On July 2, the Federal Energy Regulatory Commission (“FERC”) issued an Order denying ISO-NE’s request to waive certain tariff provisions which would have permitted cost-of-service agreements for the continued operation of Exelon’s Mystic Units 8 and 9 (“units”). In addition, the Order instituted a proceeding under Section 206 of the Federal Power Act (“FPA”) requiring the ISO to submit interim tariff revisions for a short-term, cost-of-service agreement for Mystic within 60 days, and permanent tariff revisions to address future fuel security needs by July 1, 2019. Notwithstanding the waiver denial, the majority of FERC Commissioners indicated their support for some short-term, out-of-market solution to retain the Mystic units. Commissioners Glick and Powelson dissented in part.
By way of background, in March of this year, Exelon announced its intention to retire its Mystic units once the units’ existing capacity supply obligations ended on May 31, 2022. Around the time it announced its intention to retire the Mystic units, Exelon also announced its intention to purchase the Everett Marine (Distrigas) Terminal from ENGIE North America to ensure a reliable fuel supply to the units during the remainder of the units’ operations. Following this announcement, on May 1, and drawing upon certain conclusions reached in its Operational Fuel-Security Analysis (“OFSA”), ISO-NE filed a waiver request with FERC, seeking permission to enter into out-of-market contacts to keep the units from retiring and to keep Distrigas as a fuel source within the region. ISO-NE asserted that the loss of the Mystic units’ 1,700 MW and the loss of the Distrigas facility would lead to fuel security issues and the grid operator’s inability to comply with certain reliability requirements set by the North American Electric Reliability Corporation (“NERC”).
ISO-NE’s filing drew wide interest. While some supported the request, other industry participants and intervenors disagreed both with the conclusions set forth in the OFSA, and whether there is a compelling need that justifies the ISO’s pursuit of cost-of-service contracts with Exelon for retention of the Mystic units.
Despite agreeing with ISO-NE’s finding that the OFSA demonstrated that the loss of Mystic 8 and 9 would lead to a depletion of operating reserves and might necessitate load shedding during the winters of 2022-23 and 2023-24, FERC rejected the waiver request, deeming it “an inappropriate vehicle” for addressing the issue. Because the current tariff language allows the ISO to enter into out-of-market contracts for local transmission needs, but does not authorize the ISO to enter into cost-of-service agreements for the purposes of fuel security, FERC rejected the waiver because it “effectively creates an entire process that is not in the ISO-NE Tariff.” FERC concluded that a new process may not be effectuated by a waiver request and must instead, be filed as proposed tariff provisions under section 205(d) of the FPA.
A related and equally contentious issue in the proceeding was how resources retained for fuel security should be treated in the forward capacity market (“FCM”). While some intervenors advocated treating Mystic’s 1,700 MW, or any retained unit, as price-takers, other intervenors objected, claiming that such action would unfairly suppress capacity prices and disrupt market entry and exit signals. FERC’s Order recommends that ISO-NE’s 206 filing “include a mechanism that addresses how resources retained for fuel security (e.g., under cost-of-service agreements) would be treated in the FCM.” FERC’s Order affirmed its support for market-based solutions “as the most efficient means to provide reliable electric service … at just and reasonable rates,” yet also recognized that, in certain circumstances, it might be necessary to consider reliance upon “short-term out of market mechanisms” while developing longer-term market-based solutions. Sensitive to upcoming auction deadlines, FERC both extended Exelon’s deadline to announce retirement from July 6, 2018 to January 4, 2019, and also indicated that if ISO-NE complies with the current schedule, FERC would be able to decide on a short-term out-of-market contract for the Mystic units prior to the Forward Capacity Auction in February 2019.
Commissioners Powelson and Glick dissented in part. Both agreed with the denial of ISO-NE’s waiver request, but disagreed with the Order otherwise, noting that it prematurely supports a path to out-of-market payments without first exhausting other remedies. Both Commissioners expressed concern that allowing uneconomic units to continue to operate in the market may also adversely affect ISO-NE’s CASPR proposal, recently approved by FERC, that allows state-sponsored renewable resources to enter the market to replace older, retiring units. Glick predicted that “the most likely outcome of today’s order will be a parade of uneconomic generators seeking cost-of-service rate treatment under the guise of fuel security.” With Powelson’s departure in mid-August, announced last week, FERC will be left with just 4 members to decide the fuel security issue and other important issues pending before the Commission.