The New England Power Generators Association (NEPGA) is seeking immediate action from FERC to address what it calls “serious flaws” in the design of ISO-NE’s Pay-for-Performance (PFP) mechanism, which the group says caused capacity resources to face $51 million in “improper charges” incurred during a capacity shortfall event June 24. 

In a complaint filed with FERC in late June, NEPGA wrote that resources with capacity supply obligations (CSOs) were required to provide power above their obligations and that capacity resources that performed during the event were charged millions to make up for the under-collection of penalties on resources that failed to perform (EL25-106). 

The association argued that imposing expensive PFP charges on resources that fulfill their capacity supply obligations undermines performance incentives and could dissuade resources from participating in future capacity auctions. 

ISO-NE’s PFP mechanism is intended to incentivize resource performance during capacity shortfall events. Resources that provide more than their CSO receive PFP credits, while resources that receive less than their obligation face PFP charges. Resources that lack CSOs can also receive payments by providing power during shortfall events.  

The system is intended to insulate ratepayers from the direct effects of charges and credits, with the charges for under-performers directly correlating with the payments to over-performers. To prevent resources from facing excessive penalties due to an outage, the PFP mechanism includes stop-loss provisions capping the total cost of penalties a capacity resource can incur each month. 

ISO-NE’s PFP rules have undergone multiple changes in recent years, and on June 1, the RTO increased the PFP rate from $5,455/MWh to $9,337/MW-hour. 

NEPGA wrote in its complaint that the PFP balancing ratio — which sets the portion of each CSO that resources are required to meet in an event — surpassed 1.0 on June 24 due to higher-than-expected load that exceeded the amount of obligated capacity. (See Extreme Heat Triggers Capacity Deficiency in New England.) 

The association noted that the balancing ratio averaged 1.031 over the three-hour emergency period June 24. NEPGA said this rate would have cost a perfectly performing 500-MW resource nearly $500,000 over the three-hour period and estimated the elevated balancing ratio “caused $25 million in improper charges to capacity resources” during the event. 

“Even suppliers that had delivered 100% of their promised supply obligation now faced charges under ISO-NE’s rules and a large number of resources reached their monthly stop-limit,” NEPGA wrote.  

Quoting from the movie “This Is Spinal Tap,” NEPGA stressed that “generators cannot give 110%. It is as certain as amplifiers not being capable of ‘one louder’ even if ‘these go to 11.’”

NEPGA also wrote that the RTO’s stop-loss rules led to the significant under-collection of PFP payments, which was charged to capacity resources which had not hit the stop-loss limit.  

“Capacity resources that did not reach their monthly stop-loss limit were charged an additional $26 million to make up the negative net surplus of capacity performance payments,” NEPGA said. It noted the PFP balancing fund also included $9 million in excess revenue caused by reserve shortages, which partly offset the under-collection of charges, reducing the balancing fund’s deficit to $17 million. 

When accounting for the offsetting costs, “the ISO-NE tariff charged capacity resources — including fully performing capacity resources — to recover this $42 million to provide maximum $9,337/MWh bonuses to resources performing above their capacity supply obligation,” the association wrote.  

‘Careful Evaluation’

To address the issue, NEPGA proposed to “cap the balancing ratio at 1.0 and split the bonus pool that gets collected to pay over-performers, with no post-hoc secondary charges imposed on capacity supply obligation holders to make up for any under-collection.” 

NEPGA wrote that these changes would mirror the PFP rules at PJM and noted that FERC in 2015 required PJM to impose a cap on its balancing ratio. 

The proposed changes would “adjust bonus payments to performing resources while still sending very strong financial incentives to perform during emergencies,” NEPGA wrote, adding that the changes would “ensure that the capacity market sends incentives to take on a capacity supply obligation.”  

NEPGA requested that FERC “set an immediate refund effective date” on the date of the complaint, noting that similar issues could occur before the end of the summer.  

In a filed response to NEPGA’s complaint, ISO-NE opposed NEPGA’s request for fast-track processing of the complaint, arguing the association failed to justify the need for immediate action. The RTO wrote that the complaint raises “complex questions” about the design of the PFP mechanism that are not well suited for fast-track processing. 

The RTO did not substantively comment on NEPGA’s proposed remedies, but wrote it is “misleading” to say the issues could be easily and quickly resolved by the proposed changes. 

“PJM’s version of pay-for-performance differs from New England’s version in important ways,” ISO-NE wrote, noting that PJM uses separate PFP rates for payments and charges, while ISO-NE uses a single rate. 

“A single performance payment rate that provides the same marginal incentive to perform is central to [ISO-NE’s] two-settlement, pay-for-performance market design,” ISO-NE wrote. “Transitioning to separate payment rates requires careful evaluation to ensure that it does not produce gaming opportunities.” 

ISO-NE also asked FERC to extend the deadline for responses to the complaint from Aug. 14 to Aug. 21, which the commission granted Aug. 5. The RTO said the extension is necessary to “provide the commission with a clearer indication of the full range of issues that are implicated.”