United States: FERC Institutes Two Complaint Proceedings Against ISO-NE

On December 28, 2015, the Federal Energy Regulatory Commission ("FERC") instituted two separate Federal Power Act Section 206 proceedings based on findings that ISO-NE Inc.'s ("ISO-NE") Transmission Markets and Services Tariff ("Tariff") is unjust, unreasonable, unduly discriminatory or preferential. One Section 206 proceeding (FERC Dockets Nos. EL16-15-000 and ER14-1639-000) seeks to require ISO-NE to submit Tariff revisions by March 31, 2016 that implement zonal sloped demand curves in its Forward Capacity Market ("FCM") rules ("FCM Rules Proceeding"). The other Section 206 (FERC Docket No. EL16-19-000) proceeding seeks to develop just and reasonable formula rate protocols to be included in the ISO-NE Tariff and to examine the justness and reasonableness of the ISO-NE's regional network service ("RNS") rates and local network service ("LNS") rates ("Formula Rates Proceeding").

FCM Rules Proceeding

On January 24, 2014, FERC directed ISO-NE to submit a sloped demand curve for use in the FCM by April 1, 2014 so that it could be implemented prior to the ninth Forward Capacity Auction ("FCA 9"). FERC's order was premised on a finding that a sloped demand curve would eliminate the need for administrative pricing rules that result in different prices for new and existing capacity, during periods of insufficient competition and inadequate supply. In April of 2014, ISO-NE stated that time constraints prevented it from developing sloped demand curves for its constrained zones in time for FCA 9, but committed to "submit these zonal demand curve changes by January 2, 2015, to allow sufficient time for review, approval and implementation for [the tenth Forward Capacity Auction]." Since ISO-NE's April 2014 filing, ISO-NE has submitted three subsequent filings in which it extended the deadline by which it would file zonal sloped demand curves.

In its order instituting the FCM Rules Proceeding, FERC stated that ISO-NE's "continued delay creates uncertainty for market participants and the continued use of vertical demand curves in constrained zones results in less efficient markets and affects confidence in market outcomes. Accordingly, the general challenges cited by ISO-NE do not justify further delay." Accordingly, FERC directed ISO-NE to submit conforming Tariff revisions by March 31, 2016 to be implemented in the eleventh Forward Capacity Auction.

Formula Rates Proceeding

In its order instituting the Formula Rates Proceeding, FERC explained that under the ISO-NE Tariff, the ISO-NE transmission owners recover their transmission revenue requirements through a combination of local and regional rates. The RNS rate is calculated annually using a formula rate for certain pooled transmission facilities in New England, while the LNS rate is calculated either on a historical, current, or projected basis determined by each utility. The Tariff also requires ISO-NE transmission owners to collectively submit an annual informational filing that includes revenue requirements that go into the RNS formula rate. Similarly, some of the ISO-NE transmission owners are required under their respective tariffs to submit an annual informational filing for LNS rates.

Based on the current ISO-NE Tariff, FERC found that the formula rate protocols lack adequate safeguards to ensure that the input data is correct and accurate, that calculations are performed consistently with the formula rate, and that the costs to be recovered in the formula rate are reasonable and prudently incurred. FERC also noted that several ISO-NE transmission owners are not required to submit annual updates and that there are no challenge provisions to allow interested parties to informally resolve disputes related to the implementation of these formula rates or, in the event disputes are not resolved informally, to bring formal challenges to FERC without needing to file a formal complaint.

Separate from its concerns related to the formula rate protocols, FERC also concluded that the ISO-NE transmission owners' current RNS and LNS formula rates appear to be unjust and unreasonable as they lack sufficient detail in order to determine how certain costs are derived and recovered in the formula rates. FERC noted that the RNS and LNS formula rates exclude the derivation of several components and cover different time periods for service such that the timing and synchronization of the RNS and LNS rates are not reconcilable. Finally, FERC found that the ISO-NE formula rates do not conform to FERC policy because the rates are written out in words rather than a mathematical formula and are thus subject to varying interpretations of the single RNS formula. In addition to establishing a hearing, FERC established a refund effective date and directed the Chief Administrative Law Judge to appoint a settlement judge to resolve the issues in the Formula Rate Proceeding.

The FCM Rules Proceeding order is available here.

The Formula Rates Proceeding order is available here.

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