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FERC Serves as Forum for Clash Over LICAP Cost Estimates

Estimates for the ultimate price tag of an ISO New England (ISO-NE) locational installed capacity (LICAP) proposal -- which some have put in the neighborhood of $13 billion to $15 billion -- became a central bone of contention between representatives from the New England grid operator and certain parties opposed to the LICAP plan at FERC-sponsored oral arguments last Tuesday.

More than one FERC commissioner expressed displeasure with the way in which cost estimates for LICAP were being tossed about.

In August, FERC postponed LICAP implementation, if it proceeds, until no earlier than Oct. 1, 2006 instead of January 2006 as originally scheduled, and announced an oral argument. The oral argument examined not only the LICAP proposal, but also various alternatives to the plan that have been advanced.

In comments made on behalf of Connecticut Attorney General Richard Blumenthal, Randall Speck said, "I think there's really no dispute that LICAP, as ISO [NE] has proposed it, is going to cost over the next five years between $13 [billion] and $15 billion."

FERC Commissioner Suedeen Kelly asked Speck whether he could provide details on how he arrived at the $13 billion figure for LICAP-related costs. Speck said that the $13 billion "is actually a number that the CEO" for ISO-NE "gave to the Boston Globe shortly after" an initial decision on LICAP was issued by a FERC administrative law judge (ALJ).

Noting the five-week hearing before the FERC ALJ, ISO-NE's Clinton Vince said that "the best evidence that these parties have been able to present when questioned by the Commission about cost was an out-of-record Boston Globe piece that in fact said -- if read carefully -- that the [ISO-NE] CEO Gordon van Welie told the Globe that NECPUC [New England Conference of Public Utility Commissioners] said the cost was $13 billion." Vince said that the "allegations of cost are unseemly in this case. We ought to stick to the record."

Addressing Speck, Kelly said, "I think it's unfair to the public to use a number this big in a misleading way, so I would appreciate it if you would make it clear so that we aren't inflating fears and anxieties" over possibly exorbitant rate hikes tied to LICAP implementation.

"Let's not bandy about costs that we can't calculate and we can't demonstrate," added FERC Commissioner Nora Brownell.

A report recently completed by the Josiah Bartlett Center for Public Policy said that the overall cost of the LICAP plan has been the subject of the most strident arguments. The report notes that ISO-NE has estimated the costs at $2.3 billion over five years after adding the cost of the new program and subtracting existing payments.

"A better study by the New England Power Generators Association details the increased cost of the program at $2.5 billion over five years after deducting current costs like the existing capacity program and current RMR payments," the center said. "Even that estimate is probably too high as it maintains current RMR costs." The center is part of a larger group called the New England Coalition for Reliable Electricity (NECORE) that recently was formed to support the LICAP proposal (see Power Market Today, Sept. 9).

Earlier in the proceeding, ISO-NE's Vince said that the grid operator "believes strongly" LICAP represents the best approach for meeting the goal of sending price signals to incent generation needed for reliability.

At the same time, he said "the forward procurement concept laid out in the alternatives is potentially viable. We feel it should receive serious further consideration. The ISO has committed to assist stakeholders with the development of alternatives and we've put our shoulder into it."

But ISO-NE urged FERC "to continue its long-standing view that locational price signals are critical and to give us that guidance early on," he added.

"The most important thing that I can say today is that the ISO is deeply concerned about timing," Vince said, noting the procedural schedule for LICAP has been delayed twice. "Right now, there is nothing effective in place in New England to maintain and incent generation needed for reliability."

Vince noted ISO-NE's regional system plan for 2005 reports the region will not have sufficient capacity to meet the installed capacity requirement by the 2008-2010 timeframe. "Since it takes two to four years to build new generation, the ISO anticipates a reliability problem in New England if LICAP is not put into effect by next October."

For LICAP to be in place in 2006, FERC would need to issue an order "hopefully, by next March." The ISO would then make a compliance filing in April or May and the Commission would need to act by mid-summer."

Vince said "if a better alternative is developed and decided upon next summer, which appears to be the earliest realistic date, it will be late 2007 before rules can be written, software developed and the entire market implemented."

He said given "the fact that under the best of circumstances, a better alternative would likely not be able to be implemented until 2011, the tough question is what does New England do from 2006 to 2011?" Vince said the "status quo will not work."

The status quo "means we continue with costly and environmentally dirty RMR [reliability must run] plants. With high cost, emergency RFPs and a flawed ICAP market that does not promote or retain investment." ISO-NE "will work very hard to determine whether forward procurement could become a viable alternative, but right now LICAP is the only fully developed just and reasonable solution that's ready to go," Vince noted.

Speck and Harvey Reiter appeared before the oral argument on behalf of "load intervenors" in the proceeding. The load intervenors include several New England-based entities, including, among others, the Connecticut Department of Public Utility Control, National Grid USA and the Vermont Public Service Board. Collectively, the load intervenors oppose the LICAP plan. Reiter appeared on behalf of the New England Conference of Public Utility Commissioners.

In his remarks, Reiter told FERC Commissioners that FERC shouldn't approve "this mechanism on the basis that it's a market mechanism. It isn't." He also said "even if you believe a LICAP-type curve will elicit supply and provide reliable service, our position is that the LICAP mechanism the ISO has chosen builds in layers upon layers of over-insurance, and therefore provides reliability -- if it works -- but only at excessive costs to consumers."

The afternoon portion of the oral argument dealt with alternatives to LICAP submitted to FERC. Those alternatives include a New England Resource Adequacy Market (NERAM) backed by a large collection of power companies, public advocates and utility regulators, as well as a New England Locational Resource Adequacy Market (NELRAM) supported by the utility commissions of Maine, Vermont, Rhode Island and New Hampshire.

At the start of the day, FERC Chairman Joseph Kelliher said that there "is a problem in New England's wholesale power markets that cannot be ignored, namely, the collapse of generation additions and the threat that poses to reliability and just and reasonable wholesale power prices in New England. In particular, very little new generation is being added in Southwest Connecticut and Northeast Massachusetts. At the same time, demand continues to inexorably grow. Current reserve margins are barely adequate at best, and more severe supply problems threaten just over the horizon. That is the status quo."

Kelliher said that if there was a party at the oral argument "who disagrees that there is a problem under the status quo, this is your opportunity -- perhaps your last opportunity -- to make a convincing argument that the status quo is working and is just and reasonable. The current record suggests otherwise."

The FERC Chairman said he is "concerned that the situation in New England bears an uncomfortable resemblance to the situation facing California in the late 1990s. One factor in the California crisis, of course, was lack of adequate electricity supply. I do not want to see the California crisis visited upon New England. I do not want to see the Commission criticized for not acting to assure reliability and just and reasonable wholesale power prices in New England. If the Commission is convinced there is a problem in wholesale power markets under the status quo, we have a duty to act."

He noted ISO-NE filed LICAP "after a lengthy stakeholder process, as a proposed solution to this problem. The Commission's role is to assess whether LICAP is a just and reasonable wholesale rate mechanism that will address the problems that have been identified in the New England capacity market."

Addressing alternatives to LICAP, Kelliher emphasized "that the Commission is extending the LICAP opponents an exceptional opportunity to advance workable alternatives. Doing so is consistent with the directive of section 1236 of the Energy Policy Act of 2005 that the Commission 'carefully consider' the views of the region in this proceeding." Kelliher said he wanted to know "whether any of the alternatives provide a greater assurance of entry of new generating capacity than the LICAP proposal itself."

Any approach the Commission takes "must complement regional regulation and recognize regional realities. One such reality is that New England relies very heavily on competitive suppliers for its electricity supply. That is the direct result of the region's decision to order or encourage state-regulated electric utilities to divest themselves of generation. We must bear that reality in mind as we craft a solution."

FERC "agreed to hold oral argument because it believed doing so would help it make a decision in this proceeding. In my view, the arguments that will be the most persuasive are those that are based on the law and the facts. Ultimately, the law and the facts will govern the Commission's decision, not other considerations," Kelliher said.

The oral argument wrapped up just before 4:30 p.m. (EST). "There does seem to be consensus around a threshold issue that there is a problem under the status quo that needs to be addressed," Kelliher said at the end of the day. "I believe every presenter, other than one, agreed that the Commission has to take some kind of action."

But beyond that, "there doesn't seem to be a great deal of consensus and the Commission does have a difficult decision in front of us. At this point, we will consider the record, the information and the arguments we've heard today, and decide how to proceed. If we decide that we need to receive further information as a follow up to today's proceeding, we'll issue a notice describing what should be filed and when."

Kelliher said "in the meantime, I want to urge the parties to meet and attempt to settle this matter. We've had some interesting discussion of that today. You certainly can request the services of a settlement judge or the dispute resolution service."

He noted one aspect of a procedural option presented at the oral argument "involved assigning a FERC settlement judge to hold settlement discussions in the Boston area and we're willing to provide those resources if the parties desire it and if there is legitimate prospect of settlement. On that latter point, there may be a question."

Any settlement discussions "would have to take place on an expedited basis, of course...," the FERC Chairman added. "And the fact that the alternatives presented are largely conceptual in nature presents a challenge to any kind of settlement discussions."

Offering a first blush assessment on the status of the LICAP plan in the wake of the oral argument, Stanford Washington Research Group Analyst Christine Tezak on Wednesday said she doesn't believe that the Commission has given up on the idea of approving the LICAP program.

"We left the meeting with the impression that the Commission is still predisposed to approve the contentious LICAP program and, at this time, wants an alternative to the status quo in place by Oct. 1, 2006," Tezak said in an "Electricity Policy Bulletin."

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