The ISO New England forward capacity market is “fatally flawed” and a bill in Congress would be a “modest” approach that wouldn’t really fix the underlying problem, said Bill Bottiggi, the General Manager of Braintree Electric Light Department, in Feb. 2 testimony before U.S. House subcommittee.
The Subcommittee on Energy and Power at the House Energy and Commerce Committee held the Feb. 2 hearing on eight pending energy bills, including H.R. 2984, known as the Fair RATES Act. The bill is sponsored by Rep. Joe Kennedy III, D-Mass.
The Federal Power Act (FPA) sets forth specific processes to set rates for electricity, including opportunities for the public to protest a rate change filed with Federal Energy Regulatory Commission. New rates take effect if FERC approves them or if FERC fails to issue an order approving or denying the filed rates by the time statutorily required by the FPA. In such cases, the rates become effective by operation of law, even when these rates were not approved by a majority of commissioners. The FPA provides administrative redress for members of the public to protest commission rate decisions. However, if rates become effective by operation of law – for example, as a result of a deadlocked commission – the administrative processes are not available to the public because FERC did not technically issue an order for the public to protest, said a subcommittee staff memo on the legislation. In such cases, there is no legal or administrative avenue for ratepayers to remedy or protest the rate change.
This scenario has occurred on at least five occasions in the past fourteen years. To resolve this procedural discrepancy, H.R. 2984 amends the requirement under section 205 of the FPA that a public utility provide FERC and the public sixty days’ notice before making changes to its rate, charge, or classification structure. If a lack of action by FERC allows such a change to take effect, including if FERC allows the 60-day notice period to expire without taking action, FERC’s lack of action will be treated as though FERC had issued an order accepting the change for purposes of the right of any party affected by a FERC order to apply for a rehearing within 30 days. Therefore, the bill would provide opportunities for rehearing of orders affecting rates, even in instances where FERC is deadlocked.
Bottiggi noted in his Feb. 2 testimony that Braintree Electric is a non-profit, municipal utility owned by the residents of Braintree, Massachusetts. “My remarks will focus on the forward capacity market and H.R. 2984, the Fair RATES Act,” he wrote in his prepared testimony.
He noted that during a 1990s spate of deregulation, the belief was that forcing the vertically-integrated, investor-owned utilities to sell their generation assets would result in the private development of new, more efficient generation, thereby driving down the cost of electricity. “Public power (including Braintree Electric) was exempt from the requirement to divest, because our not-for-profit business model is designed to keep costs low for consumers,” he added. “As a result of deregulation, thousands of megawatts of generation were built in the early 2000’s to take advantage of the competitive market, but the existing generation did not retire as expected. With the surplus of generating capacity, some plants were not running frequently enough to provide the owners with the revenue they needed to cover their fixed costs. Several declared bankruptcy.
“Realizing the power plant owners needed additional revenue to stay in business, in 2007 ISO-New England created a new revenue stream: the forward capacity market. Unlike the market for energy, where power plants bid their marginal cost and the ISO calls on the cheapest resources to run, the market for electric capacity provides payment to generators in exchange for having a physical resource available to run. Like an option arrangement, it is the right to call on a resource to produce electricity when needed – in the case of New England’s capacity market, that time is three years in the future.”
Bottiggi: existing generators reap windfalls from capacity auctions
“Capacity prices are set based on the need for new generation to meet the expected peak demand for that year,” Bottiggi wrote. “In theory, the results of the auction should provide a market signal that new power plants are needed. In practice, incumbent generators receive a windfall when new generation clears in the market causing New England customers to pay literally billions in annual capacity charges. Meanwhile, few new power plants are being built.
“Braintree Electric, [the Northeast Public Power Association], and public power in New England generally, believe the capacity market is a fatally flawed construct. New generation generally requires long-term contracts to secure financing, as opposed to short-term, volatile capacity market prices and frequently changing rules. [American Public Power Association] studies have shown that 98 percent of new generation completed in recent years has been built with financing from direct ownership or long-term contracts while only 6 percent of new generation in 2013 was constructed within RTOs with mandatory capacity markets.
“Instead of building new resources, incumbent generators are simply pocketing capacity payments for their existing plants. And consumers are paying the price. New England-wide, the cost of capacity after FCA-9 (starting in 2018) will be over $4 billion. The impact on Braintree Electric’s rate payers would have been an increase of $11 million per year from 2010 until 2018 if Braintree Electric was not exempt from deregulation and still vertically integrated. In terms of the monthly electric bill Mr. Kennedy’s constituents might be looking at, that translates to a $21/month increase – just for the capacity portion of the bill.
“The modern operation of the forward capacity market has seen numerous ‘tweaks’ from its inception, as ISO-New England struggles to adjust the market rules to achieve the desired result. Among the most harmful changes to not-for-profit utilities was the removal of our right to ‘self-supply,’ i.e., use our own power plants to meet our own growing capacity needs – something we specifically bargained for when the capacity market was created. Because ISO-New England mandates our participation in these markets, we would be required to purchase capacity from another generator if we build a new resource that isn’t selected by the market. Of course, we would still have our own fixed costs to pay for that resource, on top of the capacity we would be forced to buy from the market.
“Self-supply allowed municipal utilities to control our capacity costs. Unfortunately, ISO-New England removed the right of municipal utilities to self-supply our own capacity, citing concerns about ‘buyer side market power,’ after Forward Capacity Auction (FCA) 7 in 2013.”
Bottiggi: power plants retirements, particularly Brayton Point, skewed the auction results
“In 2014, FCA-8 was the first auction where new generation was needed,” Bottiggi wrote. “The surplus of capacity had kept costs low in prior auctions, but many units retired due to the economics of the energy market. Two units, Vermont Yankee and Norwalk Harbor, closed that year. Just prior to the auction, a third plant – Brayton Point – abruptly withdrew from the market, despite that fact that it had just been purchased by a new owner. In all, 4300 MWs of generation retired and only 1500 MWs of new generation cleared the market. ISO-New England determined there was insufficient competition and administratively set capacity prices of $15/kw-month for the affected region and $7.025 for the rest of the power pool. For reference, these prices are up from approximately $3.00/kw-month for the prior seven years. The total cost to the region was $3 billion – triple the prior year’s cost.”
Brayton Point is a coal- and oil-fired plant in Massachusetts, Norwalk Harbor is an oil-fired plant in Connecticut, and Vermont Yankee is a nuclear plant in Vermont.
“FCA-8 demonstrated how dysfunctional this market really is,” Bottiggi added. “When ISO-New England filed a $3 billion auction result with the Federal Energy Regulatory Commission (FERC), it should have presented an opportunity to investigate whether the last-minute closure of Brayton Point was an act of market manipulation by owners who realized they could receive higher payments for their fleet of plants by constraining supply, or whether the rules in place were followed, but so fundamentally flawed as to allow a final rate that was unjust and unreasonable. Unfortunately, FERC was unable to step in because of a vacancy on the Commission – with two Commissioners voting to let the rate stand and two voting to review the results, there was a deadlock. Adding insult to injury, not only will New England consumers have to pay billions in capacity costs, the deadlock removed any mechanism to review or contest the results, as well. Under the Federal Power Act, the FERC’s inaction meant that the rate became effective by operation of law, and customers cannot challenge the rate without a FERC order to protest.
“H.R. 2984 is an important piece of legislation to allow redress when unjust and unreasonable rates go into effect under operation of law. It would simply make the same administrative review procedures currently available to rates approved by the Commission applicable to rates that take effect by operation of law. I believe this change is necessary, because even though vacancies are a reality of life – even now, FERC only has four sitting Commissioners – it likely did not factor into the statutory scheme established in the Federal Power Act, creating the gap that left New England $3 billion poorer and scratching our heads.
“This is a modest, technical fix to that gap in the statute. While many of us would have liked to see a complete and thorough investigation into FCA-8, and those of us in the public power sector would like to see the capacity market fundamentally reformed, we cannot turn back the clocks. This bill finds a narrower target to ensure this problem does not recur in New England or any other region of the country.”
FERC is generally supportive of this fix
Max Minzner, the General Counsel of the Federal Energy Regulatory Commission, said in Feb. 2 testimony about the ISO-NE case: “When filings have taken effect under Section 205 without a Commission order, parties have occasionally sought rehearing. The Commission has dismissed those rehearing requests on the grounds that rehearing was not available because the Commission did not issue an order. The Commission followed this approach with respect to the rehearing requests in the ISO-NE case. That matter is currently pending in the United States Court of Appeals for the District of Columbia Circuit. In that litigation, FERC has taken the position that, consistent with relevant precedent, the absence of a Commission order precludes both rehearing and appellate review of the tariff change.
“In my view, modifying Section 205 of the FPA to permit a party to seek rehearing and subsequent appellate review of any rate change filed pursuant to that provision that takes effect without Commission action would change this outcome for future cases. While I believe that rehearing and appellate review are not currently available where a filing submitted pursuant to section 205 of the FPA takes effect by operation of law, H.R. 2984 would treat Commission inaction in that situation as the equivalent of an order for purposes of Section 313 of the FPA. Section 313 provides the process for rehearing and appellate review of Commission orders. As a result, the proposed legislation would permit any party aggrieved by the filing to seek rehearing. After the Commission acts on a petition for rehearing, that aggrieved party could seek review in the Court of Appeals, if necessary.
“The proposal has significant benefits. Appellate review is an important procedural avenue for those who do not prevail before an administrative agency. It would also correct an unusual outcome in a specific context that may arise when the Commission has four voting members. A party who manages to convince only one Commissioner, and loses on a 3-1 vote, may seek rehearing and appellate review. However, a party that makes a more persuasive case and manages to convince a second Commissioner will lose 2-2. Those parties are currently barred from either requesting rehearing at the Commission or seeking redress at a Court of Appeals. The proposal would avoid that outcome.
“My chief concern is that it may present difficulties in practice for the Court of Appeals. When a federal appellate court is reviewing the action of an administrative agency, it typically reviews the order issued by the agency and evaluates the record established by the agency in support of its decision. Review in the Court of Appeals may be challenging under this legislation. Without an initial FERC order, the appellate court will not be able to rely on the Commission’s reasoning in the first instance. However, two aspects of the process of appellate review should alleviate this difficulty. First, parties will still be required to petition for rehearing prior to seeking review from the Court of Appeals. In most cases, the Commission issues a separate order on rehearing that provides an additional opportunity to justify or explain its decision. If there is an order on rehearing, this order will be available for the appellate court to review. Second, if the Court of Appeals believes that it lacks the appropriate record to review the decision of Commission, it can remand the case to FERC for further proceedings.”