Saying an ISO New England capacity policy will land on market participants like a “ton of bricks,” the New England Power Generators Assn. (NEPGA) on Jan. 8 filed a formal complaint at the Federal Energy Regulatory Commission against ISO-NE.
The association wants the commission to order ISO-NE to revise its Transmission, Markets & Services Tariff to prevent “massive artificial price suppression” in the upcoming Forward Capacity Auction (FCA) for the 2016/2017 Capacity Commitment Period (FCA 8) that will result if capacity from resources whose Non-Price Retirement Requests (NPRRs) have been rejected by ISO-NE for local reliability reasons is then counted against the Installed Capacity Requirement (ICR) and thus treated as if it were offered into FCA 8 on a price-taker basis.
“The effective entry of price-taker offers for these resources will profoundly distort prices in FCA 8, with this uneconomic ‘non-exit’ suppressing prices just as surely as uneconomic new entry and stifling the capacity market’s ability to send correct price signals to new and existing resources,” NEPGA said. “This result is all the more unjust and unreasonable, not to mention nonsensical, when there is every possibility that these resources will be retired before the Capacity Commitment Period, either because their owner exercises its right to retire notwithstanding rejection of its NPRRs or because ISO-NE later concludes they are not needed for reliability.”
NEPGA wants a commission decision by Jan. 27 in order to address this issue before the scheduled commencement of FCA 8 on Feb. 3. If the commission cannot issue an order on the merits by that date, NEPGA requested that it issue an order by Jan. 27 directing ISO-NE to delay the commencement of FCA 8, and to issue a further order on the merits of this complaint by March 17, with the FCA to then be held five business days after the issuance of such order.
“At bottom, this Complaint presents two issues,” said the association. “First, the Commission must not stand quietly by as over 1,500 MW of capacity from indisputably uneconomic resources lands on FCA 8 like a ton of bricks, simply because ISO-NE and others would prefer to correct an acknowledged flaw in the Forward Capacity Market (the ‘FCM’) rules beginning with the FCA for the 2018/2019 Capacity Commitment Period (‘FCA 9’). Second, if the Commission is not prepared to order that this flaw be corrected in time for the scheduled commencement of FCA 8, allowing for a modest delay in conducting FCA 8 is better than charging ahead when this flaw will undeniably produce unjust and unreasonable capacity prices that will not send the price signals needed to encourage new entry and to discourage premature exit. While others will attempt to muddy the waters by claiming that this Complaint poses questions too complex to be resolved in time for FCA 8, the questions are, in fact, exceedingly simple, and the answers should be equally simple and obvious.”
NEPGA, in a pending complaint, and ISO-NE in a pending “exigent circumstances” tariff filing, have sought expedited commission action in time for FCA 8 to modify serious flaws in administrative pricing provisions of the tariff that are triggered when an FCA commences short of supply and in certain situations involving new entry of “lumpy” resources, the association said.
Brayton Point coal plant a center of this dispute
These provisions might be invoked in FCA 8 due to an “abrupt change in the supply-demand balance” arising out of the submission of NPRRs for over 3,000 MW of capacity, the association noted. With the rejection on Dec. 20, 2013, of NPRRs for certain units at the coal-fired Brayton Point Power Station in Massachusetts, which have a combined capacity of approximately 1,525 MW, however, a further “abrupt change in the supply demand balance” for FCA 8 has occurred that underscores another equally serious flaw in the tariff that must be addressed in time for FCA 8, the association said. Namely, the provisions under which the capacity of resources, like the Brayton Point units, whose NPRRs have been rejected for local reliability reasons is counted towards the ICR, as if their owners offered that capacity into the FCA as a price-taker. “Such action directly contradicts FERC’s extensive efforts across the organized markets, including recently in ISO-NE, to protect against the uneconomic capacity that would artificially suppress the true market price for all other new and existing resources in the marketplace,” the association said.
The proceedings that ultimately led to the development of ISO-NE’s FCM arose out of concerns about reliability must-run (RMR) contracts and specifically about “the effect widespread use of such contracts could have on the competitive market.” The commission, therefore, ordered ISO-NE to work with stakeholders to develop “a market-type mechanism” that would address reliability needs without the same disruptive impact on the markets. Accordingly, the core purpose of the FCM, like that of other capacity markets, is to maintain system reliability by sending economic price signals needed to encourage entry of new resources, when needed, and to discourage the premature exit of otherwise economic existing resources.
A capacity market’s ability to fulfill that core purpose is threatened when prices are artificially suppressed by either the entry of uneconomic new resources or the “non-exit” of uneconomic existing resources, the association added. “To date, the former has been the more common problem, and the Commission has repeatedly and consistently acted to protect the capacity markets and market participants from the damage caused by such uneconomic entry, recognizing that such uneconomic capacity will ‘inhibit new entry, and thereby raise price and harm reliability, in the long-run,’” it added.
“Now, however, the capacity markets and market participants are being confronted with the mirror-image of the uneconomic entry problem in the form of uneconomic ‘non-exit,’ when existing resources that would otherwise have exited the market have been artificially kept in the market, either through out-of-market, RMR payments or other measures. In this case, the Tariff, as interpreted by ISO-NE, will require that the capacity of the Brayton Point Units be counted against the ICR, as if it was offered into FCA 8 on a price-taker basis,” the association said. “This is true even if, following the FCA, the owner of the Brayton Point Units exercises its right under the Tariff to retire them notwithstanding the rejection of its NPRRs or ISO-NE later determines that they are not actually needed for reliability and allows them to retire.”
To be clear, NEPGA said it recognizes that there may be limited circumstances in which price signals telling an existing resource to retire need to be overridden and the resource owner must be induced through out-of-market payments to continue operating to address a local reliability issue. But the association said that it is vital to protect the market and market participants from the effects of such market intervention.
The new owner of the coal-fired Brayton Point plant said in October 2013 that it had been unable to clear the plant’s capacity on the ISO-NE system, so the plant will have to shut in May 2017. The plant was sold a few months before that by Dominion Resources (NYSE: D) to Energy Capital Partners, a private equity firm. The new owner pointed to a number of reasons for the planned shutdown, including low electricity prices from a surplus of natural gas in the region and the need to invest “significant capital to meet environmental regulations and to operate and maintain an aging plant.”
Dominion had spent about $1.1bn to modernize the Brayton Point station, which also burns oil and natural gas. This is an approximately 1,544-MW facility consisting of three coal-fired units, one gas/oil-fired steam unit and four small diesel-fired units, all located in Somerset, Mass.