Winter Program Proposal

Legal Document

Dated: August 5, 2015

Posted in:

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V.             Discussion

Q 14:    You noted that in the September 2014 Order, the Commission expressed a preference for a market-based solution to this problem. Please describe what in general constitutes a “market-based” approach to a procurement problem.

A market-based approach would be one that is structured to define a product or service, and then allow eligible entities to compete to provide the product or service. The purpose of this approach would be to achieve some of the potential benefits of markets. The alternative to a market-based approach could be bilateral or “out of market” procurement, in which the ISO as buyer might purchase from individual sellers or groups of sellers based on prices set through negotiation or through administrative calculations.

Q 15:    In general, are market-based approaches to be preferred, and if so, why?

Market-based approaches in general are preferred under circumstances where they can achieve the short-term and/or longer-term benefits of competition. In the short term, a market-based approach can achieve efficient production and consumption reflecting the marginal cost of production. The sellers with the lowest marginal costs are selected to satisfy the demand; and a price is set that generally reflects the marginal cost. Over the longer term, a market-based approach can lead to efficient exit and entry resulting again in efficient production and consumption from the long-term perspective. Prices over time reflect the full incremental cost of production and the most efficient producers are in the market.

Q 16:    Under what circumstances can market-based approaches be applied effectively?

To use a market-based approach, the product must be clearly defined so that sellers know exactly what they must provide and can determine their cost to provide the product. Then sellers can compete based on price to provide the product. This requires defining a single product (or perhaps a small number of products), or at least defining how different product attributes will be valued for the purpose of selecting among competing providers. In addition, there must be multiple potential sellers of the product for a market-based approach to achieve some degree of competition and be worthwhile.

Q 17:    Would you characterize the ISO’s Forward Capacity Market construct as a market-based approach?

Under FCM, the FCA auctions are held to acquire commitments from multiple potential providers to provide capacity under well-defined CSOs. This is a market-based approach.

Q 18:    Is the specific problem that is addressed by the Winter Reliability Program one to which a market-based approach can effectively be applied?

As described earlier, the problem here is that the ISO has come to believe that the CSOs resulting from earlier FCAs, in combination with the ISO’s energy and ancillary services markets, may not provide certain types of resources sufficient incentive to make fuel arrangements to the extent the ISO would like. The Winter Reliability Program, in essence, identifies a few “holes in the FCM fence”, and attempts to patch those holes until the longer-term market-based solution (as part of the PfP reforms) can be implemented.

Q 19:    Would a market-based approach be as effective as the most recent Winter Reliability Program for addressing the ISO’s concern about fuel assurance?

A market-based approach would be less effective. To use a market-based approach, it would be necessary to define a standard service and to allow sellers to make offers to provide the service. Depending upon how the service is defined and the associated penalties, this approach might not attract as much participation as the most recent Winter Reliability Program, or might not provide sufficient incentives for additional fuel arrangements. Thus, this approach might not achieve fuel assurance to the extent the most recent Winter Reliability Program Or, if the service imposes substantial obligations and penalties, it might achieve the same level of fuel assurance, but only at a much higher cost. The ISO has also noted that a market-based approach would likely be less effective.[11]

Q 20:    You also noted that the Commission expressed support for making the program more resource-neutral. As a general matter, do you agree that the ISO should strive for its market design elements to be resource neutral?

Yes, as a general matter, market design elements that are resource neutral are preferred, despite the complexity that inevitably is introduced by attempting to accommodate very different resource types.

There are two principal reasons why, in general, we should strive for resource neutrality. First, markets will be most competitive and efficient when they are open to the broadest participation possible. Markets that are only open to certain types of resources will generally be less competitive, and result in higher prices, than markets for which the product definition and eligibility requirements have been designed to accommodate a broader group of resource types.

Second, when market design elements are crafted in a more resource-neutral manner, they are more likely to avoid potentially unfair or discriminatory treatment of some resource types. This can be a difficult challenge, because different resource types have different characteristics which ultimately may be of some commercial significance. For instance, in most contexts, it is not appropriate to overlook that some resource types are intermittent, or that some have slower ramp rates, than others.

Q 21:    Is resource neutrality an appropriate objective in the context of the Winter Reliability Program?

In pursuing the objective of the program – to encourage incremental winter capacity – it is appropriate to strive for resource neutrality. In this regard, from the original concern about oil storage, the program was extended to compensate unused LNG contractual amounts, and to encourage incremental demand response.

Q 22:    Should the Winter Reliability Program be defined in a more resource-neutral manner to extend its compensation to additional resource types, even if the additional resources are not expected to provide incremental capacity?

Extending payments to additional resources that are not expected to provide incremental capacity would be contrary to what should be the objective of the program, as stated by the ISO last year (quoted above: “ Ensure generator winter fuel inventories… are sufficient … where/when they might not otherwise be…”), and as recognized by the Commission in accepting the most recent program:[12]

  1. We also reject arguments that, because the Winter Reliability Program does not pay all resources for providing firm fuel service, it is unduly discriminatory. The Program is designed to help ensure fuel adequacy by creating incentives for resources to procure more fuel than they would have procured in the absence of the Program. Given this objective, we find that ISO-NE reasonably limited participation in the Program to market participants that ISO-NE, as the system operator responsible for ensuring reliability in the region, determined will procure additional fuel ahead of winter as a result of payments through the Program. For instance, ISO-NE explained that identifying incremental fuel requirements for hydro or nuclear resources is challenging because those resources typically have low-cost fuels or extended fuel supplies. Thus, it would not be appropriate to make separate payments intended to incent resources to make the same fuel procurement decisions they would have made, and been compensated for, absent the Program. To the extent that the Program is not entirely fuel-neutral, we expect that a long-term market-based solution should address these concerns in the future. [citations omitted, emphasis added]

More recently, ISO-NE stated that the narrow program objective would still be to compensate generators for adopting ISO-NE’s rather than their own estimates of fuel needed at the beginning of the winter.[13] It would be inconsistent and inappropriate to extend compensation under the Winter Reliability Program to additional resources not expected to provide incremental capacity as a result.

Document Source Citations

  1.  

    [1]     NESCOE filed a motion to intervene in this docket on July 17, 2015.

    [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.

    [3]     Under Section 11.1.5. of the Participants Agreement, “when NEPOOL supports by at least a 60% Vote of the Participants Committee a Market Rule change that is different than what is being proposed by ISO-NE,” ISO-NE is required to make a “jump ball” filing whereby both the ISO-NE and NEPOOL proposal are filed pursuant to Section 205 of the Federal Power Act (“FPA”) and are considered by the Commission “at the same time and on the same legal footing[.]” July 15 Filing at Attachment N-1a (the “NEPOOL Filing Letter”), at 3-4. The NEPOOL Filing Letter describes the legal standard under a jump ball filing in greater detail.

    [4]     Rehearing Request of ISO New England Inc., Docket No. ER14-2407-003 (filed Feb. 19, 2015) (“ISO-NE Rehearing Request”), at 12; see also Letter from Gordon van Welie, ISO-NE President and CEO, to Judith Judson, Commissioner, Massachusetts Department of Energy Resources, July 6, 2015 (“ISO-NE Letter to DOER”), at 3 (stating that past winter programs “have proven to be a cost-effective short-term solution to help keep the lights on in New England during the winter”), available at www.iso-ne.com/static-assets/documents/2015/07/iso_response_doer_info_request_july2015.pdf.

    [5]     ISO New England Inc., Order Accepting Tariff Revisions, 148 FERC ¶ 61,179 (2014) (“September 2014 Order”) at P 40.

    [6]     July 15 Filing at Attachment I-1a (“ISO-NE Filing Letter”) at 9.

    [7]     Order Granting Rehearing, 151 FERC ¶ 61,052 (2015) (the “Rehearing Order”) at P 17.

    [8]     See ISO New England Inc., Winter 2013-14 Reliability Program, Docket No. ER13-1851-000 (filed June 28, 2013) (“Winter Program I Filing”), at 7; Motion to Intervene and Comments of the New England States Committee on Electricity, Docket No. ER13-1851-000 (filed July 13, 2013) (“NESCOE Winter Program I Comments”), at 10. See also Winter Program I Filing at 5 (“As a transition between the [winter reliability program] and the FCM performance incentives project, the ISO intends to propose a scaled-down version of the performance incentives project to purchase a fuel-neutral, winter-based reliability product for the winters of 2014-15 through 2017-18.”).

    [9]     ISO New England Inc., Winter 2014-15 Reliability Program (Part 1 of 2), Docket No. ER14-2407-000 (filed July 11, 2014) (“Winter Program II Filing”), at 8.

    [10]    See ISO-NE Rehearing Request at 2, 8-12.

    [11]    See Section IV.B below.

    [12]    September 2014 Order at P 43 (emphasis added).

    [13]    See NEPOOL Filing Letter at 2; ISO-NE Filing Letter at 3-4.

    [14]    See ISO-NE Filing Letter at 4; see also ISO New England Inc., Fuel Assurance Status Report, Docket Nos. AD13-7-000 and AD14-8-000 (Feb. 18, 2015) (“Fuel Assurance Status Report”), at 5, available at http://www.iso-ne.com/static-assets/documents/2015/02/Final_for_Filing__Fuel_Assurance_Report.pdf. As NESCOE explained in comments on the Fuel Assurance Status Report, although PfP “is expected to influence generator performance and responsiveness, it is not expected to solve the root cause of New England’s fundamental energy infrastructure problem and associated exorbitant price increases. . . . [and] despite over a decade of conversation in New England about gas and electric markets and the potential development of market mechanisms to address infrastructure inadequacies, not one has been proposed that is expected to solve the problems caused by the region’s natural gas constraints in a cost-effective way.” See Comments of the New England States Committee on Electricity, Docket Nos. AD13-7-000 and AD14-8-000 (filed Mar. 20, 2015), at 8, citing to Fuel Assurance Status Report at 4. See also ISO-NE Letter to DOER at 1-2 (stating that PfP “will improve resource performance, but it will not necessarily result in added natural gas pipeline” and will not address significant pricing issues arising from pipeline constraints). Despite implementation of PfP, ISO-NE has identified natural gas pipeline constraints as a continued risk to reliable operations and escalating prices. See, e.g., Gordon Van Welie, ISO-NE, State of the Grid: Managing a System in Transition, Presentation and Remarks, Jan. 21, 2015, at 35 (“Reliability will be threatened, and prices will spike, until the effects of the natural gas pipeline constraints are alleviated with additional investments in fuel infrastructure[.]”), available at www.iso-ne.com/static-assets/documents/2015/01/stateofgrid_ppt_remarks_01212015.pdf; ISO New England, 2015 Regional Electricity Outlook, at 18 (“Without significant expansion of natural gas pipeline and LNG storage serving New England, the impacts on reliability, price, and emissions are likely to continue.”), available at http://www.iso-ne.com/static-assets/documents/2015/02/2015_reo.pdf; Fuel Assurance Status Report at 4. The New England states have been closely engaged in collaborative efforts to address regional energy challenges. See, e.g., New England Governors, Actions for a Cleaner, More Reliable and More Affordable Energy Future, Apr. 23, 2015, available at http://www.nescoe.com/uploads/6_State_Action_Plan_FINAL_4-22-15_1-5.40_pf.pdf; New England Governors’ Statement: Regional Cooperation on Energy Infrastructure, Apr. 23, 2015, available at http://www.nescoe.com/uploads/6_State_Joint_Statement_FINAL_4-22-15_12-3.36pm_w-sealsf.pdf.

    [15]    ISO-NE Filing Letter at 4.

    [16]    Winter Program II Filing at 5. See also Fuel Assurance Status Report at 7 (“The region relied heavily on oil-fired generators [in the 2013-2014 winter], burning through 1.6 million of the 1.9 million megawatt-hours of oil procured through the program.”).

    [17]    See ISO-NE Filing Letter at 4-5; NEPOOL Filing Letter at 7; Winter Program II Filing at 11.

    [18]    Winter Program II Filing at 11-14.

    [19]    See NEPOOL Filing Letter at 7.

    [20]    September 2014 Order at P 40.

    [21]    ISO New England Inc., 150 FERC ¶ 61,029 (2015) (the “Clarification Order”) at P 10.

    [22]    ISO-NE Rehearing Request at 2.

    [23]    Id. at 11.

    [24]    Id. at 12.

    [25]    Id. at 13.

    [26]    Market-Based Approach to Winter Reliability: Exelon, Entergy and NextEra, NEPOOL Markets Committee, April 13, 2015.

    [27]    Rehearing Order at P 17 (footnote omitted).

    [28]    July 15 Filing at Attachment N-1b, Prepared Testimony of Jeffrey W. Bentz in Support of the New England Power Pool’s Proposed Winter Reliability Program (“Bentz Testimony”), at 21.

    [29]    NEPOOL Filing Letter at 9.

    [30]    ISO-NE Filing Letter at 5.

    [31]    See NEPOOL Filing Letter at 9.

    [32]    NESCOE, Winter Program: New England States’ Preferred Approach, NEPOOL Markets Committee, May 2015, available at http://www.nescoe.com/uploads/MC_Winter_ProposalF.pdf.

    [33]    See Bentz Testimony at 23 (“A market participant from each of the six NEPOOL sectors joined the proposal in support: Conservation Services Group (Alternative Resources Sector), TransCanada Power Marketing Ltd (Generation Sector), the Connecticut Office of Consumer Counsel (End User Sector), the United Illuminating Company (Transmission Sector), the Massachusetts Municipal Wholesale Electric Company (Publicly Owned Entity Sector), and Energy America, LLC. (an affiliate of Direct Energy) (Supplier Sector).”).

    [34]    NEPOOL Filing Letter at 10; Bentz Testimony at 21, 23.

    [35]    NEPOOL Filing Letter at 11.

    [36]    Id.

    [37]    See ISO-NE Filing Letter at 11.

    [38]    NEPOOL Filing Letter at 14.

    [39]    Id. at 11-14.

    [40]    July 15 Filing at Attachment I-1b, Testimony of Andrew G. Gillespie in Support of ISO New England Inc. (“Gillespie Testimony”), at 15; see ISO-NE Filing Letter at 6.

    [41]    ISO-NE Filing Letter at 11; NEPOOL Filing Letter at 13.

    [42]    Testimony of James F. Wilson, attached hereto as Attachment A (“Wilson Testimony”), at 9, 20.

    [43]   See id. at 4, 9, 19-20.

    [44]    ISO-NE Letter to DOER at 3. See also ISO-NE Rehearing Request at 12 (Winter Program II “has been proven to be a cost-effective interim means to assure fuel inventory while the ISO completes development and implementation of the full PFP market-based solution.”).

    [45]    ISO-NE Rehearing Request at 4. See also ISO-NE Filing Letter at 4-5.

    [46]    ISO-NE Letter to DOER at 3.

    [47]    ISO-NE Filing Letter at 6, 12.

    [48]    Wilson Testimony at 15.

    [49]    Id. at 15-16 (footnote omitted).

    [50]    July 15 Filing at Attachment N-1d, Testimony of Alan A. Trotta, Director of Wholesale Power Contracts for UIL Holdings Corporation (“Trotta Testimony”), at 3.

    [51]    Id.

    [52]    July 15 Filing at Attachment N-1e, Affidavit of Brian E. Forshaw, NEPOOL Participants Committee Publicly Owned Entity Sector Vice-Chair, at 6. See also id. at 7.

    [53]    Bentz Testimony at 19-20.

    [54]    July 15 Filing at Attachment N-1c, Testimony of John Flumerfelt, Director of Government and Regulatory Affairs, Calpine Corporation (“Flumerfelt Testimony”), at 4-5.

    [55]    July 15 Filing at Attachment N-1f, Affidavit of Herb Healy, Senior Director of Regulatory Affairs, EnerNOC, Inc., at 4.

    [56]    Wilson Testimony at 15, 19.

    [57]    ISO-NE Filing Letter at 12 (emphasis added).

    [58]    See Wilson Testimony at 3.

    [59]    Id. at 19.

    [60]    Id. at 20.

    [61]    September 2014 Order at P 43.

    [62]    Id. (emphasis added).

    [63]    Trotta Testimony at 2.

    [64]    Wilson Testimony at 20.

    [65]    Id. at 14.

    [66]    See Gillespie Testimony at 17.

    [67]    Bentz Testimony at 16 (emphasis added).

    [68]    Id. at 20.

    [69]    Trotta Testimony at 2.

    [70]    See ISO-NE Letter to DOER at 3; ISO-NE Rehearing Request at 4, 12; ISO-NE Filing Letter at 4-5.

    [71]    ISO-NE Filing Letter at 6, 12.

    [72]    Id. at 9.

    [73]    While some might argue for the exclusion of LNG and demand response resources from Winter Program III under the same rationale, these resources have proven to make limited but cost-effective contributions to the Winter Reliability Programs and, unlike the Newly Eligible Resources, they have a more direct nexus to gas pipeline constraints which motivated the advent of these programs.

    [74]    See September 2014 Order at P 43; Rehearing Order at P 17. See Section IV.C below explaining why the Rehearing Order did not require ISO-NE to file its “expanded” program.

    [75]    ISO-NE Filing Letter at 12.

    [76]    Wilson Testimony at 8; see also id. at 9.

    [77]    Id. at 8, 18.

    [78]    Id. at 18-19.

    [79]    Trotta Testimony at 4. See also Bentz Testimony at 22 (“NESCOE, along with other stakeholders, concluded that the ISO-NE Proposal was no more market-based than the Winter Program II, and were concerned that the additional costs of the ISO-NE proposal provided no identifiable benefits.”).

    [80]    Bentz Testimony at 12.

    [81]    Flumerfelt Testimony at 3.

    [82]    Wilson Testimony at 10-11 (emphasis in original).

    [83]    See September 2014 Order at P 43.

    [84]    Winter Program II Filing at 8.

    [85]    Winter Program I Filing at 7. See also id. at 5 (“As a transition between the Winter Reliability Project and the FCM performance incentives project, the ISO intends to propose a scaled-down version of the performance incentives project to purchase a fuel-neutral, winter-based reliability product for the winters of 2014-15 through 2017-18.”).

    [86]    NESCOE Winter Program I Comments at 10.

    [87]    Motion to Intervene and Comments of the New England States Committee on Electricity, Docket Nos. ER14-2407-000 et al. (filed Aug. 1, 2014), at 5.

    [88]    Motion for Leave to Answer and Limited Answer of the New England States Committee on Electricity, Docket No. ER14-2407-003 (filed Mar. 4, 2015), at 3.

    [89]    ISO-NE Rehearing Request at 8.

    [90]    Id. at 2, 8-12.

    [91]    Wilson Testimony at 9-10.

    [92]    Id.

    [93]    Id. at 10. See also id. at 20 (a market-based approach “would likely be ineffective and costly.”).

    [94]    Indeed, one way to erode support for genuine market-based approaches is to label an approach market-based and, through it, force consumers to pay more for resources with no apparent incremental value.

    [95]    Memorandum from ISO-NE to NEPOOL Members, 2015-2016 Winter Program Payment Rate, July 15, 2015, available at http://www.iso-ne.com/markets-operations/markets/winter-program-payment-rate.

    [96]    Wilson Testimony at 16-17.

    [97]    Id.

    [98]    Gillespie Testimony at 18.

    [99]    As explained in the Wilson Testimony, these are the expected costs assuming 75% of the oil inventory and LNG contract amounts are used. In a cold winter during which the oil and LNG stocks are drawn down such that the program only pays for 25% of the maximum inventory quantity for these resources, the cost of the program for these resources would be roughly $16.5 million, while the other resources compensated under the ISO-NE Proposal would likely still receive close to the $34.8 million maximum amount. See Wilson Testimony at 16-17.

    [100]   Prior to the July 15 Filing, ISO-NE had not provided an estimate of program costs or an assumed compensation rate for subsequent winters. The $14 assumed rate was based on an estimate at the time of what the expected payment rate might be for subsequent winters.

    [101]   Bentz Testimony at 16.

    [102]   Id. (emphasis in original)

    [103]   Id.

    [104]   Wilson Testimony at 17-18.

    [105]   Id.

    [106]   See id. at 18.

    [107]   Bentz Testimony at 18.

    [108]   ISO-NE Filing Letter at 6, citing to ISO-NE Rehearing Request at 12-13.

    [109]   Rehearing Order at P 17 (footnote omitted).

    [110]   Id. (emphasis added)

    [111]   Id.

    [112]   See Bentz Testimony at 13 (emphasis in original), citing to Winter Reliability Solution: Committee Discussion, presentation by Andrew Gillespie, Principal Analyst, Market Development, ISO-NE, March 10-11, 2015 NEPOOL Markets Committee Meeting, at Slide 7; Winter Reliability Solution: Committee Discussion, presentation by Andrew Gillespie, Principal Analyst, Market Development, ISO-NE, Jan. 13-14, 2015 NEPOOL Markets Committee Meeting, at Slide 7; Winter Reliability Solution: Winter Periods Prior to June 1, 2018, presentation by Andrew Gillespie, Principal Analyst, Market Development, ISO-NE, Nov. 11-12, 2014 NEPOOL Markets Committee Meeting, at Slide 6.

    [113]   Wilson Testimony at 13.

    [114]   See id. at 18.

    [115]   Winter Program II Filing at 8.

    [116]   See ISO-NE Filing Letter at 11; Gillespie Testimony at 17-18.

    [117]   Gillespie Testimony at 18; Wilson Testimony at 16-17.

    [118]   NEPOOL Filing Letter at 18.

    [119]   Id.

    [120]   See July 15 Filing at Attachment N-1g, Tabulation of NEPOOL Participants Committee Votes Taken on the ISO-NE and NEPOOL Proposals. Those participants referenced above— Dominion, Entergy, NextEra, GDF SUEZ, and Dynegy—own assets that rely on Newly Eligible Resources, specifically nuclear, coal, or pumped hydro.

    [121]   See NEPOOL Filing Letter at 18.

    [122]   See id., quoting Am. Elec. Power Serv. Corp. v. Midwest Indep. Transmission Sys. Operator, Inc., 122 FERC ¶ 61,083 (2008) at P 172 (“While stakeholder support does not alone prove that the NEPOOL Proposal is just and reasonable and preferable, ‘stakeholder consensus is an important factor to be considered in reviewing the justness and reasonableness of a rate design.’”).

    [123]   September 2014 Order at P 33.

    [124]   Winter Program II Filing at 5-6.

    [125]   About FERC, Guiding Principles, available at http://www.ferc.gov/about/about.asp.