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Lesson for Texas: ISO-NE Capacity Market Fails; FERC (Again) Tells Retail Suppliers to Pound Sand; Allocates New, Unhedgeable Backstop Costs to Real-Time Load
Showing once again its utter indifference to realities of the retail electric market, FERC has assigned unhedgeable, out-of-market costs to load serving entities, such as retail suppliers, deeming that retail suppliers "benefit" from such costs.
This time, it's the costs of ISO New England's winter reliability program -- an out-of-market intervention necessary due to the failure of the capacity market to assure reliability -- which has, over objections of ISO New England as well as retail suppliers, been assigned to real-time load (meaning load serving entities), rather than regional network load (transmission owners).
See prior story, "Reality Check: ISO With Capacity Market Forced to Rely on 'Out of Market' Solutions for Reliability" (click here) for background on need for ISO-NE winter reliability program, and failure of the capacity market to assure reliability. In short, the 2013-2014 winter reliability program pays for additional demand response and provides out-of-market payments to ensure adequate fuel inventory. FERC generally accepted parameters of ISO-NE's most recent proposal for the out-of-market program, with one glaring change -- assigning costs to real-time load rather than regional network load. If the ISO's proposed selection of bids is accepted, the cost of the program would be about $80 million.
Texas retail electric providers should especially take note here. As noted above, the ISO-NE winter reliability program is an out-of-market solution to assure reliability during winter because the ISO's forward capacity market has failed to do so. Certain Texas REPs are supporting a forward capacity market under the argument that the capacity market is compatible with retail choice; however, as can be seen with ISO-NE, when these capacity markets fail to assure reliability (which every capacity market has failed to do, which can be seen by the need for out-of market solutions like the ISO's winter reliability program or the increased reliance on reliability must-run agreements in PJM, NYISO and MISO), retail suppliers are left "holding the bag" to essentially pay twice for reliability -- first for an ineffective capacity market, and second for an out-of-market solution to backstop the capacity market. But unlike with the forward capacity market, there is no forward procurement for these backstop reliability solutions, exposing retail suppliers to new and unhedgeable costs (and worse, in states with default service, potentially putting retail suppliers on an uneven playing field with default service suppliers).
Turning back to assignment of the ISO-NE winter reliability program to real-time load, FERC justified this action by stating, "As discussed below, ISO-NE proposed the Winter Reliability Program to address generation-related reliability concerns, not transmission-related concerns, through an interim program designed to ensure sufficient energy supply to meet real-time load during the coming winter. Because real-time load is the primary beneficiary, and the primary cost-driver, of the Winter Reliability Program, we find that costs of the Program should be allocated to Real-Time Load Obligation."
Such reasoning that load "benefits" from the privilege of paying twice for reliability is an absolute joke. Load already pays for an installed reserve margin and forward capacity obligation. Obviously, load is not benefiting from the mandated reserve margin if it also must now pay a supplemental out-of-market reliability charge. But we do not see FERC rushing to re-assign costs of the forward capacity market in recognition of this.
The true beneficiaries of the winter reliability program are capacity owners, who can now extract more money from load for, what should be, if an installed reserve margin has (as claimed) any value, zero incremental benefit. Of course, this only shows that meeting an installed reserve margin provides no assurance of "reliability" since an out-of-market supplement is needed.
But in addition to a new revenue source, the winter reliability program also saves face for capacity owners, who therefore are the true beneficiaries. Had ISO-NE foregone the winter reliability program, and the ISO been subject to firm load shed this winter as a result, the entire notion of the mandatory capacity market, and possibly competitive generation ownership itself (at least for new resources), would have collapsed under the capacity market's failure, thereby depriving capacity owners of lucrative revenue streams in the future. Therefore, if costs are truly assigned to beneficiaries, it should be capacity owners which pay for the ISO-NE reliability program.
As to arguments that the out-of-market program assigns unhedgeable costs to retail suppliers, FERC said, "As the Commission previously explained in the Winter 2005-2006 proceeding, LSEs 'voluntarily assume Real-Time Load Obligation when entering into bilateral contracts with end-use customers[;]' those 'contracts contain inherent risk associated with unforeseeable future costs, and we would expect that risk to be captured in bilateral contracts between LSEs and end-use customers.'"
Docket ER13-1851
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September 17, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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