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FERC rejects ISO New England energy security proposal

November 4, 2020

by Paul Ciampoli
APPA News Director
November 4, 2020

The Federal Energy Regulatory Commission on Oct. 30 issued an order finding that ISO New England’s Energy Security Improvements (ESI) proposal “is unjust and unreasonable because it would impose substantial costs on consumers without meaningfully improving fuel security.”

Background

On April 15, ISO-NE submitted to FERC proposed ESI tariff changes, which the ISO described as “necessary to address the fuel security challenges facing the New England region.”

The proposal came in response to a July 2018 order in which FERC denied the ISO’s request for a tariff waiver to allow for reliability-must-run (RMR) agreements with Units 8 and 9 at the Mystic Generation Station for fuel security purposes.

FERC instead directed ISO-NE to submit interim tariff revisions providing for the filing of short-term, cost-of-service agreements to address demonstrated fuel security concerns, and “to submit by July 1, 2019 permanent Tariff revisions reflecting improvements to its market design to better address regional fuel security concerns.”

The ESI proposal responded to this second requirement, the deadline of which was extended twice since the July 2018 order.

The proposal called for the creation of new day-ahead ancillary service products that would allow market participants to voluntarily offer to sell options to the ISO to ensure the availability of energy in real time.

Details of FERC order

The Commission’s decision centered on three findings:

  • Day-ahead products do not provide sufficient time for resources to take the steps necessary to perform during stressed conditions if they have not already done so, such as the procurement of fuel in advance;
  • Because the options would be offered voluntarily, resources that have not made advance energy arrangements could decide not to participate; and
  • ISO-NE’s impact assessment demonstrates that the ESI proposal would not materially reduce reserve shortages or the potential for loss of load but would increase costs to consumers by $20 million to $257 million per year. FERC noted that while it “does not ‘generally require the mathematical specificity of a cost-benefit analysis’ to render a proposal just and reasonable, the Commission must protect consumers from excessive rates and charges.”

The New England Power Pool (NEPOOL) Participants Committee did not support the ESI proposal, so NEPOOL submitted an alternative ESI proposal along with ISO-NE’s proposal.

FERC determined that while the alternative “would result in lower costs to consumers than ISO-NE’s ESI proposal, we also reject the NEPOOL alternative as unjust and unreasonable because it contains the same deficiencies that render ISO-NE’s proposal unjust and unreasonable.” 

The Commission did not make a finding on whether ISO-NE faces a fuel security or energy security issue, but acknowledged the concerns leading to the proposal and stated that if ISO-NE “decides to pursue a solution to address these concerns, we encourage it to explore a market-based reserve product that provides resources sufficient lead time and ability to acquire fuel or take other steps necessary to be able to deliver energy when needed.”

FERC said it expects that such a market solution would be designed to:

  • Coordinate procurement of forward reserves with co-optimization of energy and reserves in the day-ahead and real-time markets;
  • Incentivize resources to offer into the forward, day-ahead and real-time energy and reserves markets based on their actual costs;
  • Prevent the exercise of market power, including through mitigation measures, if necessary; and
  • Include financial obligations or incentives sufficient to ensure resources can deliver energy and/or reserves in real-time. 

“We are not, however, directing ISO-NE to pursue any particular approach.  We further note that nothing in this order prohibits ISO-NE from proposing a day-ahead reserves market independent of any proposal to address the concerns at issue here,” FERC said.

The Commission also rejected ISO-NE’s associated proposal to sunset interim fuel security programs one year earlier than currently provided for in the tariff, stating that “ISO-NE may propose to the Commission other steps it believes are warranted to address fuel security, such as submitting a revised long-term fuel security proposal or seeking to extend one or more of the interim programs.” 

MMWEC, others protested ISO proposal in May

The Massachusetts Municipal Wholesale Electric Company (MMWEC), New Hampshire Electric Cooperative and Connecticut Municipal Electric Energy Cooperative protested the ISO-NE proposal in a May 15 filing at FERC.

While the ISO’s proposal “is presumably intended to bring operational enhancements to bear, it is at best an incomplete solution to the region’s fuel security issues,” MMWEC, New Hampshire Electric Cooperative and Connecticut Municipal Electric Energy Cooperative said in their protest.

The ISO has acknowledged that its proposed solution was incomplete for lack of a market mitigation plan and a seasonal forward market, they noted. “Each of the missing elements is critical, and their omission should be fatal,” MMWEC and the others said.

Without a seasonal forward market, the ISO’s filing “fails to address the root cause of the region’s fuel-security problems: that generators must make fuel-procurement decisions long before they know whether they will clear in the day-ahead or real-time markets and be able to recoup those costs,” they went on to argue.

“And without a market mitigation plan, the proposal not only fails to solve the key problem; it potentially exposes consumers to the exercise of unmitigated market power in the newly created markets.”

MMWEC, the New Hampshire Electric Cooperative and Connecticut Municipal Electric Energy Cooperative said that in the absence of these essential components, “neither the Commission nor stakeholders should be forced to draw conclusions now about whether this one piece of a larger program is just or reasonable—particularly where these other components of the ISO’s comprehensive solution would also require this Commission’s approval in another proceeding.”

Therefore, they argued that FERC should reject the ISO’s compliance filing, without prejudice to the day-ahead ancillary services proposal being re-filed when the ISO has completed work on the totality of its response, at which time the Commission and stakeholders can conduct a comprehensive review of the total package of reforms.

Alternatively, MMWEC, the New Hampshire Electric Cooperative and Connecticut Municipal Electric Energy Cooperative said that if the Commission does not reject the filing, it should:

  • Condition any acceptance on setting dates certain for the submission of the promised mitigation plan and the seasonal forward market proposal; and
  • Accept the refinements proposed in the “alternative” filed by NEPOOL rather than the ISO proposal.

“But, to be clear, acceptance of the NEPOOL Alternative — while an improvement over the ISO’s proposal — will not solve New England’s fuel security problem. Like the ISO proposal, the NEPOOL Alternative does not include a seasonal forward market nor a mitigation plan,” they noted in their filing.

In a news release, MMWEC said that under ESI, New England electric customers would have paid the region’s generators up to an additional $257 million dollars a year, “based on the hope that doing so would encourage them to procure fuel supplies under tight operating conditions.”

MMWEC, the New Hampshire Electric Cooperative and the Connecticut Municipal Electric Energy Cooperative argued that the ESI proposal did not allow sufficient time for the generators to purchase fuel supplies.

They also pointed out that the proposal was voluntary, meaning that generators could choose not to participate in providing fuel security when the system needed them the most.

In a separate filing in the proceeding made on May 15, a group of New England consumer-owned systems and Energy New England (ENE) argued that ISO-NE’s ESI Proposal was unjust and unreasonable in three substantial respects, and incomplete in a fourth respect.

Among other things, they said that ISO-NE’s ESI proposal sought to impose on load-serving entities a year-round obligation to procure “Demand Quantities” of Day Ahead options for energy to supply Replacement Energy Reserves, “which produce no benefit during the months of March through November, when the New England gas pipeline system is not subject to constraint during periods of low temperatures and high heating demand.”

ISO-NE’s ESI proposal was incomplete in its lack of an appropriately designed market power mitigation strategy, the New England consumer-owned systems and ENE said.

“In substance, this case represents a replay of the ‘jump ball’ over ISO-NE’s 2015-2018 Winter Reliability Program,” they said.

“Here, as in the earlier case, ISO-NE has pursued a theoretical market design construct without regard to its cost or efficacy. Here, as in the earlier case, NEPOOL has proposed an alternative rate design that achieves the objectives outlined in the Commission’s July 2 Order without imposing irrational and unjustifiable cost burdens on consumers.”

As in the earlier case, the New England consumer-owned systems and ENE argued that the Commission should accept the NEPOOL Alternative, and should require a number of modifications to the ISO-NE ESI proposal.

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