On July 17, 2020, FERC issued three orders relating to the executed cost-of-service agreement (“Mystic Agreement”) among Constellation Mystic Power, LLC (“Mystic”), Exelon Generation Company, LLC (“Exelon”), and ISO New England Inc. (“ISO-NE”). The Mystic Agreement provides for cost-of-service compensation to Mystic for the continued operation of two gas-fired generating units. In the first two orders, FERC addressed requests for rehearing of its 2018 orders accepting the Mystic Agreement (the “July 2018 Order” and the “December 2018 Order”), including its conclusion that Mystic should recover from ratepayers 91% of the operating costs of the Everett Marine Terminal (“Everett”), a non-jurisdictional liquified natural gas import terminal. In its third order, FERC accepted in part a Mystic compliance filing submitted in response to the December 2018 Order. Commissioner Glick issued dissents to each of the July 17 orders. Commissioner Glick concluded that FERC was forcing consumers to pay the full cost of service for Mystic in order to “bail out” Everett, and that each of the orders exceeded FERC’s jurisdiction under the Federal Power Act (“FPA”).
On March 23, 2018, Mystic submitted a proposal to ISO-NE to retire all four of its units at the Mystic Generating Station, including the Mystic Units (see July 24, 2018 edition of the WER). The Mystic Units are combined-cycle natural gas units fueled exclusively by Everett, which, like Mystic, is owned by Exelon. As ISO-NE found the retirement of the Mystic Units would present an unacceptable fuel security risk, Mystic, Exelon, and ISO-NE entered into the Mystic Agreement to provide for the continued operation of the Mystic Units through May 31, 2024. In the July 2018 Order, FERC established hearing and settlement procedures on a number of contested issues with respect to the Mystic Agreement, and, in the December 2018 Order, FERC accepted the Mystic Agreement effective June 1, 2020, subject to further compliance and additional briefing on the issue of return on equity. A particularly contested aspect of the Mystic Agreement was the Fuel Supply Charge, a component of Mystic’s cost-of-service rate that enables Mystic to recover its costs of fuel from ratepayers—in this case, costs related to the operation of Everett. In the December 2018 Order, FERC directed that Mystic should recover 91% of the costs of Everett as fuel costs, to reflect the percentage of Everett’s sales associated with vapor gas (as opposed to liquid gas, which the Mystic Units do not use).
In the first of its July 17, 2020 orders (“Mystic Order One”), FERC modified certain language in the July 2018 Order while sustaining its result. The requests for rehearing focused in large part on whether Everett’s fixed operating costs are within FERC’s jurisdiction and recoverable under the Mystic Agreement as part of Mystic’s cost-of-service. FERC rejected claims that it impermissibly asserted jurisdiction over Everett, and that Everett’s operating costs are too far removed from Mystic’s jurisdictional sales to ISO-NE to be included in Mystic’s cost-of-service rate. FERC concluded that its review and approval of the Fuel Supply Charge can include charges traceable to Everett’s operating costs. However, FERC clarified that the July 2018 Order made no explicit finding that the full costs of Everett could be recovered through the Mystic Agreement and instead set the question of the justness and reasonableness of the Fuel Supply Charge for hearing. In response to a request from the Massachusetts Attorney General, Mystic Order One also clarified that Mystic must demonstrate that its capital expenditures are just and reasonable in order to include the expenditure in its cost-of-service rate.
In the second of its July 17, 2020 orders (“Mystic Order Two”), FERC addressed the question of how much of Everett’s fixed operating costs Mystic should be allowed to recover. FERC held that because Everett’s vapor gas output is Mystic’s sole source of fuel, it is just and reasonable to allow Mystic to recover all of the fixed operating costs associated with providing vapor gas, which is roughly 91% of Everett’s fixed operating costs. FERC acknowledged that some vapor gas sales are made to third parties, but reasoned that those third-party sales benefit Mystic by helping to manage Everett’s tank. In so doing, FERC: 1) rejected arguments that Everett should recover only 39.16% of its operating costs, because Mystic is capable of using only 39.16% of Everett’s total capability; and 2) set aside the “sliding scale” revenue sharing mechanism introduced in the December 2018 Order that was intended to incentivize Everett to make sales to customers other than Mystic. Mystic Order Two also affirmed that Mystic’s rate base items should be subject to a true-up, though it set aside the December 2018 Order’s conclusion that Mystic should be required to true-up revenues in addition to costs after finding that the Mystic Agreement already contains provisions to credit revenues earned by Mystic against its annual fixed revenue requirement.
In the third of its July 17, 2020 orders (“Mystic Order Three”), FERC accepted, in part, Mystic’s March 2019 filing submitted in compliance with the December 2018 Order. FERC found that Mystic complied with its directive to include a clawback provision that would require Mystic to refund ISO-NE for costs related to certain repairs and capital expenditures if Mystic re-enters the market after the Mystic Agreement has ended. FERC also accepted Mystic’s changes to apply a true up mechanism to all items in the Mystic Agreement except those that must be made through a FPA section 205 filing. Finally, FERC directed Mystic to submit an additional compliance filing to amend its original cost test study to include all transfers of ownership of the Mystic facilities, including an instance where a group of creditors acquired the Mystic Units in exchange for forgiving the debt owned by the then-owners.
Commissioner Glick’s dissenting opinions concluded that FERC was forcing consumers to pay the full cost of service for Mystic in order to “bail out” Everett—a non-jurisdictional LNG import facility—in the name of fuel security, and in doing so, exceeding its authority under the FPA. Commissioner Glick explained that because Everett does not rely on the interstate pipeline grid to acquire natural gas, it can provide another source of natural gas for the region when the pipeline system becomes constrained. Nevertheless, he stated, it is Everett, not Mystic, that in fact provides the fuel security benefits at issue: “Mystic is relevant only insofar as it is necessary to keep Everett in operation and provides a not entirely implausible locus for Commission action under the FPA,” Commissioner Glick stated. “I see nothing in the FPA, however, that suggests that the Commission can—much less should—wield its jurisdiction to address an issue so far upstream from the markets the Commission regulates.” He concluded by stating that the potential reliability issues identified by ISO-NE would not begin for another two years, allowing plenty of time for a court to correct the majority opinion.
Mystic Order One can be found here.
Mystic Order Two can be found here.
Mystic Order Three can be found here.