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ISO-NE's sweeping proposal to adopt minimum offer price rule seen as contrary to public power business model


From the December 17, 2012 issue of Public Power Daily

Originally published December 17, 2012

By Robert Varela
Editorial Director
ISO New England Inc. has asked the Federal Energy Regulatory Commission to approve a minimum offer price rule for its capacity market that would apply to all new resources, including self-supply, imports, demand response, energy efficiency, plants receiving regulated revenues, and plants built for public policy reasons. Under the Dec. 7 proposal, the ISO would set trigger levels for capacity market offers by new resources; any offers below the triggers would be reviewed by the ISO’s market monitor and, unless justified, would be mitigated—meaning the offer would be raised so that the plant might not clear the annual capacity market auction. 

"The ISO-NE proposal is contrary to the public power business model as it sharply limits the right of municipal utilities to self-supply their capacity requirements and make their own resource choices," Massachusetts Municipal Wholesale Electric Co. CEO Ronald C. DeCurzio told Public Power Daily. "It is curious that only 27 percent of ISO-NE market participants supported this proposal, which brings into question the value of the year-long stakeholder review process that preceded the ISO filing."

"This filing is part of a continuing and disturbing trend in the Eastern RTOs to undermine the ability of public power systems to supply their own needs with their own generation resources," said APPA Senior Vice President of Policy Analysis and General Counsel Sue Kelly. "We all should be deeply concerned by this attack on our not-for-profit business model."

The ISO filed the proposal to comply with a FERC order requiring ISO-NE to adopt a minimum offer price rule. MMWEC and the New Hampshire Electric Cooperative have appealed that order to the U.S. Court of Appeals for the District of Columbia Circuit.

The trigger prices—which are different for different types of resources, e.g., combustion turbine, biomass, etc.—are designed to represent prices at the low end of the range of "competitive" offers for each resource type, the ISO said. A key assumption in setting the trigger price is that the project’s output is sold pursuant to an arm’s length long-term contract, which ensures that the trigger price is set at the low end of the range of competitive offers, the ISO said. The trigger prices will recalculated using updated data at least every three years.

The proposal appears to intrude on issues traditionally left to states. In a discussion of how to treat new resources with long lead times (such as coal or nuclear plants), the proposal says they would be treated like any other new resource. "In summary, if a project appears as if it was being built for other than economic reasons (e.g., price manipulation or public policy) when it was started," then the market monitor will consider using an estimate of the plant’s total costs to set an "appropriate" offer price for the project. 

In reviewing low capacity market offers, the market monitor will exclude any out-of-market revenue sources from the cash flows used to evaluate the requested offer price. The proposal defines out-of-market revenues as any revenues that "are: (a) not tradable throughout the New England Control Area or that are restricted to resources within a particular state or other geographic sub-region; or (b) not available to all resources of the same physical type within the New England Control Area, regardless of the resource owner." 

If a new resource is supported by a regulated rate, charge, or other regulated cost recovery mechanism, "then that rate will be replaced with the [market monitor’s] estimate of energy revenues." The market monitor also will review capital costs, discount rates, depreciation and tax treatment "to ensure that it is consistent with overall market conditions," the proposal said. "Any assumptions that are clearly inconsistent with prevailing market conditions will be adjusted."

The problem of what might be termed "phantom" power plants is addressed by the ISO’s proposal. A power plant that does not clear in the capacity market is not recognized as existing, so the ISO would seek to procure more new capacity than is actually required, "given the physical existence of the resource in question," the ISO said. To address this problem, the market monitor "will reduce the capital cost used to calculate the resource’s New Resource Offer Floor Price by the depreciation accumulated during the years in which the resource has been in operation."

The ISO asked FERC to permit the large majority of its proposed changes to become effective without suspension or hearing on Feb. 12, 2013.

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