On January 30, 2015, the Commission denied a complaint filed by the New England Power Generators Association, Inc. (“NEPGA”) in which NEPGA sought either modification or elimination of the Peak Energy Rent (“PER”) Adjustment mechanism in ISO New England Inc.’s (“ISO-NE”) Forward Capacity Market (“FCM”).

In the ISO-NE FCM, generation resources compete in annual Forward Capacity Auctions (“FCAs”) to provide capacity three years in advance of an associated one-year Capacity Commitment Period (“CCP”).  The PER Adjustment is a market mechanism operating within the FCM that: i) acts as a hedge for load against price spikes in the energy market; and ii) helps mitigate incentives to create price spikes in the energy market through economic or physical withholding, by removing any profits gained from the rise in energy prices above a designated level.  The PER Adjustment does this by requiring suppliers to return “peak energy rents”—the revenue earned when real-time clearing prices exceed a pre-determined “strike price”—to load through rebates.  To determine what the PER Adjustment will be, each day ISO-NE calculates a PER strike price that is slightly higher than the marginal running cost of the most expensive generation resource in New England.  For each hour in which the real-time Locational Marginal Price (“LMP”) exceeds that strike price, ISO-NE calculates an hourly PER value equal to the difference between the real-time LMP and the PER strike price, adjusted by a scaling factor and an availability factor.  Each month, the capacity payment received by each capacity supplier is then reduced by a rolling average of the monthly PER values for the previous 12 months.

On December 3, 2014, NEPGA filed a complaint with the Commission pursuant to section 206 of the Federal Power Act, requesting that the Commission require ISO-NE to: i) increase the PER daily strike price by $250/MWh for certain CCPs; and ii) prospectively eliminate or modify the PER Adjustment mechanism for future CCPs.  In its complaint, NEPGA cited the recent implementation of a two-settlement capacity market design proposal in ISO-NE, which included a change to the “Reserve Constraint Penalty Factor”— a mechanism that serves as a cap on the price that ISO-NE may pay to procure additional capacity reserves.  NEPGA contended, among other things, that the Reserve Constraint Penalty Factor had the potential to substantially increase real-time energy prices, thereby increasing the PER Adjustment amount that is ultimately returned to load through rebates.  NEPGA sought fast-track treatment for its complaint, asking the Commission to act on or before January 30, 2015 (three days before the commencement of the next FCA on February 2, 2015).

In denying NEPGA’s complaint, the Commission found that NEPGA had failed to meet its burden under section 206 to demonstrate that ISO-NE’s existing tariff provisions governing the PER Adjustment were unjust and unreasonable.

  1. With respect to NEPGA’s request to increase the PER daily strike price by $250/MWh for certain CCPs, the Commission found, among other things, that NEPGA’s contention that the change in the Reserve Constraint Penalty Factor will result in unjust and unreasonable results was not supported by sufficient evidence.  The Commission noted that NEPGA had based its contention on a single year of data, and found that NEPGA did not adequately explain how this data could be extrapolated to conclude that unjust and unreasonable results for generation resources would occur in other CCPs if the new Reserve Constraint Penalty Factor remained in place.
  2. With respect to NEPGA’s request to prospectively eliminate or modify the PER Adjustment mechanism for future CCPs, the Commission found that NEPGA’s argument largely rested on the “uncertain impact” the PER Adjustment might have on FCA clearing prices, and stated that this argument failed to satisfy NEPGA’s section 206 burden of showing that the existing ISO-NE tariff was unjust and unreasonable.

A copy of the Commission’s order may be found here.