Electricity Markets

FERC sets agreement for New England units for hearing

The Federal Energy Regulatory Commission on July 13 accepted and set for hearing a cost of service agreement for two Exelon Generation power plant units in Massachusetts -- Mystic 8 and 9. At the same time, it made the proceeding subject to the outcome of a case that the Commission recently launched related to fuel security in the ISO New England region.

The order met with dissents from Commissioners Robert Powelson and Richard Glick.

At issue is a cost of service agreement filed on May 16 by Constellation Mystic Power LLC. The agreement’s parties include Constellation Mystic Power, Exelon Generation Company, and ISO-NE (Docket No. ER18-1639].

The agreement provides cost-of-service compensation to Constellation Mystic Power for continued operation of the Mystic 8 and 9 natural gas-fired generating units. ISO-NE had asked that the Commission accept the agreement to enable ISO-NE to retain Mystic 8 and 9 to ensure fuel security in New England for the period of June 1, 2022 to May 31, 2024.

Exelon’s Mystic 8 and 9 units currently participate in ISO-NE’s forward capacity market.  On March 23, 2018, Exelon submitted retirement de-list bids for four units located in Boston, Massachusetts, including its Mystic 8 and 9 units, which provide approximately 1,400 MW of capacity.

Exelon indicated that unless it obtains cost-of-service compensation for Mystic 8 and 9, it would retire those units. Mystic 8 and 9 are fueled exclusively by the Everett Marine Terminal (known as the Distrigas Facility), a liquefied natural gas import terminal.  The Distrigas Facility is currently owned by Engie Gas & LNG Holdings LLC, but Exelon is in the process of purchasing the Distrigas Facility, to secure fuel for its Mystic units.

ISO-NE filing at FERC

In related developments, ISO-NE on May 1 submitted a filing in which it sought a waiver of certain provisions of its Transmission, Markets and Services Tariff to allow it to enter into a cost of service agreement with Constellation Mystic Power for the Mystic 8 and 9 units.  ISO-NE has argued that the units are needed to ensure fuel security in the region.

It said that retirement of Mystic 8 and 9 in 2022 “presents unacceptable risks that the system will have inadequate supplies of electricity to serve all customers during the coldest days of New England’s winters.”

In response to the filing, FERC on July 2 issued an order denying ISO-NE’s waiver request, saying that the requested waiver is “an inappropriate vehicle for allowing Mystic 8 and 9 to submit a cost-of-service agreement in response to the identified fuel security need.”

At the same time, the Commission said it was launching a proceeding under section 206 of the FPA (Docket No. EL18-182) “because we preliminarily find that the ISO-NE tariff may be unjust and unreasonable based on ISO-NE’s demonstration in this proceeding that its tariff fails to address specific regional fuel security concerns identified in the record.”  FERC directed ISO-NE to submit interim tariff changes providing for the filing of cost of service agreements to address fuel security concerns, followed by permanent tariff revisions “to better address regional fuel security concerns.”  In the alternative, FERC directed ISO-NE to “show cause” why such tariff revisions are unnecessary.

Order sets agreement for hearing

FERC’s July 13 order accepts the May 16 agreement for filing, but sets various matters for hearing and makes it subject to the outcome of the proceeding in Docket No. EL18-182.

In order to facilitate a decision by January 2019, FERC ordered an expedited hearing schedule and took the unusual step of directing an administrative law judge to certify the hearing record to the Commission without first writing an initial decision in the case.  FERC indicated that the expedited schedule was needed “due to the January 4, 2019 deadline for Exelon to determine whether it will unconditionally retire Mystic 8 and 9 and the commencement of FCA 13.”

While setting the case for hearing, FERC made findings and provided guidance on a number of contested issues, including Mystic’s recovery of capital expenditures needed to keep the units in service, and the recovery of Distrigas Terminal costs through cost of service electric rates.

Powelson, Glick dissent

In his dissent, Commissioner Powelson said that the cost of service agreement is “woefully under-supported and lacking in detail.” He said a more prudent approach would have been to reject the agreement and provide guidance where appropriate.  This result would allow ISO-NE and its stakeholders to collectively consider the best path forward following the July 2 order.

“Unfortunately, today’s order again puts the interests of one stakeholder above those of all others, and more troubling, paves the way for changes that threaten the long term viability of electricity markets in New England,” he wrote.

Powelson argued that FERC’s decision prejudges the outcome of the section 206 proceeding by accepting and suspending the agreement.  Despite language in the July 2 order highlighting a preference “for ‘markets’ or ‘market-based solutions,’ the action taken sends a different message. By setting the agreement for modified settlement and hearing procedures, the majority is expressing a preference for a short-term cost-of-service mechanism to address fuel security.”

He said that message may have been implied in the July 2 order, but after the more recent July 13 decision, “there is no question as to the majority’s direction.”

Powelson said he shares Commissioner Glick’s frustration that the Commission is “not even waiting for stakeholders’ responses” to the July 2 order “before moving forward with plans to provide short-term out-of-market compensation to Exelon.”

He argued that this is a problem for several reasons. For example, Powelson argued that the agreement itself is deficient. “Perhaps most notably, it is void of any cost allocation proposal,” he wrote.

Pointing to the roughly $400 million in payments projected to be made under the two-year cost of service agreement for the Mystic units, Powelson opined that “[l]onger-term alternatives, even if done through out-of-market payments, could be more cost effective than retaining Mystic.”

Finally, Powelson expressed concern that the Commission was allowing Exelon to engage in “an unprecedented exercise of market power, using lack of fuel security as its threat.”

For his part, Glick said that FERC’s July 13 order “continues the Commission’s needless rush to judgment on a series of significant questions regarding the potential retention of the Mystic units and the Distrigas LNG facility.”

He said that while this approach “may provide Exelon with certainty in the near-term, the fundamental economic and legal questions created by today’s order will ultimately create far greater uncertainty for every other market participant.  The eventual consequence of the Commission’s action will be New England ratepayers bearing significant additional costs without even a cursory examination by the Commission of other options for addressing potential fuel security concerns more efficiently.”

Glick said that the fact that reliability is among FERC’s most important responsibilities “does not transform every reliability concern into an emergency. This is particularly true here, where the reliability concern created by Mystic’s potential retirement will not manifest itself for at least four years, even under conservative assumptions.”

But rather than “giving this important issue the consideration that it deserves, the Commission is again jumping to conclusions without adequately evaluating the causes and contours of the fuel security issues in New England or identifying a comprehensive set of potential solutions.”

Glick also said that FERC’s order “sweeps aside fundamental legal questions raised by the Commission’s actions. In addressing what appears to be a question of first impression, the Commission concludes that it has authority to allow” Constellation Mystic Power to recover through its wholesale electric rate “the cost — perhaps the entire cost — of operating the Distrigas facility.”

Glick said that Constellation Mystic Power should be able to recover certain costs associated with purchasing fuel from Distrigas, such as the prudently incurred variable costs of fuel burned to produce electricity, because those costs are sufficiently related to the wholesale sale subject to the Commission’s jurisdiction. 

“However, it is not at all clear that the Commission has jurisdiction to permit” Constellation Mystic Power to recover all of the costs of operating Distrigas in its wholesale electric rate, even if they are arguably just and reasonable, he said.

Glick also agreed with Powelson “that what is being proposed amounts to an unprecedented exercise of market power by Exelon that will let a single market participant fundamentally alter the course of the wholesale electricity markets.”