Responding to a complaint about “serious flaws” in ISO-NE’s Pay-for-Performance (PFP) design, ISO-NE said it is open to capping the balancing ratio used to calculate PFP payments at 1.0 to prevent capacity resources from being required to provide more power than their capacity supply obligations (CSOs).

Multiple generation companies, associations and municipal utilities supported the New England Power Generators Association (NEPGA) complaint and the proposed solution. Consumer advocates and the New England states expressed support for the general concept that generators should not be required to provide more power than stipulated in their CSOs (EL25-106).

NEPGA’s complaint stems from an ISO-NE capacity shortfall event on June 24, in which New England experienced its highest peak load in over a decade. ISO-NE estimates that PFP payments associated with this event totaled over $114 million. (See Extreme Heat Triggers Capacity Deficiency in New England.)

The RTO’s PFP mechanism compensates resources for performing beyond their obligations during scarcity events, while charging these costs to underperforming resources with CSOs. The amount of power that capacity resources are required to provide during shortage events is determined by the balancing ratio, which equals the region’s capacity requirement divided by the total amount of available capacity.

During the June 24 event, the balancing ratio exceeded 1.0 for the first time in the region’s history, averaging 1.031 over the three-hour scarcity period. This required capacity resources to provide power in excess of their CSOs, costing capacity resources about $25.6 million.

In a Section 206 complaint submitted by NEPGA to FERC following the event, the association argued that ISO-NE should be required to cap the balancing ratio at 1.0 to prevent “improper charges” on capacity resources. (See NEPGA Seeks Relief for ‘Improper’ Pay-for-Performance Costs in ISO-NE.)

NEPGA also took issue with ISO-NE’s method for allocating stopped losses for underperforming resources. ISO-NE’s PFP rules include stop-loss provisions capping the total charges an underperforming resource can accrue each month. ISO-NE allocates the under-collection of charges caused by the stop-loss limit to all capacity resources that have not hit their limit.

NEPGA argued that these costs should not be socialized among capacity resources and that the under-collection instead should be deducted from the credits paid to performing resources.

Stakeholders including RENEW Northeast, the Electric Power Supply Association, LS Power, FirstLight Power and the Massachusetts Municipal Wholesale Electric Co. supported NEPGA’s filing in comments submitted to FERC prior to the Aug. 21 deadline.

“The proposed changes are not only reasonable but essential because they eliminate penalties on perfectly performing resources and preserve durable, risk-balanced price signals for future scarcity events,” wrote LS Power.

The New England States Committee on Electricity (NESCOE) and a coalition of consumer advocates from five of the six New England states offered general support for the concept of capping the balancing ratio.

“NESCOE does not take a position on whether or not the commission should grant or deny NEPGA’s complaint or whether or not the commission should order NEPGA’s requested relief,” the states wrote. “However, NESCOE does agree with NEPGA on the general principle that a capacity resource should not be held to a performance standard that exceeds its capacity supply obligations.”

The states also echoed NEPGA’s concern that penalizing perfectly performing capacity resources “will eventually either disincentivize resources from participating in the Forward Capacity Market or cause higher risk premiums, which in turn increases both reliability risks and prices.”

The consumer advocates took a similar stance, and encouraged FERC, ISO-NE and stakeholders “to develop a solution that (1) retains the existing insulation of load from direct financial costs of CSCs [capacity scarcity conditions], and (2) avoids the incorporation of unnecessary and potentially substantial risk premiums into future capacity supply offers due to the now material possibility that a capacity resource could be financially liable for failure to overperform during a CSC.”

They noted they generally are “wary of any rule or market design that could broadly disincentivize participation in the capacity market,” and that, “in a time of increasing demand forecasts and already increasing capacity product prices, the region cannot afford the financial or reliability ramifications of a short capacity market.”

ISO-NE did not endorse any changes to the PFP methodology but said it “would not oppose an order from the commission to cap the balancing ratio at one … so long as adequate time is provided for the ISO to evaluate and make other necessary changes to the Forward Capacity Market rules so that the capping does not create other problems.”

The RTO wrote that capping the balancing ratio likely would not “materially undermine” incentives for resources to perform during capacity scarcity events.

It acknowledged that many suppliers are not capable of providing power in excess of their CSOs and conceded NEPGA’s argument that “the risk of the balancing ratio going above one was discussed only as a theoretical possibility, and that suppliers very well may not have accounted for it as a result.”

However, ISO-NE opposed NEPGA’s complaint and proposal regarding the allocation of stopped losses.

It argued that all resources with CSOs “potentially benefit from the stop-loss mechanism because — in addition to limiting a supplier’s net financial losses — it enables a supplier to know its maximum loss exposure prior to participating in the Forward Capacity Auction, and to communicate its maximum loss exposure to third parties with which it may do business, such as external entities providing financing.”

While ISO-NE argued that NEPGA failed to demonstrate that the allocation of stopped losses is not just and reasonable, it acknowledged NEPGA’s proposal to adopt PJM’s cost allocation methodology may be a viable alternative. The RTO said that “implementing such a replacement rate is feasible under the 180-day compliance timeline.”

Vitol, which operates as a power marketer in New England, opposed NEPGA’s complaint in its entirety, arguing that NEPGA failed to demonstrate that the current rules are not just and reasonable.

“NEPGA cannot escape the fact that the PFP program FERC approved in 2014 was designed to impose a share-of-system obligation on capacity resources during scarcity events, and that it was expressly recognized that the balancing ratio could exceed 100%,” Vitol wrote. “The PFP design feature at issue in the complaint was debated, and it was approved by the commission.”

Vitol noted it does not hold capacity commitments in the region, and that it earned PFP credits by importing power to the region during the scarcity event. It argued that NEPGA’s proposed changes “would harm reliability in New England by diluting incentives for suppliers to deliver energy in scarcity circumstances when it is most needed.”