FERC on Nov. 21 granted, in part, and denied, in part, Hudson Transmission Partner’s (HTP) August 2012 complaint against the New York ISO (NYISO) in which HTP alleged that NYISO improperly implemented its New York City buyer-side market mitigation exemption test with respect to HTP’s new 660 MW high voltage, direct current merchant transmission facility.
NYISO is to submit a compliance filing within 60 days of the order’s date, FERC added in its order.
According to FERC, the project is a unidirectional controllable transmission line running between Ridgefield, N.J., and New York City that entered service last June.
The project was the winner of a New York Power Authority (NYPA) request for proposals (RFP) process in 2006 and was in the NYISO interconnection Class Year of 2008. FERC also noted that HTP, a PowerBridge affiliate, applied for and received negotiated rates authority from FERC in 2011.
In its application in that proceeding, HTP said that it will recover all of the project’s costs, including fixed and operating costs, only from customers who voluntarily acquire transmission capacity on the project. Under the firm transmission capacity purchase agreement (capacity agreement) between HTP and NYPA, NYPA will buy 75% of the transmission capacity rights of the line for a term of 20 years for the purpose of importing energy and capacity from PJM Interconnection into NYISO’s NYC capacity zone.
FERC further noted that up to 15% of the remaining transmission capacity is to be available for purchase in bilateral contracts by anchor customers, and the balance – 10% to 25% – is to be allocated by an open season process. When it entered service, the line went under PJM control.
According to FERC, HTP said that it has funded, or agreed to fund, about $200m in upgrades on the NYISO and PJM systems to ensure that PJM capacity will be deliverable, on a firm basis, into New York City. HTP further noted that as part of its mitigation exemption determination, NYISO assumed that HTP would spend an additional $193m for upgrades to provide capacity to NYISO.
Referred to as “buyer-side mitigation,” a certain section of NYISO’s services tariff implements market power mitigation rules for the NYC zone of the installed capacity (ICAP) market for the purpose of inhibiting entry of uneconomic capacity into the NYC ICAP market that artificially depresses NYC ICAP market prices to uneconomic levels.
The mitigation rules provide a two-part exemption test where the resource is exempt if it meets either prong of the test, FERC added, noting that under the test’s “prong (a),” a resource will be exempt from offer floor mitigation if the average of the ICAP spot market auction prices for the two capability periods starting three years from the start of the project’s interconnection Class Year is projected to be higher than the net cost of new entry of the proxy peaking unit used to establish the demand curve that establishes the ICAP market price for that period.
Under the test’s “prong (b),” a resource will be exempt if the average of the ICAP spot market auction prices in the six capability periods starting with the capability period three years after the start of the project’s Class Year is projected to be higher than the reasonably anticipated net cost of new entry of the resource.
The mitigation exemption test is aligned with NYISO’s project cost allocation for new interconnection facilities, FERC added, noting that project cost allocation is a factor in the calculation of the unit net cost of new entry and in determining the expected capacity prices used in the mitigation determination.
Under its open access transmission tariff (OATT), NYISO estimates and allocates cost responsibility among NYISO transmission owners, load-serving entities and developers of generation and merchant transmission for new interconnection facilities.
Under the cost allocation process, NYISO examines the new facilities assigned to a given Class Year to determine what incremental upgrades are necessary to provide deliverability for the interconnection of new projects that want to participate in NYISO’s ICAP market.
In discussing the complaint, FERC said that HTP asserted that NYISO improperly applied the mitigation exemption test to the project, using methods and assumptions that are unjust, unreasonable and unduly discriminatory, and that are inconsistent with the requirements of the NYISO OATT and the services tariff.
Specifically, HTP asserted that NYISO violated its OATT and services tariff by evaluating the project as part of Class Year 2010 instead of Class Year 2008 and improperly used an arbitrary 50% “scaling factor” that is neither in the services tariff, nor applied to generators, to reduce HTP’s projected energy revenues.
Among other things, HTP further asserted that NYISO improperly used three-year forward prices from PJM’s base residual auctions (BRAs) in order to project future PJM capacity prices. It also asserted that NYISO improperly used the proxy cost of capital from the demand curve reset process and should have used HTP’s actual capital costs to calculate its unit net cost of new entry.
FERC added that HTP argued that the commission should direct NYISO to recalculate HTP’s unit net cost of new entry using information available as of what it asserts was the “going forward” date of December 2009 or January 2010; deducting the full amount of HTP’s projected energy revenues without applying the 50% scaling factor; and projecting PJM capacity prices either by applying an appropriate discount to the BRA clearing prices, or using prices in the incremental auctions that are available as of the going-forward date.
Furthermore, HTP asserted that FERC should direct NYISO to establish a tariff mechanism to compensate HTP for the reliability benefits that it will provide if not exempted from mitigation or, in the alternative, clarify that HTP may file a rate schedule under the Federal Power Act to receive compensation for the reliability benefits provided by the project.
FERC noted that NYISO responded that HTP has not met its burden of proof in showing that NYISO violated or improperly implemented its tariff or otherwise acted unjustly or unreasonably, or in an unduly discriminatory manner.
NYISO maintains that it correctly determined that the project would be subject to offer floor mitigation upon entry, and NYISO has made no arbitrary or unreasonable assumptions, or taken any steps that are unreasonable, or unduly discriminatory.
FERC also said that NYISO asserted that it properly examined the project under certain rules and it is fully settled that the project is subject to buyer-side mitigation rules.
NYISO contended that the buyer-side mitigation rules fully satisfy FERC’s transparency requirements and that the project was properly examined concurrently with Class Year 2010 examined facilities.
Furthermore, NYISO contended that it properly applied a scaling factor to determine HTP’s projected net energy revenues when establishing unit net cost of new entry and that NYISO’s methodology for calculating this factor is just and reasonable.
NYISO also asserted that it properly estimated the cost of capacity in PJM to be delivered over the project using costs based on prices in PJM’s BRA instead of PJM’s incremental auctions.
Finally, FERC added, NYISO responded that HTP’s unilateral request for compensation for reliability benefits is procedurally defective in that it is an attempt to circumvent NYISO’s shared governance, and provision of such benefits would contravene the buyer-side mitigation rules as well as NYISO’s market design.
NYISO said HTP has not established that its project will actually provide “substantial and easily quantifiable” reliability benefits to NYISO beyond those reflected in the capacity market price and that providing such non-market based compensation to a new entrant that is properly subject to an offer floor would violate FERC policy and precedent.
FERC said that with regard to Class Year, NYISO reasonably interpreted the services tariff and appropriately included the Class Years 2009 and 2010 in its mitigation exemption determination for the project. FERC also found that NYISO used the appropriate analysis date consistent with previous FERC orders.
FERC found that the services tariff identifies three separate categories of projects that will be examined together as a group, including “Category (III),” which is for projects from prior Class Years – those that have already completed the cost allocation process – but have yet to have a mitigation exemption determination made.
“We conclude that the HTP project falls under the Category (III) definition of examined facilities,” FERC said, adding that while the definition of that category does not include controllable lines, NYISO previously clarified, and FERC agreed, that the NYISO tariff’s references to generators are intended to include controllable lines. HTP was a Class Year 2008 project that not yet received a mitigation exemption determination, FERC said.
With regard to the analysis date matter, FERC noted that in a September 2012 order in a separate docket, it said that the mitigation exemption analysis must be “based on the most up-to-date data information available during the period when NYISO was evaluating the project,” and found “that the decision to move forward with a project is not generally tied to a single date, but is, instead, a series of decision points over an extended period of time.”
The use of a scaling factor to project HTP’s energy revenues is reasonable, but FERC granted the complaint to the extent that it requires NYISO to provide the specific scaling factor that it applied to HTP, to explain in detail how such factor was calculated and to support its methodology.
Noting that it rejects HTP’s claims that the use of a scaling factor in the calculation of net energy revenues of transmission lines but not for generators is discriminatory, FERC said that as New York City suppliers point out, such a scaling factor is unnecessary for new generator entrants because they are not attempting to arbitrage a price difference between two markets; instead, power is sold in only one location, so there is no price spread.
Also, FERC said that while it is reasonable for NYISO to project HTP’s energy revenues by accounting for imperfect arbitrage using a scaling factor, it agrees with HTP that NYISO’s approach is based on undisclosed assumptions and lacks transparency.
“Accordingly, we direct NYISO, within 60 days of the date of this order, to provide the commission with the specific scaling factor used, to explain in detail how it was calculated, and to support the methodology,” FERC added.
FERC also said that it finds that NYISO’s use of PJM’s BRA market clearing price was reasonable, most closely represents the cost of capacity in PJM relevant for determining whether HTP is economic, and is consistent with the objectives of the mitigation exemption test.
FERC noted that HTP favors using the price determined in PJM’s third incremental auction as the measure for PJM capacity cost to be combined with HTP’s transmission cost to evaluate whether HTP’s capacity is economic and should be exempt from a bid floor. HTP emphasizes that the third incremental auction, which is conducted a few months ahead of the PJM delivery year, more closely corresponds to the time frame of NYISO’s monthly spot market auction. However, FERC added, the price determined in the third – or any – incremental auction is not the capacity price received by most capacity suppliers in PJM in the delivery year.
Regarding HTP’s cost of capital, FERC said it finds that it is reasonable to use HTP’s actual cost of capital in the mitigation exemption determination.
Finally, FERC found that with respect to HTP’s proposal for additional compensation for reliability benefits, HTP has not established that its project will actually provide substantial and quantifiable benefits beyond those reflected in the capacity market price in the ICAP market.
Among other things, FERC noted that HTP claims that the import capability provided by its transmission facilities will be reflected in NYISO’s installed reserve margin (IRM) and minimum locational unforced capacity requirement (MLCR) calculations and that this fact alone warrants compensation if mitigation applies. Furthermore, HTP claims that compensation would not be required if an unforced capacity deliverability rights (UDR) holder that cannot use its UDRs to import capacity is not required to return the UDRs to NYISO.
“As NYISO answers, the determination of IRM and MLCR is based on system-wide facilities and does not translate into any specific benefit attributable to any particular facility,” FERC added. “We agree with NYISO that HTP has not established that the HTP project will actually provide substantial and quantifiable benefits beyond those reflected in the capacity market price in the ICAP market.”