The Federal Energy Regulatory Commission (FERC) on July 2 denied ISO-New England’s (ISO-NE’s) request for a tariff waiver to keep two gas-fired units—a total capacity of 1,700 MW—at Exelon’s Mystic Generating Plant in Boston, Massachusetts, running to address “fuel security risks.” The commission instead gave the grid operator a year to submit permanent tariff revisions that will improve its market design and better address regional fuel security concerns.
In a petition for waiver of multiple provisions of its tariff filed with FERC on May 1, ISO-NE argued that the loss of the units, part of Exelon’s 2,000-MW Mystic plant, presents “unacceptable fuel security risks,” that could deplete the ISO’s 10-minute operating reserves. Loss of the units could also instigate load shedding (for between 1 to 8 hours) during New England winters of 2022–2023 and 2023–2024, it said.
Shuttering the units would also mean that the Everett Marine Terminal (known as Distrigas), which Exelon is in the process of acquiring from its current owner ENGIE North America, would lose its biggest customer, “substantially diminishing its financial viability” and putting the regional reserve depletion and load shedding at further risk. That’s problematic for New England’s generation fleet, which relies primarily on fuels imported from elsewhere in the U.S. or abroad, especially in the winter, when fuel for nearly half the region’s generating capacity may become inaccessible due to priority demand for natural gas from the heating sector, the ISO said.
Exelon in March said it planned to retire the four-unit gas-fired plant when its capacity obligations expire in May 2022 unless it received a two-year reliability must-run (RMR) contract to recover full cost of service. The company later estimated it would need an annual fixed revenue requirement of about $219 million for capacity commitment period 2022/2023 and nearly $187 million for 2023/2024.
Under its current tariff, ISO-NE may retain retiring resources to resolve local transmission security issues. The tariff waiver, which ISO-NE said it requested “only as a last resort,” is unprecedented because it effectively seeks to retain resources for reliability risks related to region-wide fuel security. It sought to exempt Mystic 8 and 9 from the tariff’s local reliability review requirement for two forward capacity auctions. The waiver would have also allowed ISO-NE to enter into a cost-of-service agreement with Exelon to retain Mystic 8 and 9 for a two-year term (2022–2024).
But on July 2, FERC denied ISO-NE’s waiver request, saying it was an “inappropriate vehicle” for Mystic 8 and 9 to submit a cost-of-service agreement in response to an identified fuel security need.
“A typical waiver seeks to suspend a tariff provision. By contrast, ISO-NE’s request would not only suspend tariff provisions but also alter the existing conditions upon which a market participant could enter into a cost-of-service agreement (for a transmission constraint that impacts reliability) and allow for an entirely new basis (for fuel security concerns that impact reliability) to enter into such an agreement,” the order says.
FERC instead preliminarily found that ISO-NE’s tariff “may be unjust and unreasonable” based on the grid operator’s “demonstration” in the proceeding that the tariff fails to address specific regional fuel security concerns that could result in reliability violations by 2022. To tackle those concerns, FERC instituted a proceeding under Section 206 of the Federal Power Act (Docket No. EL18-182-000) and directed ISO-NE to submit interim tariff revisions within 60 days of the order or explain why the tariff was just and reasonable. Those revisions should include a short-term, cost-of-service agreement to address fuel security concerns, it said. It also directed ISO-NE to submit by July 1, 2019, permanent tariff revisions reflecting improvements to its market design to better address fuel security concerns.
FERC also extended Exelon’s deadline to submit a retirement decision for Mystic Units 8 and 9 from July 6, 2018, to January 4, 2019, which is about four weeks before ISO-NE’s Forward Capacity Auction 13.
A Case with Wide Implications
The case garnered much interest from competitive market participants and observers. As some experts noted, it could substantially impact the future of the restructured administrative market model, which has been besieged by “extra-market” interventions.
On May 28, most stakeholders filing comments with FERC opposed the request. Some questioned the legality of using FERC’s waiver process in the “expansive way” ISO-NE proposed. Others argued the request was “premature and over-broad.” Some commenters pointed out that the ISO-NE tariff does not address fuel security, much less the pricing treatment of resources retained for fuel security, but that changes were underway.
NRG Energy, for example, noted that ISO-NE stakeholders had begun discussions of a market-based solution that could be implemented as early as 2020. If a market-based solution was inadequate, Section 202(c) of the Federal Power Act (FPA) allows the Department of Energy (DOE) to issue an emergency order to ensure reliability, and it would require consumers to pay the cost-of-service for the Mystic facilities only for the duration of the emergency.
Section 202(c) of the FPA, which directs grid operators to purchase electricity or electric generation capacity from at-risk facilities has made headlines recently. A draft memo leaked at the end of May suggests that the DOE is mulling a two-year directive under the clauseto stall premature retirements of coal and nuclear plants in competitive markets. In March, FirstEnergy’s competitive arm also urged the DOEto issue an emergency order under the clause to secure baseload resources in PJM Interconnection for long-term reliability.
‘Injected into the National Debate’
On Monday, FERC’s commissioners, too, were divided about certain aspects of the action. Commissioners Cheryl LaFleur and Neil Chatterjee wrote concurring opinions, while Commissioners Robert Powelson and Richard Glick dissented in part.
LaFleur said that while she agreed with the decision to reject the waiver request, the record demonstrates how critical the Mystic units are to ensuring regional reliability and fuel security. “I recognize that today’s order will be injected into the national debate regarding the asserted need for subsidization of certain ‘fuel secure’ resources to ensure that our nation’s electric grid remains resilient,” she wrote.
However, she stressed, rather than lending credence to a “generic or national resilience need, or an approach to address that need,” the order “rightly responds to documented and specific regional challenges in New England, including its dependence on a unique generation facility that can be served only by imported [liquefied natural gas].” LaFleur added that she believes “market-based solutions” are the best means to ensuring reliability in the region.
Powelson, who is set to leave the commission in August, said he supported the decision to reject the waiver, which “if granted, would have amounted to an end-run around the ISO-New England stakeholder process.” But Powelson disagreed with the commissions directive for an interim short-term, cost-of-service agreement to be filed within 60 days of the order.
“While I agree that states have certainly interfered with market outcomes, by no means is this indicative of a market failure, nor does it justify a logical leap to the conclusion that out-of-market support to retain certain existing resources may be necessary.” Reliability concerns are forecast more than five years into the future, which is “more than enough time for stakeholders in the region to address the problem through the standard processes,” he said.
Glick agreed with Powelson, dissenting in part because the order “is a rush to judgement,” he said. “Instead of rushing to install new tariff provisions years before the fuel security concern mayarise, the Commission, ISO-NE, and stakeholders should engage in a thorough process to evaluate potential fuel security problems and identify durable solutions rather than another series of band-aids.”
Like LaFleur, Glick recognized that the order would likely have far-reaching implications. “Ultimately, I suspect that the most likely outcome of today’s order will be a parade of uneconomic generators seeking cost-of-service rate treatment under the guise of fuel security. In addition to imposing tremendous costs on ratepayers, by framing the fuel security issue as a series of one-off determinations regarding the need to keep particular resources, this approach will short circuit more serious efforts to fundamentally reform the ISO-NE market to address the drivers of whatever fuel security problem may exist.”
He went a step further, however, criticizing FERC for overstepping its bounds. “I am also troubled by the fact that the Commission is seizing control of the fuel security debate without a clear understanding of where that debate can or should go. Fuel security is a multi-faceted issue, only certain aspects of which fall under the Commission’s jurisdiction.”
—Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)