FERC ruled Friday that ISO-NE’s proposed Energy Security Improvements (ESI) market design is “unjust and unreasonable” because it would add substantial costs “without meaningfully improving fuel security” (ER20-1567).

ESI would have allowed the RTO to procure energy call options for three new day-ahead ancillary service products to improve the region’s energy security, particularly in winter when natural gas shortages can leave generators without fuel. Option awards would have been co-optimized with all energy supply offers and demand bids in the day-ahead market.

FERC found that the RTO’s proposed day-ahead ESI products “do not provide enough time for resources to take the steps necessary to perform during stressed conditions if they have not already taken them” as arranged fuel, for example. The proposed market design would have allowed resources that have not made advance arrangements to not participate because of its voluntary nature, undermining its ability to address fuel security. The commission noted that the impact assessment produced for the RTO by Analysis Group said ESI “would not materially reduce reserve shortages or the potential for loss of load, but nevertheless, forecasts increased costs of $20 million to $257 million per year.”

FERC also rejected an alternative proposed by NEPOOL that would have resulted in lower costs to ratepayers than the RTO’s proposal, saying it contains the same deficiencies.

FERC said that although it “does not generally require the mathematical specificity of a cost-benefit analysis to render a proposal just and reasonable … the commission must protect consumers from excessive rates and charges. In light of our finding above that ISO-NE fails to demonstrate that ESI will materially improve fuel security, we find that ESI does not strike an appropriate balance between addressing fuel security in New England while protecting consumers from the significant cost of those fuel security benefits.”

The commission said the RTO’s proposal also does not adequately address the misaligned incentives problem: fuel-secure resources may not be sufficiently motivated to make additional investments in energy supply arrangements. ISO-NE currently relies on resources that might not be available during stressed conditions because it did not procure the necessary fuel or resources with energy storage capabilities and did not take the steps needed to produce energy during stressed conditions.

“We find that, while the procurement of day-ahead reserves or call options allows ISO-NE to procure additional resource capability one day prior to real time, the record in this proceeding demonstrates that one day is not a sufficient time frame for resources to take the steps necessary to perform during stressed conditions,” the commission wrote.

The RTO pointed to the results of the impact assessment to claim that ESI would create strong financial incentives for resources “to maintain more secure energy supplies without an associated forward market.” According to FERC, ISO-NE failed to demonstrate how such incentives would be meaningful to resources that are unable to adjust energy supply arrangements in the day-ahead time frame.

NEPOOL Proposal

The RTO’s proposal had failed to win NEPOOL stakeholders’ endorsement, garnering only 39.6% support at a Participants Committee vote in April. Although Generators, Suppliers and Alternative Resources generally approved the plan, the other sectors were unanimous in opposition.

The committee endorsed a proposal by the New England States Committee on Electricity by a 61.7% sector-weighted vote, with unanimous support from the Transmission, Publicly Owned Entity and End User sectors and unanimous opposition from Generators. (See ISO-NE Sending 2 Energy Security Plans to FERC.)

But FERC said the NEPOOL’s alternative “fails to sufficiently align the timing of reserve procurement with that of fuel procurement and maintains the voluntary nature. … Furthermore, the impact assessment demonstrates that the NEPOOL alternative would not materially reduce reserve shortages or the potential for loss of load.”

The result of more than a year of stakeholder meetings, the ESI proposal was prompted by FERC’s July 2018 finding that ISO-NE’s Tariff is not just and reasonable because the RTO lacks a way to address fuel security concerns that it said could result in reliability violations as soon as 2022. The Tariff currently allows cost-of-service agreements only to respond to local transmission security issues. (See FERC Denies ISO-NE Mystic Waiver, Orders Tariff Changes.)

But FERC said Friday it made no finding on whether the RTO faces fuel security or energy security problem.

“We recognize that ISO-NE has concerns about its current and future ability to reliably serve load given its growing reliance on ‘just-in-time’ resources such as pipeline-fed natural gas and renewable generation, which could have efficiency and reliability consequences,” the commission wrote. “If ISO-NE decides to pursue a solution to address these concerns, we encourage it to explore a market-based reserve product that provides resources sufficient lead time and ability to acquire fuel or take other steps necessary to be able to deliver energy when needed.”

FERC added that it expected a market design would coordinate procurement of forward reserves and incentivize resources to offer into the forward, day-ahead and real-time energy and reserves markets based on their actual costs. It should also prevent the exercise of market power, including through potential mitigation measures and include financial obligations or incentives sufficient to ensure resources can deliver energy or reserves in real time.

“We are not, however, directing ISO-NE to pursue any particular approach,” the commission wrote. “We further note that nothing in this order prohibits ISO-NE from proposing a day-ahead reserves market independent of any proposal to address the concerns at issue here.”

The ruling also rejected ISO-NE’s proposal to sunset the interim fuel security retention mechanism and the inventories energy program one year earlier than currently set in the Tariff. 

“We’re reviewing the decision and will discuss next steps with stakeholders,” ISO-NE spokesman Matt Kakley said. “We remain committed to finding market-based solutions to solving the region’s energy security challenges.”