Retail Suppliers Oppose "Windfall" to Generators Under Proposed Peak Energy Rent
Change
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January 12, 2011
New England generators, with the support of ISO New England, are seeking to implement
"knee jerk" changes to the Peak Energy Rent mechanism of the Forward Capacity Market
which would retroactively cost load in excess of $100 million, retail and load suppliers
said in protests at FERC (ER11-2427).
The Peak Energy Rent (PER) mechanism is "intended to remove the incentive to raise
prices in the Real-Time Energy Market by offsetting high real-time prices (above
the PER Strike Price) with reductions in capacity payments, and in the same manner,
it is intended to act as a hedge for load against high prices in the energy market."
Essentially, load receives a credit, paid out over 12 months to smooth out volatility,
for instances where energy prices exceed the PER Strike Price.
The PER Strike Price is currently established using a formula under which the fuel
cost of the proxy unit is deemed to be the lower of the price of (i) ultra low-sulfur
No. 2 oil measured at New York Harbor plus transportation; or (ii) day-ahead natural
gas measured at the Algonquin City Gate.
Pushed by generators, ISO-NE is seeking two changes to the PER mechanism: 1) changing
the fuel cost proxy form the lower-of to the higher-of the current two options; and
2) reducing the 12-month rolling-average methodology for payments to load to a six
month average, effective February 2011.
The change to a higher-of fuel price would reduce the times the PER mechanism is
triggered, resulting in fewer credits to load, while the change from a 12-month to
six-month average would deprive load of payments from prior months they would otherwise
be due under the current formula.
"The proposed FCM amendments would effectuate a revenue shift from load suppliers
to Generation Based Capacity Suppliers," said Constellation Energy Commodities Group,
Hess Corporation, Macquarie Energy LLC, and BP Energy Company (the indicated load
suppliers).
"Changing this mechanism provides a clear windfall to generators," the Retail Energy
Supply Association added.
"No adequate justification exists for the implementation of the change from the use
of a 12 month rolling average" for calculating PER payments, the indicated load suppliers
said.
Although ISO-NE's filing claims the change is needed to reflect "unexpected", "unintended",
or "unanticipated" operation of the PER mechanism, "there is nothing unexpected about
fluctuations in fuel prices over time, there is nothing unexpected about gas prices
being lower than oil prices, nothing unexpected about oil being the marginal cost
fuel when oil-fired generators are often the marginal units, and nothing unexpected
about the use of a 12 month average to even out the highs and lows of price fluctuations
over time," indicated load suppliers argued.
Under the shortening of the PER averaging mechanism to six months, "load suppliers
will lose the uncollected value of the PER deduction for past periods, including
the high PER summer months," indicated load suppliers noted. "As June, July, August
and September 2010 were high cost summer months with relatively high Monthly PERs
... the inability to collect the full deduction for these months has a particularly
detrimental impact on load suppliers," the load suppliers added.
"By shortening the 12-month rolling average to a 6-month rolling average, ISO-NE
would prevent PER generated in previous months from being credited to load. This
is because PER generated in a single month is credited back to load over the next
12 months," the Retail Energy Supply Association added.
Over $100 million may be at stake, representing over 10% of the total costs of capacity,
indicated load suppliers reported. The change is particularly harmful to load serving
suppliers given that most have entered into fixed contracts to serve customers on
the expectation that the PER would be paid out over 12 months.
"Elimination or modification of the 12-month rolling average without agreement of
all parties would result in a prohibited 'increased price for past services' - a
fundamental tenant of the Commission's prohibition against retroactive ratemaking,"
RESA argued.
Both RESA and the indicated load suppliers noted that ISO-NE's proposal did not go
through the normal stakeholder process, but was "rushed" as an "emergency" proposal.
Indicated load suppliers reported that the elimination of the 12-month average was
first made public at a December 7, 2010 meeting of the NEPOOL Markets Committee.
Despite revisions to the FCM being evaluated for over a year prior, none of the
earlier public discussions addressed the length of the PER averaging.
"This [change] came as a complete surprise to Indicated Suppliers. Given the speed
between the time the proposal was made public and voted upon, it seems very likely
that behind-the-scenes developments had been occurring for many months prior. Unfortunately,
the Indicated Suppliers were unaware of these non-public discussions and therefore
were unable to factor these discussions into their business decisions. Had they
known about these non-public discussions, the Indicated Suppliers would have been
able to take certain actions to protect themselves, including factoring risk premiums
into their sales contract prices," indicated load suppliers said.
Furthermore, RESA said that the rushed changes may be an inappropriate "knee-jerk"
reaction to a short-term market anomaly, especially as RESA noted that the PER rate
seems to be declining since the spikes seen in the summer.
"To be sure, there are a number of FCM-related market improvements that have been
discussed at ISO-NE, the PER mechanism is one of them. However, the sheer lack of
transparency and the speed with which the proposal was made and approved shows an
utter lack of due process and illustrates that the proposal will not result in just
and reasonable rates," RESA said.
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