UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
ISO New England Inc.
New York Independent
System Operator, Inc.
)
)
)
)
Docket No. RT02-3-000
MOTION TO INTERVENE AND PROTEST
OF
THE VERMONT DEPARTMENT OF PUBLIC SERVICE AND
THE VERMONT PUBLIC SERVICE BOARD
TABLE OF CONTENTS
I.
II.
III.
IV.
DESCRIPTION OF THE JOINT PETITION......................................................................3
MOTION TO INTERVENE ................................................................................................4
PROTEST ............................................................................................................................5
A.
THE COMMISSION SHOULD DISMISS THE NERTO PETITION ...................5
1.
The NERTO Petition Is Incomplete And Premature, Thus Not The
Proper Subject Of A Declaratory Order.......................................................5
2.
The NERTO Petition Does Not Address The Concerns Of Stakeholders,
Especially Given The Evidence That The Merger Would Impose A Net
Cost Increase On New England Customers .................................................8
a.
The NERTO Proposal Is Unlikely To Draw Support From The
Entire Region ...................................................................................8
b.
The NERTO Proposal Is Presently Hypothetical...........................10
3.
The NERTO Petition Will Distract Market Participants, ISO-NE,
Regulators, And Others From Getting The Market Rules Right In New
England ......................................................................................................12
4.
The NERTO Petition Conflicts With The Commission’s SMD
NOPR .........................................................................................................15
B.
IN ADDITION TO ITS PROCEDURAL DEFICIENCIES, THE
PETITION FAILS TO ADDRESS THESE SIGNIFICANT
SUBSTANTIVE PROBLEMS: SHARING OF BENEFITS,
GOVERNANCE, SYSTEM PLANNING AND EXPANSION,
COST ALLOCATION FOR SYSTEM UPGRADES MARKET
MONITORING, DEMAND RESPONSE, AND THE ROLE OF THE
STATES .................................................................................................................18
1.
The Petition Does Not Address The Necessary Sharing Of Benefits
That Might Result From The NERTO Merger ..........................................19
2.
The Petition Does Not Adequately Address Independence And
Governance ................................................................................................19
3.
The Petition Does Not Adequately Address System Resource
Planning And Expansion............................................................................21
4.
The Petition Sets Out Important, But Partial Details On Cost Allocation
Schemes For System Upgrades ..................................................................25
a.
The Commission Should Adopt A “Resource Parity”
Standard .........................................................................................25
b.
If the Commission Should Decline To Adopt the “Resource
Parity” Standard It Should Ensure Equity Among The New
England States ................................................................................29
5.
The Petition’s Market Monitoring And Mitigation Requirements
Should Be Augmented ...............................................................................31
6.
The Petition is Deficient On Demand Response........................................33
7.
The Petition is Unclear About The Role Of The States .............................34
CONCLUSION: THE PETITION, AS FILED, MUST BE REJECTED AS .......................
INCOMPLETE, PREMATURE, AND SUBJECT TO SUBSTANTIVE
DEFICIENCIES .................................................................................................................39
i
In accordance with Rules 213 and 214 of the Rules of Practice and Procedure of the
Federal Energy Regulatory Commission (“Commission”), 18 C.F.R. §§ 385.213 and 385.214
(2002), and the Commission’s September 18, 2002 Notice of Extension of Time, the Vermont
Department of Public Service (“VDPS”) and the Vermont Public Service Board (VPSB)
(collectively “Vermont”) hereby move to intervene and protest the August 23, 2002 Joint
Petition for Declaratory Order Regarding the Creation of a Northeastern Regional Transmission
Organization (“NERTO”) filed by ISO New England, Inc. (“ISO-NE”) and the New York
Independent System Operator, Inc. (“NYISO”).1
Petitioners request a declaratory order that
“the proposed [NERTO] would qualify as a Regional Transmission
Organization pending its timely establishment, and the
Commission’s acceptance of complete tariffs and related
documentation . . . . ”2
Unfortunately, the filing as presented, simply does not allow the Commission to answer
the questions posed by the Petitioners; indeed, its acceptance would set the Commission and the
Northeast on a path of piecemeal review and litigation, rendering it almost impossible to achieve
a unified end-result. Vermont emphasizes that they are not unalterably opposed to a merger
between ISO-NE and NYISO. The Platonic concept of a larger market has positive elements, if
pursued through a filing that in actual substance and detail is likely to deliver those positive
elements to customers and citizens. Vermont opposes the approval of this Petition by the
Commission at this time for four reasons:
1.
The Petition is too hypothetical (i.e., incomplete and premature) to be considered
a concrete controversy that the Commission should resolve through a declaratory
order;
ISO-NE and NYISO are sometimes collectively referred to herein as “Petitioners” and the filing is referred to as
the “Petition.”
1
2
Petition at 114.
1
2.
The Petition ignores the substantial concerns of regulators, consumer interests,
and other representatives of the public interest in New England, particularly the
substantial cost shifts to New England for many years;
3.
This Petition would distract the attention of ISO-NE, participants, and regulators
from ISO-NE’s efforts to implement New England SMD (“NE-SMD”); and
4.
This Petition does not take into account significant elements of the Commission’s
Standard Market Design (“SMD”) Notice of Proposed Rulemaking (“NOPR”),
such as elimination of ICAP, thus the final interplay of market components cannot
be judged.
For these reasons, Vermont urges the Commission to dismiss the Petition at this time
without prejudice. The Commission should instead urge the Petitioners to work closely with
regulators, the market participants, and other public interest representatives in the region, to
continue efforts to create consensus on the form and structure of a broader regional transmission
organization (“RTO”) for the Northeast region.
Of greatest importance at this time is the ongoing work to implement NE-SMD and
eliminate the seams between the two regions. We respectfully submit that these two tasks
require and deserve the full attention of regulators, market participants, and ISO-NE, who are all
hard at work on both of these important initiatives. Distraction from these two tasks holds the
very real danger that these initiatives may fail.
The Petitioners state that if a favorable declaratory order were issued by January 1, 2003,
they expect that they would make supplemental filings by the close of April 2003 and could
commence NERTO operations by June 30, 2003.3 Ironically, the April, 2003 date overlaps with
the first month of NE-SMD, and the June 2003 date coincides with the current expectations of
announcements of the Commission’s SMD. Thus, the shadow of uncertainty surrounding market
rules would reach a peak stress period under this proposal. Further reasons for our concerns are
submitted below. We have long taken the position that getting the market rules right should be
2
the Commission’s first priority; we submit that acting upon this Petition at this time could deter
us from achieving this goal.
Finally, we note that even if the Commission chooses to address the Petition, it will need
to provide NERTO with clear guidance on several important issues, the most important of which
are outlined below.
I.
DESCRIPTION OF THE JOINT PETITION
ISO-NE and NYISO request a declaratory order pursuant to Order No. 2000 that the
proposed NERTO “would qualify as an RTO”.4 Petitioners request a declaratory order that the
proposed NERTO would “qualify as a Regional Transmission Organization pending its timely
establishment,
and
the
Commission’s
acceptance
of
complete
tariffs
and
related
documentation . . .”5
In support of the request, Petitioners present: (i) a description of the proposed NERTO,
including the organizational and operational structure and intended participants; (ii) a description
of the NERTO market and an envisioned Northeast Power Coordinating Council (“NPCC”)
Common Market; (iii) a description of NERTO’s rate structure to be filed under Section 205 of
the Federal Power Act (“FPA”); and (iv) a discussion of how NERTO will satisfy the RTO
characteristics and functions under Order No. 2000.6
Petitioners explain that the NERTO
proposal remains contingent upon “timely establishment of the NERTO”7 as well as Commission
acceptance of necessary filings under Sections 203 and 205 of the FPA.8
3
Id. at 3.
4
Id. at 2.
5
Id. at 114.
6
Id. at 2-3.
7
Id. at 3.
8
Id.
3
II.
MOTION TO INTERVENE
Pursuant to Rule 2010, 18 C.F.R. § 385.2010 (2002), Vermont hereby designates the
following persons for service of documents in this proceeding:
Harvey L. Reiter
John E. McCaffrey
M. Denyse Zosa
Stinson Morrison Hecker LLP
1150 18th Street, NW, Suite 800
Washington, DC 20036
(202) 785-9100
Hans Mertens
Director – Engineering Services & Chief Engineer
Vermont Department of Public Service
112 State Street
Montpelier, VT 05620-2601
(802) 828-4007
Sandra Waldstein
Senior Policy Advisor
Vermont Public Service Board
112 State Street — Drawer 20
Montpelier, VT 05602-2701
VDPS is charged, through the Director for Public Advocacy, to represent the interests of
the public in utility matters before the Vermont Public Service Board as well as before the
Federal Energy Regulatory Commission.9 As the State of Vermont’s public advocate, VDPS has
an affirmative duty to protect the interests of Vermont consumers of electricity in securing
reliable, safe, reasonably priced power. VDPS has participated in Commission proceedings on
behalf of Vermont ratepayers in numerous dockets.
In addition to its advocacy role, VDPS pursues its consumer protection objectives
through its engagement in the acquisition and sale of power at wholesale, activities which
supplement the regulatory protections afforded consumers by stimulating competition in the
Vermont electric market.10 Based on the foregoing, VDPS has a vital stake in the operation of
the New England power markets.
9
See Vt. Stat. Ann. tit. 30, § 2(b) (1997).
10
VDPS, in contrast to the VPSB, also has the authority, and in prior periods has sold at retail directly to rural and
residential consumers of electricity, under rates filed with and regulated by the VPSB. See Vt. Stat. Ann. tit. 30,
§212a (1997).
4
VDPS submits that it has a direct and substantial interest in this proceeding and may be
affected by its ultimate determination. VDPS will not be represented adequately by any other
party and may be adversely affected or bound without opportunity to present its position unless it
is permitted to participate fully in this proceeding. Accordingly, VDPS respectfully requests that
it be permitted to intervene in the above-captioned case.
Under Vermont law, the VPSB is the state commission designated by statute with
jurisdiction over rates and service of electric utilities in the state.
III.
PROTEST
A.
The Commission Should Dismiss the NERTO Petition
1.
The NERTO Petition Is Incomplete And Premature, Thus Not The
Proper Subject Of A Declaratory Order
Petitioners request a declaratory order pursuant to Rule 207(a)(2) of the Commission’s
Rules of Practice and Procedure;11 that Rule permits a person to request “[a] declaratory order or
rule to terminate a controversy or remove uncertainty.”12 Consistent with the language of Rule
207, the Commission will not issue a declaratory order when doing so will not terminate
controversy or remove uncertainty.13 Nor will the Commission issue a declaratory order when
the petition is premature or where the putative controversy is purely speculative.14
To be sure, the Commission has discretion in determining whether to address a petition
for a declaratory order, and the Commission is not bound by the Constitutional “case or
controversy” requirement imposed on Article III courts.
However, that exercise of the
Commission’s discretion should still be informed by the principles applied by federal courts in
11
18 C.F.R. § 385.207(c)(2) (2002).
12
18 C.F.R. § 385.207(a)(2).
13
See Arkansas Power & Light Co., 35 FERC ¶ 61,358 at p. 61,818 (1986).
5
assessing whether a given case presents an actual controversy ripe for a decision. In this respect,
federal courts, by refusing to address unripe disputes;
“avoid becoming entangled in abstract disagreements, enhance
judicial economy, and
ensure that a record adequate to
support an informed decision exists when the case is heard.”15
Further, the piecemeal review of significant elements of an RTO, as has been presented in
this Petition (which as noted above is critically deficient for lack of major defining documents),
weighs heavily against granting a declaratory order at this time.
The Commission should decline to address the NERTO Petition because the fundamental
premise on which it is based, that ISO-NE and NYISO will merge into one RTO in the form
proposed by Petitioners, is highly speculative and, in fact, faces significant opposition. As such,
issuing the declaratory order requested by Petitioners would not “terminate any controversy” or
remove any uncertainty, and would only serve to entangle the Commission and others in an
abstract argument as to whether the hypothetical and incompletely described NERTO could be
considered an appropriate RTO. The continuing existence of controversy is neither hypothetical
nor speculative. Indeed, in both New York and New England, some market participants have
categorically asserted that they will not support the NERTO unless they are granted certain
conditions in return.
Vermont maintains that the ISOs have a broader role to fulfill — protection of the public
interest. The Commission, in allowing generators to sell at market-based rates, rather than
pursuant to a cost of service tariff, is relying upon the presumption that such market-based rates,
14
See, e.g., Camille E. Held, 57 FERC ¶ 61,080 at p. 61,293 (1991); Texas-New Mexico Power Co. v. El Paso Elec.
Co., 30 FERC ¶ 61,242 at p. 61,482 (1985).
15
Navegar, Inc. v. United States, 103 F.3d 994, 998 (D.C. Cir. 1997) (internal quotes and citations omitted).
6
when administered by an RTO, will in fact be “just and reasonable.”16 Thus, the RTO/ISO
Board members must have an obligation to act in the public interest (as an adequate substitute for
the statutory "just and reasonable rate" requirement) with particular reference to the following:
1.
2.
3.
System reliability and operating efficiency;
Efficiently functioning markets that operate fairly and provide a balance between
the concerns of buyers and sellers; and
Balance between short term and long term objectives.
This responsibility to the public interest is unavoidable, since it is inherent in the Commission’s
delegating to an RTO, as market-manager, the fulfillment of the Commission’s own statutory
duty to ensure “just and reasonable rates.” That delegated responsibility requires a commitment
to the general good, rather than to “representational” market participants. What informs this
express commitment to the general good is a wider concern with the delegation of legislative
powers to a private entity; a concern which has historically been shared by the courts.17
Vermont recognizes, of course, that Order No. 2000 solicited petitions for declaratory
orders as to whether proposed RTOs meet the Commission’s regulations.18 Of course, every
RTO petition is uncertain to some extent; the Commission could require modification to the
proposal, new rules could be issued, or entities could join or drop out of the proposed RTO.
However, because this Petition is premature, because it is speculative and will not resolve a
controversy, because it is incomplete in a number of essential respects, and because it does not
16
See, Regional Transmission Organizations (Order 2000), 1996-2000 FERC Stats. & Regs., Regs. Preambles ¶
31,089, at 31,044 (1999), order on reh’g, Order No. 2000-A, 1996-2000 FERC Stats. & Regs., Regs. Preambles
¶21,092 (2000), petition for review dismissed, Public Utility District No. 1of Snohomish County v. FERC, 272 F.3d
607 (2001).; Federal Power Act, 16 U.S.C. §§ 205-206 (1978).
“. . . delegations to private groups continue to be viewed with understandable, and perhaps justifiable, suspicion.”
Lawrence Tribe, American Constitutional Law 992 (2001).
17
18
For example, see Petition for Declaratory Order submitted by SeTrans Sponsors on the proposed SeTrans RTO in
Docket No. EL02-101 (June 27, 2002).
7
have widespread public support, this case is very different from the other RTO petitions for a
declaratory order, and those differences warrant dismissal of the Petition.
2.
The NERTO Petition Does Not Address The Concerns Of
Stakeholders, Especially Given The Evidence That The Merger
Would Impose A Net Cost Increase On New England Customers
a.
The NERTO Proposal Is Unlikely To Draw Support From The
Entire Region
Petitioners have not made a proffer that affected parties strongly support the merger.
Vermont submits that this omission is due to the fact that there is not widespread support for the
merger in New England at this time. Absent a cost-sharing agreement between New England
and New York, New England stakeholders are likely to oppose the combination given the
evidence that a merger would impose higher net costs on New England consumers. 19
As
Petitioners acknowledge, their Economic and Reliability Assessment (“Assessment”) indicates
that New England would experience increased wholesale power costs in the early years of the
merger. Petitioners’ forecasts indicate that customers in New England can expect to pay $67.0
million more in wholesale power costs in 2005 than if ISO-NE remained in its present form.20 It
stands to reason that, absent a sharing of the benefits of a merger, NERTO is unlikely to receive
the support of all the New England state regulatory agencies (NECPUC), the New England
Governors, the region’s Attorneys General or Public Advocates.
The Petition does not
adequately address this fundamental impediment to the NERTO proposal.
Absent an agreement on cost-sharing arrangements, Vermont has significant concerns
regarding the demonstrated lack of savings, marginal reliability benefits and real operational cost
19
NECPUC has actively participated in a cost-sharing working group, in collaboration with NEPOOL, to work
toward a resolution of the cost-sharing issue. The working group has developed a process for defining costs that
could be shared within the NERTO region. NECPUC is filing that proposal with the Commission in this Docket.
However, that submittal does not address the substance of cost-sharing or costs and benefits rather it will leave the
final step for allocation of savings indeterminate.
8
increases that will accrue to New England customers from a single Northeast RTO under the
Petitioners’ proposal. The Petitioners’ filing itself included a study showing cost shifts to New
England amounting to tens of millions of dollars in the next few years. Only if one extends
projections for nearly a decade into the future – a dubious undertaking – does the merger, as
proposed, begin to produce any net positive benefit to New England. Further, this benefit may
be achieved much more quickly through the implementation of NE-SMD and addressing the
seams issues. In addition, the results of the cost-benefit study that show benefits, above and
beyond the elimination of the seams between the region, are dubious as they rely upon
undocumented and unsupported administrative cost savings from merger of the two ISOs; thus
they deserve little or no weight.
The Petition also incorporates an affidavit of Dr. David Patton that includes an unfounded
assertion that when “additional sources of benefits” are realized (beyond those identified in the
NERTO cost-benefit study), New England can expect to realize significant benefits. Dr. Patton
asserts those additional sources of benefits result from:
(1) inclusion of reductions in the
frequency of capacity shortages by allowing power to freely flow in real-time to the areas of
greatest demand, and (2) the improved coordination of trade with Canada. However, Dr. Patton
admits that these additional benefits are “described qualitatively” in his affidavit.21 Indeed, his
affidavit does not include a rigorous analysis of his assumptions or assertions.
Even if, in the absence of such rigor, we were to accept his assertion that additional
benefits might be achieved within the NERTO region, Dr. Patton does not attempt in any way to
back up his statement that “New England will realize significant net benefits” as a result of these
20
Petition at Attachment X, p. 6.
21
Petition at Attachment XI, ¶ 40.
9
additional benefits.22 We will only note that for these additional benefits to produce a net benefit
to New England, they would have to be greater than the $67.0 million loss to New England in
wholesale power costs through 2005.
In fact, nowhere in the affidavit is this purported
attribution of the additional benefits to New England quantified. We are not at all comforted by
Dr. Patton’s bold assertions.23
A sharing of benefits is a necessary component for Vermont’s support for a merger
between New England and New York. However, we recognize that the very same cost-sharing
issues arise in the context of elimination of the seams, absent a direct merger. Thus, as a partial
step in that direction, Vermont is actively supporting the efforts of ISO-NE, New England
market participants, and other stakeholders, to build a model which would allow the
measurement and attribution, in real-time, of costs and benefits that would result from the
elimination of one seams issue — the export fee between New England and New York.
Consequently, Vermont has entered their support for a NECPUC filing on this matter.24 We will
not repeat the arguments set forth in that filing here. We urge the Commission not to approve
the instant Petition until it has first ruled on the cost sharing issue. To do so could create
significant uncertainty and exacerbate political and financial opposition to broader markets
across the Northeast.
b.
The NERTO Proposal Is Presently Hypothetical
Petitioners aver that “[t]he NERTO will be formed by combining the ISOs to establish a
single organization under the direction of one independent Board and one chief executive
22
Id. (emphasis added).
23
We note that Dr. Patton also avers that the $2 per MWh hurdle rate assumption included in the NERTO
cost/benefit study may be too high, which would tend to overstate the benefits attributable to the formation of the
NERTO. Petition at Attachment XI, ¶ 28.
24
Comments of the New England Conference of Public Utility Commissions Docket No. RT02-3-000 (Nov. 8
2002).
10
officer.”25 Thus, as Vermont understands it, ISO-NE and NYISO would merge and cease to
exist as independent entities. The Petition, however, does not contain a draft NERTO tariff.
Petitioners state that this omission is “in recognition of the need for additional stakeholder input,
Commission guidance in response to this filing and the pendency of the proposed pro forma
Network Access Tariff.”26 Nor does the filing contain an agreement between the ISOs and the
New York and New England transmission owners pursuant to which the transmission owners
would agree to cede operational authority of their facilities to the NERTO. Petitioners aver that
they “expect” to enter into such an agreement; 27 this, despite the fact that market participants in
both regions voted against the filing.
To be sure, Vermont does not believe that the authority of ISO-NE should be viewed as
solely derived from the NEPOOL Agreement, but rather that the Commission should view the
ISO as operating pursuant to the Commission’s ultimate authority to oversee the markets.
Vermont submits that an agreement among transmission owners is not a necessary prerequisite
for formation of an RTO. The Commission’s powers under Sections 206 and 207 to eliminate
undue discrimination and inadequate interstate service, for example, would permit it to mandate
RTO formation as a remedy. However, we also recognize that over the past year there have been
negotiations between the ISO and the transmission owners to reach agreement on whether and
how the transmission owners would transfer operational control of their assets to an RTO and the
ISO-NE has relied upon internal support for their initiatives in the past.
Vermont is concerned that these bilateral and closed negotiations, that have excluded
state regulators, have the potential to affect both the structure and mechanisms of the NERTO
25
Petition at 5.
26
Id. at 32, n.24.
27
Id. at 4.
11
and the terms of the NERTO tariff. Of greater concern to Vermont is the fact that the Petition
provides no structured role for the states or other representatives of the public interest in that
negotiation process, nor does it provide for express approval of any such agreement by the states.
This is unacceptable, since such an agreement could directly affect every ratepayer within the
region, particularly if the negotiations include any trade-offs within the tariff filing, such as cost
allocation concessions for the transmission owners in return for participation in NERTO, or
concessions on the transmission owner’s role in the regional planning process.
Vermont finds it inconceivable that the Commission would grant the Petition in the
absence of details on a NERTO tariff and any agreement with the transmission owners pursuant
to which the transmission owners would agree to cede operational authority of their facilities to
the NERTO. Taken together, these two critical elements are likely to have major implications
for the states and state ratepayers. We believe that the Commission should withhold action on
the Petition at this time since in its present form the Petition is akin to an empty shell absent any
discussion of these essential elements. Furthermore, the Commission should allow sufficient
time and opportunity to comment prior to any Commission action, now or subsequently, upon
any component of these elements that might be filed by the ISOs after the filing date of the
original Petition.
3.
The NERTO Petition Will Distract Market Participants, ISO-NE,
Regulators, And Others From Getting The Market Rules Right In
New England
In addition to the incomplete and overly speculative nature of the Petition, the
Commission should decline to issue the declaratory order on prudential grounds. The Petition
comes at an odd time. After many fits and starts, ISO-NE is at last on the cusp of implementing
12
NE-SMD. An operational date of early 2003 is expected.28 This upgraded market system is
already four years overdue, a fact that demonstrates its complexity and difficulty. It will require
the full attention of all parties to assure successful implementation. There is little to gain – and
much to lose – from expending a great deal of resources on determining whether a hypothetical
merged NERTO would meet the requirements of Order No. 2000. Diverting those resources to
the merger at this time would be imprudent when ISO-NE is simultaneously implementing NESMD. Devoting resources to a merger becomes even more burdensome when stakeholders in
both New York and New England will likely be required to implement the rules resulting from
the Commission’s recent SMD NOPR before the proposed NERTO is forecast to begin full
operation.29
Vermont strongly supports the current efforts by NEPOOL and ISO-NE to implement
NE-SMD. However, we are concerned that implementation of NE-SMD would be disrupted or
delayed by ISO-NE’s efforts to garner support for and implement a market design across New
England and New York. Commission endorsement of the NERTO market design, which is both
incomplete and in some areas inconsistent with the Commission’s proposed SMD rules, will
cause confusion and uncertainty as to what the “correct” market design would be for ISO-NE to
implement. Commission action on this Petition at this time, given its serious deficiencies, would
be a piecemeal approach to market formation and implementation. Both direct actors and
financial investors will be deterred by this uncertainty.
28
See New England Power Pool, Docket No. ER02-2330 Joint Filing of NEPOOL and ISO-NE, Transmittal Letter
at 2 (July 15, 2002) (approved in part and modified in part in New England Power Pool, 100 FERC ¶ 61,287
(2002)).
29
Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market
Design, 100 FERC ¶ 61,138 (July 31, 2002) (“SMD NOPR”).
13
Aligning New England markets with New York also may be particularly difficult (at
best) and unwise at this time, given the recent criticisms of the New York market. 30 We strongly
encourage the Commission to allow New England to focus its attention on the New England
markets. Let us get our house in order before expecting us to expend scarce resources in an
attempt to resolve another’s problems.
As the Commission is fully aware, the new market design for New England is expected to
begin early in 2003. As an example of the effort required for state commissions, market
participants, and other affected entities to work with the ISO-NE and others in the region to
ensure successful implementation of the markets, Vermont points the Commission to the
multitude of meetings currently being held by ISO-NE to review the manuals required to
implement NE-SMD.
This review of market rules and documents requires a significant
commitment of resources on behalf of ISO-NE, market participants, and the NECPUC states,
both in terms of staff time and funding for such activities.
Assuring that the rules properly reflect the objectives of SMD is an enormous task. In
addition, NECPUC states have also been actively involved with the New England Demand
Response Initiative (“NEDRI”) process to ensure that practical demand response options are
available for incorporation into the market rules. Vermont emphatically states that having to
devote additional significant resources to a potential merger between New England and New
York at this critical time would undermine the efforts to get the market rules right in New
England; and this at a time when economic forces lead us to have not more, but fewer resources
at hand. Thus, the Commission should not grant the Petition for a declaratory order until New
England’s market transformation has been successfully accomplished.
30
David B. Patton, Ph.D, Summer 2002 Review of the New York Electricity Markets, October 15, 2002.
14
4.
The NERTO Petition Conflicts With The Commission’s SMD NOPR
The Commission’s standard market design initiative indicates that the market rules for
RTOs will be developing significantly in the very near future. The Petition does not adequately
address how the proposed NERTO market structures would be efficiently reconciled with the
market structures proposed in the Commission’s SMD NOPR. While Petitioners aver that “[t]he
NERTO Market design will be consistent with the Commission’s standardized market design
principles”31 there are several critical inconsistencies between the NERTO proposal and the
SMD NOPR. To take one obvious example, Petitioners propose to utilize an installed capability
(“ICAP”) mechanism to promote generation adequacy.32 In the SMD NOPR, the Commission
expressly moved away from reliance on ICAP, proposing to eliminate ICAP in favor of a process
that would require load serving entities (“LSE”) to secure, in advance, their share of supply
resources to meet forecasted regional load and reserve margin requirements.33
To enforce
compliance, an LSE would face a penalty for taking energy from the spot market that threatens
reliable transmission operation during a year in which the LSE had failed to meet its resource
adequacy requirement.34 In fact, the Commission specifically explained that “[t]he resource
adequacy requirement proposed here is unlike that of the three Northeast ISOs,” 35 i.e., ICAP. In
striking contrast with this, the NERTO proposal would result in the New York ICAP market
system being adopted by New England and thus could impose significant additional
implementation costs on New England.
31
Petition at 41.
32
Id.
33
See SMD NOPR at ¶ 474-75.
34
Id. at ¶ 526-535.
35
Id. at ¶ 483; see also, id. at ¶ 527.
15
The Commission anticipates that its new SMD rules would be implemented by
September 30, 2004.36 Petitioners explain, however, that even its “Day One” tariff is not
expected to be implemented until June, 2003. The NERTO ICAP market is forecast to be up and
running in the first quarter of 2004,37 mere months before the Commission’s SMD is to be
implemented. Consider this in the context that ISO-NE forecasts have always been optimistic.38
Thus, NERTO’s timetable for implementation of ICAP would require dedication of resources to
resolution of an issue that is nearly certain to be superseded in short order by the Commission’s
SMD final rule.
We point out these differences between NE-SMD and the Commission’s proposed SMD
NOPR, not to argue here in favor of one approach over another, but rather to point out the
inconsistencies between the two. Another example of a difference between the SMD NOPR and
the Petition is the design of the congestion management system. The Petition does not seek to
implement a standard congestion management system within the NERTO region on day one.
Rather, under the implementation plan included in the Petition, ISO-NE will move to SMD
version 1.0 in the spring of 2003 (Stage 1). The NY-ISO will not implement SMD 1.0 but rather
is expected to transition to SMD version 2.0 in early 2004 (Stage 2). Both ISOs will not reach
the final stage of market standardization, or SMD version 2.X, until “the 2005/2006 timeframe”
(Stage 3).`39
The Commission now has before it a Motion for Rehearing or Clarification, as well as a
30-Day Compliance Filing, for the September 20, 2002, Commission Order accepting in part and
36
Id. at ¶ 591.
37
See Petition at 6.
38
ISO-NE had originally planned to have a congestion management system and multi-settlements system in place in
October 1998.
39
Petition at VII.
16
modifying in part NE-SMD.40 We note here that there are a number of additional differences
between the Commission’s SMD NOPR and the proposed implementation of NE-SMD as
described in Market Rule 1.0. One difference is that under the terms of the SMD NOPR,
revenue surplus and deficits from Congestion Revenue Rights (“CRR”) will be allocated to
transmission owners. NE-SMD includes a similar concept to CRRs (Financial Transaction
Rights or “FTR”s). However, it proposes that revenue surpluses would be allocated among
entities that paid congestion costs while deficits would be allocated among FTR holders.
Another difference is that under the Commission’s SMD NOPR, CRRs would include flowgate
rights. NE-SMD does not include the concept of flowgate rights in Market Rule 1.0. A third
example of differences between the SMD NOPR and NE-SMD is that NE-SMD has no special
scheduling provisions for intermittent resources. The Commission’s SMD NOPR proposes to
adopt a recent California ISO scheduling provision for intermittent resources with request for
comment on whether there is a better way to accommodate intermittent resources.41
While Vermont has not attempted to identify every potential conflict between the
NERTO proposal and the SMD NOPR (doing so is impossible in the absence of a proposed
tariff), it is clear that the NERTO plan will likely have to be re-evaluated in light of the
Commission’s rules.
As such, it makes little sense to spend time evaluating the NERTO
proposal because, at best, the ongoing SMD rulemaking will make the NERTO proposal a
moving target.
In sum, issuing the requested declaratory order would potentially disrupt implementation
of ongoing market reforms and the Commission’s new SMD rules. Given the concerns with
Request for Rehearing and Clarification of FERC’s Order Issued 9/20/02 of ISO New England, Inc. under ER022330 et. al. (filed 10/21/02). New England Power Pool and ISO New England submits compliance filing in
response to FERC’s 9/20/02 Order under ER02-2330 et. al. (filed 10/7/02).
40
41
SMD NOPR at ¶ 275.
17
Petitioners’ current proposal, and given further the comprehensive market reforms the
Commission is in the process of instituting (which Petitioners barely address), there is substantial
doubt that NERTO would ever be implemented in the form proposed in the Petition. As such,
the Petition is, as best, premature and should be dismissed.
At this stage, the Petition merely represents the ISOs’ incomplete view of how they could
hypothetically merge. The ISOs’ plan does not adequately address the objections of their own
stakeholders, does not make a case why the NERTO will benefit the entire region, and does not
provide a substantive explanation of how NERTO will incorporate key elements of the
Commission’s evolving market rules. The Commission should dismiss the Petition at this time
and allow us to get on with the more important task at hand – getting the market rules right in
New England.
B.
In Addition To Its Procedural Deficiencies, The Petition Fails To Address
These Significant Substantive Problems: Sharing Of Benefits, Governance,
System Planning And Expansion, Cost Allocation For System Upgrades
Market Monitoring, Demand Response, And The Role Of The States
If, contrary to the position of Vermont, the Commission chooses to address the NERTO
Petition, we urge the Commission to simultaneously address the following issues: (1) sharing of
benefits; (2) governance; (3) system planning and expansion; (4) cost allocation for system
upgrades; (5) market monitoring; (6) demand response; and (7) the role of the states. The
NERTO Petition is lacking adequate detail on all these key issues. Vermont requests that the
Commission provide clear guidance to the Petitioners regarding these aspects of the Petition that
Vermont believes need to be modified or subject to further clarification. These comments also
reflect positions that Vermont is likely to reiterate in comments on the Commission’s SMD
NOPR. Indeed, many of the issues will need to be addressed – hopefully at a more measured and
better informed pace – if New England moves forward in a six-state regional RTO.
18
1.
The Petition Does Not Address The Necessary Sharing Of Benefits
That Might Result From The NERTO Merger
As a threshold matter, the Commission must clarify that NERTO must implement some
form of benefit sharing so that New England customers are not saddled with higher power costs
while New York customers benefit from savings. As we make clear in Section (A)(2)(a), above,
the merger will have a detrimental effect on New England customers. Under the NERTO costbenefit analysis, New England stands to lose $67 million in wholesale power costs through 2005
as a result of the proposed market changes under NERTO.42
NECPUC has been participating in a working group, in collaboration with NEPOOL, to
design a model and methodology for determining the specific costs and benefits that would flow
from either the NERTO or from elimination of the export fee between regions. The working
group has developed a proposal for the prioritized allocation and distribution of the net benefits
and NECPUC has filed that proposal in this Docket.43 More detail will be submitted in a
NECPUC filing in this Docket with respect to this issue. We ask the Commission to review that
filing and grant the relief requested therein.
2.
The Petition Does Not Adequately Address Independence And
Governance
Vermont would prefer to see a NERTO governance structure which has less involvement
from market participants. However, we can support moving forward as long as the Commission
accepts the changes to the NERTO governance proposal as set out in the NECPUC comments
and clarification filed in this Docket.44 The joint NECPUC filing represents a consensus of all
42
Petition at Attachment X, p. 6.
43
See, Joint Statement by The New England Conference Of Public Utility Commissioners and New England Power
Pool Participants Committee, Docket Nos. RT02-3-000 and RM01-12-000 (November 8, 2002).
44
See, Comments And Request For Clarification Of The New England Conference Of Public Utilities
Commissioners, Docket No. RT02-3 (November 8, 2002).
19
the New England state commissions on NERTO governance. We will not repeat all those
arguments here, but Vermont strongly supports the NERTO governance positions included in the
NECPUC filing; positions that have been long-held by the New England regulatory
commissions. In particular, Vermont supports the concept included in the NECPUC filing that
the NERTO governing documents must include an express requirement that the NERTO Board
will have a responsibility to act in the public interest. We urge that, should the Commission
decide to take action upon the Petition at this time, that the NECPUC governance positions be
fully incorporated into any Commission order approving this (or any) RTO for the Northeast.
In addition, Vermont asks the Commission to consider the following points if it chooses
to act upon the Petition. Vermont is concerned over the lack of detail for the retention and
selection of Board members past the initial selection process. The Petition discusses an ongoing
selection process in which the nominating committee develops a slate of candidates “for
presentation to the market participants.”45 The process continues as follows:
The market participants will then be asked to approve the slate by
means of a simple majority of the sector vote of those present or
voting by proxy. If the market participants approve the slate, the
nominating committee will present the slate to the NERTO Board
for its vote. If the participants do not approve the slate, the
nominating committee will consider whether to recommend the
existing slate to the NERTO Board after informing the Board of
the participants’ vote, or to modify the slate. In the latter case, the
nominating committee will repeat the entire process once, and may
opt to do so more than once, if necessary.46
Vermont believes that the advisory vote on proposed Board candidates should be limited to one
initial round. Again, this is in the interest of having an independent and self-sustaining Board.
At the very least, the conditional term “if necessary” requires clarification. Vermont does not
45
Petition at 25.
46
Id. at 25-26 (emphasis added, parenthetical omitted).
20
object to an advisory vote of the market participants, so long as it does not lead to endless
reconsideration and re-votes of proposed slates of candidates. Such an outcome would be
redolent of the gridlock that has characterized much of the ISO-NE/NEPOOL governance
process to date. Thus we ask the Commission to clarify this section of the Petition and limit the
number of rounds of consideration of a slate of Board candidates to one round only.
3.
The Petition Does Not Adequately Address System Resource Planning
And Expansion
Vermont has grave concerns over the proposed NERTO planning and expansion process
that is included in the Petition as Attachment VII. The proposed process has a number of
weaknesses including:
1.
A lack of balance and diversity among resources, signified by an overemphasis on
transmission upgrades;
2.
A failure to provide any definition or rationale for the distinction between a
‘reliability system upgrade’ and a ‘market efficiency transmission upgrade;’
3.
The proposed use of a default threshold of 345 kV for cost allocation to all load
within the entire NERTO region and a default cost allocation for facilities below
345 kV to sub-regional load (where default is defined as “in the absence of an
agreement on cost responsibility for a given upgrade”); and
4.
Failure to adequately recognize the statutory role of the states in the planning and
siting process.
The NERTO petition adopts, in large part, the Regional Transmission Expansion Plan
(RTEP) that is currently used by ISO-NE. Although the RTEP process is a capable tool for
identifying problems and estimating the benefits of solutions to system-wide problems, it
perpetuates an historical bias towards transmission solutions at the expense of possible lower
cost solutions that utilize demand response, load management, distributed generation, and energy
efficiency in combination with transmission upgrades.
21
Our primary concern is that the Petition’s focus on the system expansion process is
clearly on transmission upgrades. This is an extraordinarily important defect, and is a highly
surprising one since it ignores not only the Commission’s counsel to treat all resources on a level
playing field47 but also state statutes which allow siting of new resources only if they are the
least-cost alternative to a public good.48 This concept is discussed further below.
As the Commission has recognized, under a locational pricing regime, transmission,
generation, and demand-side resources can often be substitutes for one another. Thus, failure to
treat generation, transmission, demand-side resources, distributed generation, and other resources
equitably impedes the development of competitive energy markets. A planning process without
those basic tenets of balance and diversity, in essence, forces an RTO to step in and become a
market actor as it tips the scales in favor of one set of resources over another. When the costs of
one alternative are socialized, and the costs of other, potentially cheaper alternatives are not, the
system will create an extraordinarily powerful perverse incentive to favor one type of investment
over another and to create uneconomic costs.49
Balance and diversity in resource options should be an essential principle of system
expansion and planning since different transmission investment and pricing strategies will affect
the relative market positions of remote generation, load-center generation, and demand-side
resources. The electric industry has traditionally favored transmission solutions to congestion
and reliability problems under the assumption that expansion of the grid will enable more
efficient deployment of supply-side resources. It is time to move away from this supply-side
bias because efficient markets cannot exist without a fully-integrated demand component.
47
SMD NOPR at ¶ 347.
48
See, for example, N.H. Rev. Stat. Ann. § 378:38; R..I. Gen. Laws § 42-98-2; Vt Stat. Ann. Tit. 30 § 248(b)(2).
22
The principles of balance and diversity of resources should be actively included in the
NERTO planning process in order to ensure the development of the demand-side of the market
and enable the deployment of distributed resources.
To this end, the system of making
investments to solve grid concerns should be actively designed to solicit all solutions to
overcome any inherent bias for a wires-only solution.
The Petition does not adequately
incorporate these basic principles of resource balance and diversity into the planning process,
thus the system planning and expansion process as proposed is fatally flawed.
As an example of the Petition’s deficiency in this area, section 3.4 of Appendix VII
discusses the inclusion and removal of transmission upgrades from the NERTO system plan.
This section does recognize that alternative projects (generation, merchant transmission, and
demand-side projects) may develop and thus be included in the plan. However, it gives the
transmission owning entities full cost recovery for any upgrades included in the plan, even if
they are ultimately never built because of revisions to the plan by the NERTO. However, it does
not offer equivalent recovery (pooling) rights for non-transmission planning and analysis. This
grant of preferential recovery of planning costs, solely for transmission upgrades, creates a
barrier for alternative resources which are not guaranteed cost recovery. The Commission needs,
at a minimum, to require equal pooling opportunities to be offered to all aspects of a least-cost
solution to a problem.
This section of the Petition also references a default cost allocation methodology for
“reliability transmission upgrades.” These upgrades are to be funded via a default cost allocation
methodology in which, absent agreement on assignable cost responsibility, the facility will be
charged to all regional load if it is 345 kV and above and charged to sub-regional load if below
49
Importantly, this issue is distinct from the question of what costs to pool once a lowest cost option is selected,
assuming that each option competes for pooling on an even-handed basis.
23
345 kV. We are concerned that this default cost allocation scheme will distort the planning
process. Should the Commission accept the default cost allocation scheme as proposed in the
Petition it is highly likely to become the standard under which transmission investments that
qualify under the NERTO planning process are paid for; in effect negating the possibility of
assignment of costs to the beneficiaries of those upgrades. Why would parties voluntarily agree
to bear some or all of the costs of an investment if, by their failure to agree, they could have the
costs of that investment picked up by every one else in the region?
The proposed default cost allocation methodology also is arbitrary. By providing an
automatic roll-in of 345 kV lines, it does not test the solution against other solutions that may be
lower in cost. It also assumes, without further justification, that lower voltage transmission
projects would not provide system-wide benefits meriting socialization. Neither assumption can
be justified.
To start with fundamentals, a planning process for regional wholesale markets needs to
accomplish two critical tasks:
1.
It should provide a source of balanced credible expertise for state siting board
decisions on the “need” and “highest value” of various options; and
2.
It should determine how the costs of system improvements identified in the plan
should be financed.
In addition, when markets fail, an RTO may need to be the default provider of essential services.
If so, it should pursue least-cost options as a goal consistent with system reliability objectives.
Vermont takes no issue with the precept that the planning process should serve as a
backstop to identify non-market based solutions to system needs, but only when it appears that a
market response will not resolve a problem and only when the non-market based solution has
been tested against other alternatives.
Non-market based broadly-funded solutions should
24
include all functionally equivalent resources – transmission, generation (including distributed
generation), and demand-side resources.
However, the planning process set out in the Petition assumes, inappropriately, that the
only type of resource option that could be eligible for region-wide funding would be a
transmission resource. Consistent with the SMD NOPR, all practicable resource options should
receive equal consideration as potential solutions that might be eligible for broad-based funding.
As a threshold matter, the Commission should require the NERTO planning process to
incorporate a “resource parity” standard as a test against whether a non-market based solution to
a system-wide problem is least-cost. Put another way, if any resource costs are to be socialized
regionally they should be subject to a standard in which the socialized solution is the least-cost
solution.50
We refer to this concept as “resource parity.” The Commission’s reiteration of the
“resource parity” standard in this context is necessary both because of the deficiencies of the
Petition and in order to: (1) provide much needed discipline in situations where expensive wires
solutions are proposed to address reliability problems (and granted broad-based funding) while
more robust, less expensive solutions are overlooked; and (2) provide states with material
evidence upon which to base siting decisions that, by statute, often require a demonstration of
need, including consideration of more economic alternatives.
4.
The Petition Sets Out Important, But Partial Details On Cost
Allocation Schemes For System Upgrades
a.
The Commission Should Adopt A “Resource Parity” Standard
It will be important to ensure that time constraints do not force a “least-time” solution in place of lower-cost
options with longer lead times. Thus, the regional planning process needs stable funding, along with the
institutional capability to look ahead and balance solutions before short-term crises develop.
50
25
Vermont is concerned that the Petition does not provide an appropriate proposal for how
the costs of system upgrades will be allocated to participants. 51 The Petition states that the costs
of transmission upgrades for reliability purposes will be allocated by "the agreement of NERTO
participants."52 There is no description of the process that will be used to achieve this agreement
nor is there any definition of who qualifies as a NERTO "participant." The treatment of cost
allocation in the Petition is also not fully consistent with the SMD NOPR. The SMD NOPR
establishes two general principles for allocating the costs of transmission upgrades. Upgrades
for reliability purposes should be allocated to all ratepayers, i.e., socialized. Upgrades for
economic purposes should be allocated to those who will benefit through some form of a
participant funding mechanism.53
The Petition is deficient in its lack of definition for what will constitute a “Reliability
Transmission Upgrade” (and therefore be socialized) versus what will be defined as “Market
Efficiency Transmission Upgrades.”54
Further, the Petition does not define how Market
Efficiency Transmission Upgrades costs will be allocated.55 These definitional problems are not
straightforward and must be resolved before the cost allocation issues can be fully resolved.
But we believe that there is an even more fundamental flaw with the treatment of this
issue in the Petition. It does not provide for parity among resources. Thus, it is in conflict with
the Commission’s stated goals. A “resource parity” standard would test all alternatives against a
least cost solution. This is consistent with several state statutes, such as Vermont’s statutory
51
See Petition at 104.
52
Id.
53
SMD NOPR at ¶¶ 194-200.
54
See Petition at 99, nn.115-116.
55
Id. at 104.
26
requirement that any transmission or generation resource sited in the state be cost effective. 30
V.S.A § 248(b) states in relevant part,
“Before the public service board issues a certificate of public good . . , it shall find
that the purchase, investment, or construction: . . .(2) is required to meet the need
for present and future demand for service which could not otherwise be provided
in a more cost effective manner through energy conservation programs and
measures and energy-efficiency and load management measures . . .”
Other states have similar statutes.56
The Commission needs to declare that the Petition is deficient in this area.
The
Commission should require Petitioners to cure this deficiency by applying a “resource parity”
standard, as consistent with the SMD NOPR. Under this standard, a regional planning process
would treat all potential solutions (transmission, generation, demand response, and distributed
generation) for reliability or economic upgrades on an equal basis. This would allow any
potential solution, not just a transmission solution, to receive rolled-in cost treatment.57
This
standard is consistent with the NOPR’s guidance that “the planning process should leave open
the question of how and by whom those needs should be met, without favoring one solution
(whether it is transmission, generation or demand response) over another.”58 The “resource
parity” standard is also consistent with the Commission’s goal of market-based participant
funding for a sub-set of network upgrades and expansions, while preserving the option of
socialized treatment for those facilities that provide region-wide reliability benefits and thus may
be eligible for rolled-in funding.
56
See fn. 48.
57
This treatment was put into practice in New England in response to a request for proposals for 80 MW of peak
shaving. This served as a solution for what has been identified by ISO-NE a reliability problem in Southwest
Connecticut. In that situation, the costs of the demand response program rolled into uplift for the region. ISO-NE,
Summer 2002 Capacity Assessment (April, 2002).
58
SMD NOPR at ¶¶ 346-347.
27
In past filings before the Commission, the VDPS has argued that the socialization of
transmission upgrades and expansion costs should end once NE-SMD is in place.59
Vermont
has come to recognize that, even under a locational pricing regime, there may be some subset of
projects (typically projects which are deemed necessary to preserve system-wide reliability) for
which broad-based funding (socialization) is appropriate. These network upgrades that will
provide system-wide benefits for reliability might merit socialized treatment. This approach is
consistent with the Commission’s statement in the SMD NOPR that “[i]f the expansion is for
region-wide reliability, there is little disagreement as to who should pay for the necessary
facilities – all ratepayers.”60
However, Vermont believes that socialization of upgrades will only be appropriate for
those resources that provide region-wide reliability benefits and meet two critical tests:
1.
That a socialized solution is only considered when markets have failed to provide
a solution; and
2.
The socialized solution meets the “resource parity” standard i.e., it is the best
combination of solutions (whether transmission, efficiency, or generation)
constituting the lowest-cost option that will meet need in a timely way.
The fundamental objection to a rote socialization of solely transmission expansion costs
is that it masks the true costs of alternatives and may lead to inefficient solutions to system-wide
problems. The preconditions outlined above preserve the most critical component of a test for
whether a network upgrade should be socialized, namely a measurement of whether any upgrade,
transmission or otherwise, is an economically superior alternative to other solutions. Vermont
believes that this “resource parity” standard should be an ongoing feature of any locational
pricing regime, including NE-SMD or any SMD for the Northeast region.
59
Joint Motion for Clarification of the Maine Public Utilities Commission and the Vermont Department of Public
Service Under EL00-62-032 et. al. (filed 3/15/02).
60
SMD NOPR at ¶ 194.
28
b.
If the Commission Should Decline To Adopt the “Resource
Parity” Standard It Should Ensure Equity Among The New
England States
If the “resource parity” standard is not adopted in full and in such a form as to be
rigorously enforced, then considerations of simple parity and equity require some period to
transition from the historical PTF regime in New England. This transition needs to be long
enough to provide for the equitable balancing of contributions made in the past. The transition
could be used to develop more specific information on those contributions and negotiate a
mechanism to provide for balance within the region.
Under the PTF regime, Vermont paid a portion of the costs of all projects within the
region that were deemed to be “Pooled Transmission Facilities” based upon its load share.
Vermont to date has paid more into the pool then it has received under the PTF formula. Under
the new locational pricing regime, we have great concerns about being asked to continue to pay
for upgrades that are deemed necessary to preserve reliability, and thus eligible for broad-based
regional funding, if we cannot be assured that a socialized solution is least-cost.
Should the Commission decline to require the NERTO to adopt the “resource parity”
standard, Vermont wants to ensure that long-term equity prevails among the New England states.
Given the Commission’s prior rulings, a flash-cut application to a pure cost-causation theory in
New England, absent the “resource parity” standard, would clearly be inequitable. In the past,
the VDPS argued against socialization of upgrade costs for the Northeast Massachusetts region
but has been over-ruled by the Commission. Having ruled against the VDPS on this issue, and
having required Vermont to pay its proportional share of major upgrades in other areas of New
England, it would be particularly egregious to now change the terms under which region-wide
costs are allocated without any recognition of the past payments of states to projects that have
already been built with pooled costs.
29
However, we also recognize the need for a timely end to the transitional period since
widespread continued socialization of resource upgrade investments, after a transitional period,
may dampen the very market mechanisms we put into place with the move to a new market
system based upon locational marginal pricing.
Thus, we propose the following practical
solution. Phase One — an interim ‘second best’ solution that is built upon political support and
parity within New England in which some projects continue to be socialized within the New
England region, up to a level for each state that brings the states into equilibrium; and (2) Phase
Two — in which the greater region moves to a long-term steady-state built upon the principle of
cost-causation – or as high a degree of direct assignment is economically efficient given the high
costs and analytical imprecision of efforts to identify the beneficiaries of specific resource
upgrades.61
We propose that the NECPUC states work toward a more defined working statement and
process for achieving regional equity and a more defined statement of the transition to Phase
Two over the next six months. We look forward to working with our colleagues in other New
England states, and with the Commission, ISO-NE, and other stakeholders to resolve this
difficult issue.
As for the treatment of upgrade costs in New York, should the Commission grant the
Petition, Vermont contends that, due to the equity and fairness issues discussed above, inclusion
of New York upgrades during the transitional period would not be equitable. Given the long
history and disparate methodologies to socialize transmission upgrades in New York, as opposed
to in the New England region, any effort to blend their mutual obligations would be
extraordinarily difficult with little, if any, chance of achieving a just result. Thus, during the
61
Attribution of costs to beneficiaries can be both costly and contentious, especially in a dynamic sense, i.e., when
that determination is contingent upon projections of costs and benefits through the decades that follow the date of
30
transition, New York should recover the costs for system upgrades within its borders from its
own consumers. To saddle New England ratepayers with the costs of system upgrades in New
York is quite simply untenable.
5.
The Petition’s Market Monitoring And Mitigation Requirements
Should Be Augmented
Vermont largely endorses the ISO’s proposal for market monitoring. However, one
aspect of market monitoring was not directly addressed in the NERTO filing and that is the need
for adequate funding and adequate resources to be able to accomplish this mission which is so
critical to the success of workable, competitive markets. We are concerned that the NERTO
cost/benefit study showed that there would be a system-wide savings from RTO budgets
resulting from combining control areas into a central, single dispatch. This budget reduction
contrasts with the need for increased market monitoring and mitigation. Merger of the markets
will not necessarily lead to lower costs, particularly if such a premise is built upon an assumption
of savings in the costs of market monitoring and mitigation. To the contrary, Vermont submits
that any larger footprint for the markets in the Northeast must be accompanied by a significant
increase in resources for market monitoring and mitigation.
In addition, Vermont believes that the market power mitigation measures described in the
Petition need to be augmented. As proposed, mitigation would only be imposed after significant
conduct and impact thresholds have been met. Vermont believes that the reference prices that
serve as the basis for the conduct threshold should have a strong relationship to the full marginal
operating cost of a unit and not rely solely or even primarily on past bidding behavior. There is
no reason to believe that bids that have little relationship to marginal costs are reasonable no
matter how often they have been bid and accepted in the past. In a centrally dispatched market
installation.
31
where every unit gets the market-clearing price, there is no reason for a truly competitive
supplier to bid anything other than full marginal costs. The proposed thresholds also allow too
much economic withholding to occur before mitigation is imposed. It is important that conduct
and impact thresholds are as low as practical so that instances of economic withholding are kept
to a minimum.
Further, even if the thresholds are breached under the proposal, the contemplated
mitigation only replaces a suspect bid with one set at a reference level. This contemplated
mitigation will not be a sufficient deterrent to economic withholding.
Indeed, mitigation
whereby inappropriate bids are flagged and modified in short order without further pain to the
bidder removes from bidders any need or incentive to police themselves. The market monitor is
put in a situation of trying to police bidders who have no incentive to limit what they try to get
away with.
In fact, under the proposed mitigation, bidders are better off attempting to
economically withhold resources and getting caught, then they are not engaging in economic
withholding to start with.
In order to be effective, the mitigation must also include refunds or fines levied against
offending bidders so that market participants are deterred from exercising market power through
economic withholding and/or otherwise engaging in anticompetitive behavior. Putting additional
financial consequences into the mitigation measures will help discipline bidders so that they bid
more like truly competitive suppliers.
Therefore, Vermont urges the Commission to augment the market monitoring and
mitigation procedures proposed in the NERTO so as to reduce the thresholds that must be
breached before mitigation is imposed and to materially increase the financial consequences to
suppliers that attempt to economically withhold resources from the market.
32
Additionally, Vermont suggests a modification of the structure of the internal market
monitor. As proposed, the internal monitor is appointed by and reports to the CEO of the
NERTO Board. This relationship has the potential to distort any reports sent to the CEO by the
internal monitor. Although the existence of an external monitor mitigates these concerns to
some extent, we suggest that the NERTO Board, rather than the CEO, have authority over the
appointment and termination of the internal monitor. This structure would help ensure that
authority over the monitoring functions of NERTO are diffused throughout the Board rather than
concentrated in one individual.
6.
The Petition is Deficient On Demand Response
The Petition also lacks sufficient detail regarding how NERTO would facilitate priceresponsive demand. On this issue, the Petition merely states that “[t]he NERTO will promote
robust demand-side response mechanisms, including a day-ahead demand response program
based on the current New York model . . . demand-side mechanisms will ultimately include the
ability for qualified demand resources to participate in the ancillary services markets.” 62
Vermont believes that sending adequate price signals to promote demand response is an essential
element of any electric market, and it is not at all clear from the Petition if the NERTO markets
would adequately accomplish this goal.
In this area, the Petition also demonstrates value differences when compared to the
Commission’s SMD NOPR. The Commission proposes to create a demand response resource,
and in public comments, has endorsed the importance of developing a demand response resource
that might be bid into the market in a like manner as supply. However, NERTO proposes to
enlarge the differences between supply and demand response by promoting a $1000 price cap for
62
Petition at 41.
33
a supply resource while establishing a $500 cap for a demand response resource. Allowing
NERTO to define different objectives and values for demand-side and supply-side resources will
not only distract investors, but will unsettle the markets and be counterproductive.
As mentioned in Section (A) above, Vermont is concerned that the Petition is silent on
the consensus-building efforts that are underway in New England through NEDRI. The NEDRI
process was underway at the time the Petition was filed with the Commission yet the Petition is
absent any reference to the NEDRI process. This raises real concerns about the commitment of
the ISOs to incorporate the work that NEDRI is doing into its mission under NERTO. Vermont
cannot endorse a NERTO that does not make development of the demand-side of the market a
top priority and the Commission should recognize this as a serious defect of the filing.
New England’s regulatory commissions, environmental regulators, market participants,
ISO-NE, and many consumers have been active participants and supporters of this broad-based,
regional NEDRI effort and are actively working to propose policies, market rules, and programs
for a comprehensive demand response in the region. NEDRI has assembled a strong technical
and facilitation team, and is working collaboratively with this broad group of stakeholders.
Vermont submits that the efforts underway at NEDRI should be fully incorporated into any RTO
process for the Northeast.
7.
The Petition is Unclear About The Role Of The States
The Petition proposes an Advisory Committee of seven state regulators, which will meet
with the NERTO Board on a regular basis. However, there are no specific duties or areas of
responsibility for the Advisory Committee. In contrast, the SMD NOPR establishes a Regional
State Advisory Committee (“RSAC”) that might include governor appointees, utility regulators,
and other state agencies. The RSAC would have specific duties in regard to transmission
planning and establishing the resource adequacy requirement. In addition, its duties might
34
encompass reviewing market rule changes, RTO management and budget review, market
monitoring, demand response, environmental issues, rate design, and other as yet unspecified
duties.63 For reasons set out below, we believe that neither the Petition, nor the SMD NOPR,
adequately incorporates the role of the states in the NERTO, or any regional RTO that might be
formed under the Commission’s SMD rules.
Vermont submits that the Petition is deficient because it pays scant lip service to the role
of state regulators in NERTO governance, NERTO system planning, and other matters that affect
the states directly. There are only two sentences in the Petition devoted to state participation in
the NERTO.64 In contrast, the Petition gives significant deference to market participants by, for
example, providing for seats on the nominating committee and providing for meetings between
the NERTO Board of Directors and stakeholder representatives prior to each Board meeting.65
The Petition, in its silence upon this central point, suggests that it is ignoring, rather than
recognizing, the ultimate role that state siting decisions play in regard to system resource
expansion. In doing so, the Petition suggests that any resulting RTO will fail to focus on the
fundamental need to provide state siting bodies with authoritative and credible testimony about
the needs that they will have to consider in determining whether to grant siting permits and
approve the use or threat of eminent domain proceedings. The Commission has rightfully noted
the importance of the role of state regulators in its SMD NOPR. Vermont submits that the
NERTO filing is woefully inadequate in this respect and the Commission should direct the ISOs
to cure this in any future filings.
63
SMD NOPR at ¶¶ 490-491, 524, and 554.
64
Petition at 30
65
Id. at 28.
35
More specifically, Vermont has significant concerns regarding the precise role that state
siting authorities will play in system planning for a Northeast RTO. As part of formulating the
NERTO System Plan (“NSP”), NERTO will perform a needs assessment, which will assess
resource adequacy, transmission adequacy and will include reliability needs as well as projected
congestion levels under various conditions.66 Petitioners state that the needs assessment will
receive input from the Planning Advisory Committee (“PAC”) and “will consider the views, if
any, of state regulators . . . .”67 To the extent Petitioners suggest by this statement that they, not
the states, will make resource siting decisions, simply turns existing law on its head. It ignores
the fact that many statutes clearly place siting authority with state regulators, not with the
Commission and not with any future NERTO. It is flawed because it is built on a premise that
what is being planned can, in fact, be built. We submit that siting is, and must continue to be, an
integral part of system planning. Thus the relegation of state regulators to a mere “advisory” role
in that formalized process to consider siting issues, is a serious deficiency of the Petition.
As noted in Section (B)(3), the planning process for regional wholesale markets needs to
accomplish two critical tasks:
1.
It should provide a source of balanced, credible, expertise for state siting board
decisions on “need options;” and “highest value options;” and
2.
It should determine how the costs of system improvements identified in the plan
should be financed.
As noted earlier, many states have a more open resource selection process than that which is laid
out in the NERTO proposal.
The proposed “consideration” of state regulator views simply fails to incorporate
adequate state siting input at the outset of the planning process, especially given that state siting
66
Id. at 99-100.
67
Id. at 100.
36
approval will still be a prerequisite for the RTO to go forward with a system upgrade. 68 Nor is it
clear that the planning process, as described in the Petition, will provide state regulators with the
requisite information they will ultimately need to be well-informed about siting decisions that
only they can make.
While the NERTO filing, in its current form, provides inadequate mention of the role
which State regulators would play in resource planning, the Commission in the SMD NOPR has
advocated the establishment of Regional State Advisory Committees. This solution has not yet
been fully vetted within the region. However, we are concerned that under this model, the States
would also be relegated to an insufficient advisory role only that does not give adequate weight
and input to the traditional State role – and statutory obligations – in resource planning.
Vermont maintains that the Commission’s approach, taken literally, is indicative of troubling
Federal infringement into the realm of the States as provided under the Federal Power Act and is
without any legal merit, given the states’ legislatively mandated role.69
Another mechanism for State involvement in regional planning has been put forth by the
National Governor’s Association (“NGA”). The NGA calls for the establishment of Multi-State
Entities (“MSE”). The primary focus of the NGA report is transmission siting, but the concepts
could be applicable to resource planning in general. MSEs would facilitate coordination among
the participating States and with the RTO on matters covering the overlap between State and
interstate planning.
68
Id. at 103.
69
For example, the recent energy bill passed by the House would provide for Federal authority over siting of
transmission lines. This is a clear recognition that that authority does not now exist and, in the absence of its
passage, it can be presumed that Congress sees no need to upset long-standing law in this area.
37
Vermont believes that RTOs have four essential tasks:
1.
2.
3.
4.
Dispatch control;
Advice to the states as to the necessity or usefulness of state siting decisions;
Defining the amounts of costs to be socialized (and assigned to utilities) v. costs
to be allocated to beneficiaries; and
Monitoring and advocating for improvements to the market rules.
States should have formal input on 2 and 3 and their advice should be sought on 4.
Thus, in the formation of regional entities, the Commission needs to incorporate a formal
role for the states so that RTOs, the Commission, and the states have conduits for decisionmaking in cases where state/federal jurisdictional purview may overlap or be in conflict.
However, we recognize that this means breaking new ground; regional institutions are needed,
yet the options currently available are limited. New partnerships must be formed, yet several
obstacles must be overcome prior to the formation of any regional multi-jurisdictional decisionmaking body. A primary stumbling block will be subordinating parochial interests in order to
advance common, region-wide purposes.
Vermont suggests an approach that might lead to an ultimate resolution of this
challenging problem. In order to fashion a mechanism or institution to overcome this problem,
FERC and the states should consider a joint board that could be established by FERC under
Section 209 of the Federal Power Act for the specific purpose of addressing the problem of
multiple jurisdictions on important electric wholesale market issues such as siting of adequate
transmission and generation resources. The joint board should be considered a means to an end
rather than the end itself. In other words, there should be a clear goal for the joint board, which
should be the establishment of a regional body providing the States within an RTO a mechanism
for speaking with one voice on resource planning issues. The final product of such a joint board
might range from an informal, ad hoc committee to an interstate compact requiring a legislative
grant of Congress. Whatever the particular form of the final outcome, that outcome would
38
necessarily recognize the existing statutory role of state authorities and set out a path for any
RTO to provide useful, credible, and balanced information about resource options in a timely
basis to state authorities within a region.
The foregoing list of issues is not intended to be exhaustive, but is advanced in order to
offer observations of Vermont on several of the specific issues raised by the Petition. As the
foregoing makes clear, the final resolution of many, if not all of these issues depends ultimately
on the Commission’s pending SMD Rules. Vermont intends to more fully address SMD at the
appropriate time in Docket No. RM01-12-000. In the meantime, the Commission, if it addresses
the Petition at all, should provide clear guidance to NERTO and the other stakeholders consistent
with the foregoing.
IV.
CONCLUSION: THE PETITION, AS FILED, MUST BE REJECTED AS
INCOMPLETE, PREMATURE, AND SUBJECT TO SUBSTANTIVE
DEFICIENCIES
For the reasons set forth above, the Commission should grant the motion of Vermont to
intervene in this proceeding and dismiss the Joint Petition for Declaratory Order filed by ISO-NE
and NYISO. The deficiencies in the Petition are material and acting upon an insufficient
proposal at this time will divert our attention from getting the rules right under New England
standard market design. While the intention of the Commission and the ISO to move forward
with RTO formation expeditiously is admirable, it would be a mistake to put a speculative
experiment ahead of pragmatic experience with application of better rules within existing
markets. As John Dickinson told the 1787 Constitutional Convention, “Experience must be our
only guide; reason may mislead us.”70 In other words, an ounce of experience may teach us
more lessons than a pound of hypotheses. Denial of the pending Petition will allow New
70
John Dickinson, as reported in the Debates in the Federal Convention of 1787 reported by James Madison, Vol. II,
p. 392 (1987).
39
England to focus on experience with the better rules that are due for the first quarter of 2003.
Testing those rules in known markets will produce more value than launching the vast
experiment inherent in a merger. For these reasons, we respectfully request that the Commission
not act on the Petition at this time.
If the Commission does not dismiss the Petition, it should require NERTO to afford New
England customers a share of the benefits expected to accrue from the merger of the two existing
ISOs.
Further, the Commission should provide additional guidance on particular issues,
consistent with the discussion herein.
Respectfully submitted,
VERMONT DEPARTMENT OF PUBLIC SERVICE
VERMONT PUBLIC SERVICE BOARD
By: ________/s/___________
Harvey L. Reiter
John E. McCaffrey
M. Denyse Zosa
Stinson Morrison Hecker LLP
1150 18th Street, N.W.
Suite 800
Washington, DC 20036
(202) 785-9100 (phone)
(202) 785-9163 (fax)
Dated: November 8, 2002
Its attorneys
40
CERTIFICATE OF SERVICE
I hereby certify that I have this day served a copy of the foregoing document by firstclass mail upon each party on the official service list compiled by the Secretary in this
proceeding.
Dated at Washington, D.C., this 8th day of November, 2002
/s/
Harvey L. Reiter
WDCDOCS 50858v1
41