On October 5, 2018, FERC accepted revisions to the New York Independent System Operator, Inc.’s (“NYISO”) methodology used to determine Locational Installed Capacity Requirements (“LCRs”) in NYISO’s Installed Capacity (“ICAP”) market. In doing so, FERC found that the proposed Alternative LCR Methodology was just and reasonable because, among other things, the Alternative LCR Methodology results in LCRs, and thus capacity costs, that are reasonably aligned with the associated reliability benefits.

Under current rules, each year, the New York State Reliability Council, L.L.C. (“NYSRC”) establishes the Installed Reserve Margin (“IRM”) for the upcoming Capability Year. NYISO then uses the IRM to calculate the statewide minimum ICAP requirement for each Capability Year (referred to as the “Unified Method”). NYISO’s ICAP market rules require all load-serving entities (“LSEs”) to purchase a specified amount of capacity to count toward this statewide minimum, and LSEs with customers in certain transmission-constrained areas, defined as Localities, must fulfill a portion of their respective purchase obligations from capacity resources electrically located within their Locality (i.e., LCRs).

On June 5, 2018, as amended August 9, 2018, NYISO proposed the Alternative LCR Methodology, which uses an economic optimization algorithm to minimize the total cost of capacity for the New York Control Area (“NYCA”), resulting in lower total ICAP costs than the LCRs established using the Unified Method. In its filing, NYISO explained that NYISO and stakeholders recently have been exploring alternatives to the Unified Method because of concerns that it was not designed to accommodate nested Localities and that anomalous LCR results had been observed. Moreover, NYISO asserted that the Alternative LCR Methodology will maintain the 0.1 days/year loss-of-load expectation (“LOLE”) reliability standard, respect the NYSRC-approved IRM, and avoid violations of transmission security limits. NYISO also stated that it and its stakeholders set three goals for the Alternative LCR Methodology: (1) enhance the transparency and the predictability of the LCR results by eliminating undue variability; (2) improve the stability of the LCR results and allow them to move appropriately with system changes; and (3) be robust by setting requirements to attract capacity in a targeted fashion, the requirements can be administered consistently with any configuration of Localities, and the requirements can be modified to incorporate additional future constraints.

In approving NYISO’s proposal, FERC found that the Alternative LCR Methodology satisfies the 0.1 days/year LOLE reliability standard while economically optimizing the LCRs to minimize the total cost of procuring capacity in NYCA, despite protests to the contrary. In response to arguments that the Alternative LCR Methodology results in some Localities being more or less reliable than others, FERC affirmed that the Localities need only meet the minimum LOLE reliability standard. Regarding the alignment of reliability costs and benefits, FERC found that the reliability benefits associated with the LCRs are roughly commensurate with the costs associated with the LCRs. FERC explained that, despite the fact that the Alternative LCR Methodology would result in changes in capacity costs for each zone, those changes do not demonstrate an issue with cost allocation because the Alternative LCR Methodology is just correcting for inefficiently high and inefficiently low relative LCRs resulting from the Unified Method’s lack of a cost-minimization algorithm, which the Alternative LCR Methodology possesses.

A copy of the order is available here.