Consumers overlooked amid ISO power politics

THE FUEL SECURITY CONTROVERSY in New England, particularly as it relates to the availability of natural gas in the winter, escalated dramatically with the issuance of a fuel security study by the operation of the region’s power grid, ISO New England. That was followed quickly by Exelon’s announcement that it intends to shut down its Mystic units in Everett unless it receives a subsidy from ISO-NE.*

Despite credible challenges to the study, the Federal Energy Regulatory Commission quickly accepted the impact of the Mystic shutdown as a legitimate reliability concern and cleared the path for Exelon to recover the full costs of running the Mystic units for two years, outside of the competitive market.

Over the summer, the participants in the New England Power Pool considered and debated many issues—mostly arcane and complex—affecting the fundamental economics of “price formation” and impacts of the Exelon subsides on other generators. The states of New Hampshire and Maine tried to dump all of the costs on Massachusetts customers, arguing that is was a “local” reliability issue. This was clearly not the case, given that the Mystic plants are the largest non-nuclear generating facilities in the entire region. But, for the most part, the debate focused on the impact on the competitive market—the wholesale competitive market, that is.

Only one group of participants—the retail competitive suppliers—stood up for retail competition and the impact of ISO-NE’s proposal on retail customers. How the costs are recovered matters as much to retail competition as it does to wholesale competition. ISO-NE has proposed passing the charges through to suppliers. In doing so, retail suppliers must then factor these added costs in their pricing to customers, often several years in advance. If the suppliers guess too low, they have to absorb the difference. Similarly, if they overestimate, it becomes further profit, and consumers are overpaying. The most likely outcome is that customers will pay more, because the suppliers need to put a premium on the estimate to compensate for the risk.

There is another way. To avoid the premium and ensure customers only pay what they should, suppliers might opt to make the cost a “pass-through” added on to a price later. This may result in no premium, but it also exposes customers to the risk of price changes and can cause difficulty in budgeting their energy costs. This is not ideal for customers, as most opt for fixed, all-in pricing in order to ensure budget certainty and predictability in their costs. The magnitude of the Mystic surcharge, approximately $270 million a year, leaves customers subject to cost overruns and budget busters. This is particularly difficult for PowerOptions’ nonprofits and public entities, which have little leeway in their budgets, and what leeway they have should be reinvested in their missions.

Suppliers rightfully proposed at the New England Power Pool that the costs be recovered through what is known as “network load,” or the transmission charge to customers. This would take the Mystic cost uncertainty out of the retail price for supply and avoid issues of pass-throughs, premiums, and price uncertainty.

But, while the ISO worries about price formation at the wholesale level, they have not made a similar commitment to the impact on retail competition. The ISO says the Federal Energy Regulatory Commission will not approve such an approach but is not even willing to ask. The proposal was passed by all of the sectors of New England Power Pool except the transmission owners, i.e. utilities. They claim that they can address the premium concern in the context of how they manage their basic service. That’s code for, “we’ll spread the recovery of true-up costs across all customers”—even those not on basic service. Basically, this means that customers who are on competitive supply would be picking up the tab for any true-up of Mystic charges for basic service customers on top of their own costs.

ISO-NE has already filed its new market rule mechanism for the recovery of the Mystic costs. Officials there did not listen to the stakeholders in the retail competitive market, or even the majority in the New England Power Pool. This is a problem, and it needs to be fixed. We’ll be taking the arguments to the Federal Energy Regulatory Commission. We hope the region’s consumer advocates will join us.

* It’s important to note that gas was available for gas generators this past winter during the cold snap. The reason the gas generating units did not run was because oil was cheaper than natural gas and the dual fuel units could run on oil. Thus, the issue wasn’t about security. ISO-NE was simply uncomfortable with the oil supply arrangements of the generating units, making the issue about ISO-NE control, not security.

Cynthia Arcate is the president and chief executive officer of PowerOptions, an energy-buying consortium of nonprofits and government entities in Massachusetts, Connecticut, and Rhode Island.