In pursuing the objective of the [winter reliability] 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.[[82]]
However, as explained above, there is an overriding interest and legal requirement that program incentive payments be extended only to those resources that can provide incremental capacity, which justified the limitation of resource eligibility in Winter Program II.[83] Winter Program II, as ISO-NE stated, was thus resource neutral to the maximum extent possible.[84] That same principle must apply with equal force to Winter Program III.
- Fuel Neutrality and Market-Approaches Cannot Become the End-Goal at the Expense of Just and Reasonable Rates.
Since Winter Program I, NESCOE has been directionally supportive of steps to make the Winter Reliability Program more fuel neutral. ISO-NE stated in its filing with the Commission on Winter Program I that it preferred a fuel-neutral approach and that future Winter Reliability Programs should achieve that neutrality.[85] NESCOE agreed with ISO-NE and, while generally supportive of Winter Program I, NESCOE stated a preference for the concept of ISO-NE taking a more fuel-neutral approach for future programs in order to promote greater competition.[86] NESCOE also supported changes to Winter Program II to expand eligibility to a set level of LNG “take-or-pay” contract holders.[87]
However, as NESCOE stated in prior comments to the Commission, any modification to future winter programs, whether compensating more resource types or moving to a market-based structure, must be a means to an end: providing consumers with a cost-effective solution to winter fuel supply security challenges.[88] It has become increasingly clear since implementation of Winter Program II that a market-based structure presents risks to the effectiveness of the program and could cost significantly more than the most recent (and successful) program. In its rehearing request, ISO-NE described the adverse implications of adopting a market-based approach, stating that “the options for developing a market-based solution in the context of existing obligations are, at best, potentially less effective than the winter reliability programs, and, at worst, less effective, inefficient, controversial and expensive to implement.”[89] ISO-NE identified a number of concerns about the complexity, efficiency, effectiveness, and cost of such a market-based structure implemented for the three-year period preceding PfP.[90]
Mr. Wilson also concluded that a market-based structure would be a less effective approach than continuing the most recent winter program.[91] He stated that such an approach might not achieve the same fuel assurance as Winter Program II, either because it fails to attract sufficient participation or is inadequate in providing “sufficient incentives for additional fuel arrangements.”[92] Furthermore, while a truly market-based solution might secure the same level of fuel assurance by imposing “substantial obligations and penalties,” it would do so “at a much higher cost.”[93]
ISO-NE has not proposed a market-based program for subsequent winters until PfP becomes operative. That is the appropriate result. While market-based structures are generally preferable given the potential consumer benefits they can provide, in this case, they do not match the instant problem. Given the risks and costs identified by ISO-NE and others, a market-based structure is not an acceptable interim approach.[94]
- There are Significant and Unjustified Cost Increases Resulting from the ISO-NE Proposal
The ISO-NE Proposal will cost consumers considerably more than the NEPOOL Proposal. Using the estimated compensation rate set by ISO-NE, $12.90 per equivalent barrel of oil,[95] Mr. Wilson calculates that the maximum cost exposure of the ISO-NE Proposal would be more than 50% higher than the costs of a Winter Program II design, adding almost $35 million in new program payments per year, or more than $100 million over the life of the three year program.[96] The Wilson Testimony includes the following table breaking out these cost components:[97]
| Table 1: Estimated Cost of Winter Reliability Program Alternatives | ||||||
| Total MW | Equiv. bbl (maximum) | Payment Rate $/bbl | Max. Cost Exposure ($ mil.) | Equiv. bbl(cold winter, @ 25%) | Total cost, cold winter ($ mil.) | |
| Current program resources: | ||||||
| Oil | 10,778 | 4.10 | $12.9 | $52.89 | 1.03 | $13.22 |
| LNG | [6 Bcf] | 1.00 | $12.9 | $12.90 | 0.25 | $3.23 |
| Total | 5.10 | $65.79 | 1.28 | $16.45 | ||
| Additional resources under ISO Proposal: | ||||||
| Nuclear | 4,041 | 1.62 | $12.9 | $20.90 | (no changes) | (no changes) |
| Coal | 2,002 | 0.80 | $12.9 | $10.32 | ||
| Biomass | 577 | 0.23 | $12.9 | $2.97 | ||
| Hydro | 2,941 | 0.05 | $12.9 | $0.65 | ||
| Total | 3.30 | $34.83 | $34.83 | |||
| Total Cost: Current plus Additional Resources | $100.62 | $51.28 | ||||
| Sources: Total MW and equivalent bbl: Gillespie Testimony, p. 17; payment rate: 2015-2016 Winter Program Payment Rate, memo from ISO New England to NEPOOL Members, July 15, 2015; equivalent bbl under moderate conditions: Wilson assumption. Due to the small quantity of demand response, their costs were excluded from this summary. | ||||||
This analysis is based upon and consistent with ISO-NE’s own estimate of program participation and costs. The Gillespie Testimony, using an assumed $13 rate, calculates a high-end estimate of $35.1 million per year in costs related to adding the Newly Eligible Resources.[98] In total over three years, when compared to the NEPOOL Proposal, consumers could therefore pay $105.3 million more for a program without demonstrated additional value. Furthermore, at an expected cost of $51 million under a cold winter scenario compared to the NEPOOL Proposal’s expected cost of $16.45 million, the ISO-NE Proposal would triple the cost of the program.[99]
The NEPOOL filing also includes a cost estimate for the two proposals. In his testimony supporting the NEPOOL Proposal, based on an assumed rate of $14 per equivalent barrel of oil,[100] Mr. Bentz calculated an approximate $46 million price delta between the programs per year.[101] Mr. Bentz testified that the “$46 million cost difference is almost equal to the entire cost of last year’s program ($47.48 million) and more than double what the cost would have been last year under the expected $14 rate.”[102] Mr. Bentz further stated that “[t]he difference in cost between the proposals is even larger if oil returns to prices used to calculate the 2014/2015 program rate.”[103]
Another flaw in the ISO-NE Proposal is that Newly Eligible Resources could receive “considerably larger” payments than oil- and gas-fired resources.[104] Mr. Wilson explains that Newly Eligible Resources “likely would be compensated for the full amount of ‘inventory’ under the program each year, while resources compensated for oil and LNG stocks are compensated only for the (potentially much lower) remaining inventory or contractual amount at the end of the winter.”[105] ISO-NE’s flawed design and unclear program objective thus could produce a perverse and avoidable outcome, whereby the majority of payments are made to resources that are not the focus of the Winter Reliability Program and that have not demonstrated any likelihood of changes to their fuel procurement practices as a result of program payments.[106]
As discussed below, NESCOE supports the NEPOOL Proposal because of the value consumers would receive under the proposal in exchange for program payments. Indeed, “the consumer costs of the Winter Reliability Programs must be considered in the context of providing important insurance against risks to reliable operation of the electric system resulting from natural gas pipeline constraints[.]”[107] Consumers buy insurance for the promise of the benefit it will deliver, and there is a nexus between the premium for that product and the benefit received. Here, in the context of the ISO-NE Proposal, consumers could be made to pay in excess of $100 million above the cost of the NEPOOL Proposal without a demonstrated corresponding benefit. No economically rational consumer would increase the limits on an auto insurance policy when umbrella coverage is already in place: material price increases to the Winter Reliability Program must be supported by a corresponding increased value beyond what a resource with an existing CSO already provides.
The cost increases reflected in the ISO-NE Proposal are material, without sufficient support or attendant benefit, and it would not be just and reasonable to impose those cost increases on consumers, particularly when an alternative is available to the Commission that would achieve the desire objective of the Winter Reliability Program. The Commission should reject the proposal in favor of the NEPOOL Proposal.