JOKE: FERC Administratively Doubles ISO-NE Capacity Prices ($1.4 Billion Hit); Moeller Claims "Real" Reliability Benefits from Capacity Payments Even as 75% of Gas-Fired Generation Offline

FERC has administratively doubled capacity prices to be paid by retail suppliers, and their customers, in ISO New England, with Commissioner Philip Moeller brazenly trying to sell customers on the "reliability benefits" of the rate shock -- at a time when 75% of ISO-NE's gas-fired generation was recently offline and the grid was forced to rely on utility-owned generation -- not merchant capacity -- to keep the lights on.

In brief, due to what it considered flaws in the current ISO-NE capacity market rules, FERC established a new administrative price for the upcoming 2017/18 Forward Capacity Auction -- $7.025/kW-month.

This is more than double the current administrative price of $3.465/kW-month, but lower than the $11.00/kW-month sought by "competitive" generators.

Due to an expected shortage of existing capacity resources for the upcoming 2017/18 auction, the administrative price of $7.025/kW-month is expected to be invoked under rules which trigger the price due to a lack of competition.

In a concurring statement relating to a denial of the generators' complaint regarding administrative pricing, Moeller tried to convince customers that FERC was serving them chicken salad.

"[W]hile consumers of any product should be concerned with the rise in prices of any goods or services, there are situations when a legitimate price increase is warranted to ensure the viability of a product manufacturer or a service provider. Here, we seek to ensure that utilities who generate electricity will receive an adequate price for the service they provide and this, in turn, will help to ensure the long-term viability of our competitive electric markets," Moeller said.

"Even though today’s price increase may appear significant in relative terms, the reliability benefits funded by this rate increase are real, and the relative cost to ratepayers should be small when viewed as the price paid on a per kilowatt-hour basis. Moreover, when compared to some of the recently announced state initiatives to promote new energy resources, the price increase being approved today should impact ratepayers much less, as the cost will be much smaller on a per kilowatt-hour basis," Moeller said.

The recent experience of ISO-NE has shown that customers get no reliability benefits from their forward payments for capacity, as indicated by 75% of gas-fired generation being offline during last week's cold snap. While the ISO has proposed strengthening performance requirements, it remains to be seen what, if any, requirements FERC adopts, while the doubled administrative pricing now approved by FERC, under the current tariff, can be reaped by non-responding resources, so long as their non-performance doesn't occur in the still-narrow definition of "shortage."

Moreover, the administrative price of $7.025/kW-month is the definition of excessive, or exceeding what most capacity suppliers are willing to accept.

As explained by Northeast Utilities and United Illuminating, "Another reason the Commission should reject the $7.025/kW-month administrative price is that prior FCA results show that existing capacity suppliers have been willing to stay in the FCM when FCAs cleared at the floor of $3.15/kW-month. This was demonstrated recently by the results of FCA-7 that shows capacity suppliers in the Rest of Pool Capacity Zone still offering 3,048 MW when the FCA closed at the $3.15/kW-month floor. If capacity resources have been willing to stay in the FCM at the $3.15/kW-month floor, there is no reason to believe that the current administrative price of $3.465/kW-month would be too low to reflect a competitive market outcome. In sum, the $7.025/kW-month is excessive in comparison to the capacity prices existing capacity resources have been willing to accept."

Moreover, NU and UI noted that significant capacity market changes, including a sloped demand curve noted further below, which are forthcoming, "make it unlikely that existing suppliers of capacity (the parties affected by the administrative pricing provisions) will make long-term decisions based on the administrative pricing set for a single year."

"Rather, changing the administrative pricing for FCA-8 as proposed by ISO-NE could result in a transfer of about $1.4 billion from electric consumers in New England to capacity suppliers with very little certainty of a corresponding reliability benefit," UI and NU said.

This $1.4 billion could result in an incremental retail cost of electricity of over 1.0 cent/kWh across New England, NU and UI said.

FERC also ordered ISO-NE to submit its proposed downward sloping demand curve for the capacity market by April 1, 2014, to allow sufficient time for implementation prior to the 2018/19 delivery year.