Statements from FERC in ISO New England Inc. to Comply with the Fair Rates Act of 2018, Part Two: Commissioner Richard Glick’s Statement

Statements from FERC in ISO New England Inc. to Comply with the Fair Rates Act of 2018, Part Two: Commissioner Richard Glick’s Statement

The Chairman and Commissioners of the Federal Energy Regulatory Commission (FERC) released statements regarding ISO New England Inc. filing revisions to the “ISO-NE Transmission, Markets and Services Tariff (Tariff) to implement an inventoried energy program in the Capacity Commitment Periods associated with the 14th and 15th Forward Capacity
Auctions (FCA 14 and FCA 15, respectively) to compensate resources for maintaining inventoried energy during the winter months of 2023-2024 and 2024-2025 (Inventoried Energy Program or program).” In May, FERC issued a letter to ISO-NE to inform them that the filing was deficient, and they needed additional information; they received a response in June.
Since FERC did not take action by August 5, the amended proposal from ISO-NE “became effective by operation of law.”

FERC did not act on the filing due to “a lack of quorum at this time.” As per section 205(g)(1)(B) of the FPA, the FERC Chairman and Commissioners provided written statements explaining their views of the filing.

This is Commissioner Richard Glick’s statement.

Glick said that he found the program to be unjust and unreasonable because “The program will cost New England consumers as much as $300 million without any evidence to suggest that it will actually improve the region’s fuel security or that any improvement is likely to be worth the cost. Indeed, the program goes so far as to hand out substantial payments to nuclear, coal, and hydropower generators with no indication that these payments will change their behavior in the slightest.” He said he found this to be a windfall instead of a reasonable rate.

Glick agreed that there is an issue with fuel security in New England, and that during “especially cold winter days, the region’s natural gas transportation capacity can become constrained, creating a risk that there may not be enough natural gas available to supply the natural gas-fired
power plants that would otherwise help power the grid. On these days, the region tends to substitute oil and natural gas delivered via liquefied natural gas (LNG) terminals for gas that would otherwise be shipped through the constrained pipelines.” However, since oil and LNG are not relied upon much during normal weather conditions, “there is a concern that resources may not always have enough of these fuels on hand to sustain the grid over a long period of time. Although the number of these cold winter days has historically been low—and the region has never actually run out of oil and natural gas—the consequences of not being able to generate enough electricity could be catastrophic, making the region’s fuel security an issue we must take seriously.”

Glick stressed that he believes FERC should be “taking fuel security seriously means that ISO New England, stakeholders, and the Commission itself must ensure that efforts to address this issue actually help the region procure the services needed to operate the grid reliably. It also means that we must not waste consumers’ money on poorly designed solutions that do little, if anything, to improve the region’s fuel security.” He believes that “wasting consumers’ money is exactly what the Inventoried Energy program does.”

He explained that the program “proposes to pay certain types of resources for maintaining ‘inventoried energy’—which is, essentially, onsite fuel that the resource can convert into electricity —during two winters: 2023-2024 and 2024-2025. A resource is eligible to participate in one of two ways: either by entering a forward contract, which requires the resource to have a certain amount of ‘inventoried energy’ onsite whenever the ISO declares a cold weather event, or through the spot market, which allows the resource to be paid for whatever ‘inventoried energy’ it happens to have onsite during a cold weather event.”

He explained the “fatal flaws” that he saw in the proposal. “Most importantly, ISO New England does not point to any evidence that there is a near-term operational problem that cannot be adequately addressed by its existing rules or any evidence that the Inventoried Energy program would address any such problem by making the region more fuel secure. Without such analysis, there is no foundation to evaluate whether the program will achieve its intended purpose or do so in a manner that is just and reasonable.”

“At least a third of the capacity eligible to receive payments through the Inventoried Energy program is from resources that will not change their behavior in response to these payments because they already maintain considerably more than three days’-worth of fuel onsite.” He explained that “at least $40 million dollars a year is likely to be spent on resources, such as coal and nuclear generators, that will not change their behavior in response to those payments. That is an utter waste of ratepayers’ money. Based on the record here, one cannot help but wonder whether burning that money might contribute as much to fuel security as wasting it on entities that we know will not do anything differently.”

Glick said “the record suggests that the Inventoried Energy program’s poor design will dissuade other types of resources from participating. For example, ISO New England explains that its proposed forward rate is based on the fair market value of a fuel contract between a natural gas-only generator and an LNG storage terminal. This suggests that the program is intended to incentivize resources to enter into backup LNG contracts.” However, ISO New England has described the “forward rate as representing the ‘break even’ payment associated with a backup LNG contract, meaning that, at that price, resources will be economically indifferent about whether to enter such a contract.” It is because of this that Glick thinks “there is little reason to think that the program will do anything to change the behavior of natural gas-only units, which, as noted, are the primary concern when it comes to fuel security in New England.”

ISO New England suggested that the program was “just and reasonable because it might forestall the retirement of otherwise uneconomic resources, which might then benefit the region’s fuel security… creating a program to funnel money to uneconomic resources in order to prevent their retirement would seem to undermine a key element of the balancing act that the Commission relied upon when it found the Capacity Auctions with Sponsored Policy Resources (CASPR) program just and reasonable.”

But even if we assume, for the sake of argument, that the Inventoried Energy program will make an incremental contribution to fuel security, ISO New England has not shown that this contribution is likely to be worth the program’s considerable price tag. As noted, the ISO estimates that the Inventoried Energy program will cost New England ratepayers between $200 and $300 million over just two years. But the record is insufficient to determine whether that is just and reasonable. For one thing, there is no evidence of how much incremental ‘inventoried energy’ the ISO might get in response to those payments.” He said that since they “did not perform any analysis of how much ‘inventoried energy’ it needs, we have no way of knowing whether the program will satisfy any need for ‘inventoried energy’ that New England may or may not have. And without that information, we simply cannot assess what benefit, if any, New England customers will receive from the program, and therefore whether it is just and reasonable.”

“The Inventoried Energy program does not possess even the basic principles of an effective market-based solution, which the Commission has repeatedly instructed ISO New England to make the foundation of its approach to fuel security.” Glick said that it it those principles that
“help to ensure that the approach is effective, both in delivering the product in question and in ensuring that customers get what they pay for.”

ISO New England “evaluate[d] neither the specific need for inventoried fuel nor the quantity demanded. As a result, there is no market competition for this product because every resource with the necessary attributes receives the same price. But without competition, the price-setting mechanism is untethered from market fundamentals and may produce an extremely inefficient outcome.” He said this is what will happen now; “SO New England established a fixed price, $82.49 per megawatt-hour, without making any attempt to evaluate how much ‘inventoried energy’ it should buy at the price or how much resources might supply at that price.”

“ISO New England’s decision to pursue such an ill-conceived approach is all-the-more disappointing because the ISO has better options than the Inventoried Energy program to address any short-term need that might exist.” He said there were other options that would allow the region’s need to be addressed at a better rate. ” In general, by taking away the downside
risk of having excess fuel at the end of the winter, the Winter Reliability Program provided a proven method for incentivizing resources to procure fuel while targeting payments at resources that might actually respond to those payments. A modified version of the Winter Reliability Program might have helped to address any short-term need while providing at least some evidentiary basis, in the form of real-world experience, for the Commission to evaluate whether the proposal might be effective and worth the cost—in other words, whether it is just and reasonable.”