Regional grid operator too protective of industry

Policies are driving up electricity prices that consumers pay

THIS SUMMER, governors from five of the six New England states joined together to issue a statement acknowledging the challenges the region faces in maintaining reliable, affordable electricity.  The governors pledged to work within their jurisdictions to carry out policies that ensure both a robust and reliable system and keep prices as low as possible. We believe one should not happen at the expense of another.

Their statement highlights the significant limits states face in trying to control electric prices for their residents.  Many state policies are aimed at keeping costs low, maintaining jobs, and increasing low-carbon generation sources within their borders.  As the governors observe, however, electric prices also reflect costs regulated by the Federal Energy Regulatory Commission (FERC), and these costs can be heavily influenced by the actions of ISO New England, the FERC-approved regional grid operator.

ISO-New England has paid significant attention to the ways state policies impact its wholesale electric markets.  We are calling on the ISO to also recognize the ways wholesale markets affect the retail prices consumers pay.

The governors are focused on the big picture of energy policy, which includes attracting and retaining businesses, limiting price impacts on the most vulnerable populations, and reducing environmental impacts.  While we understand ISO-New England’s mission is focused on reliability, these state objectives cannot simply be viewed through the lens of their impacts to organized markets.  Doing so has led the ISO to make short-sighted characterizations of these policies as “market distortions” and to enact policies at cross-purposes with these objectives to avoid “price suppression.”

For example, during the 2014 “polar vortex,” ISO-New England faced severe concerns over the availability of natural gas-fueled electric generators, even though these plants received capacity market payments to be available to supply power when needed.  Instead of critically examining whether the capacity market was really a workable construct, it adopted a “pay-for-performance” program to reward power plants with extra-high payments for being available during critical shortages, and strongly penalized plants that weren’t available.  Power plant owners responded by increasing their prices to account for the risk of a penalty being assessed.  This program represents one of the many ways in which the ISO uses ever-higher prices – which are borne by captive consumers – as its primary tool to shore up reliability.

Part of the ISO’s justification for pay-for-performance was the incentive it would create for power plants to maintain adequate fuel supplies, reducing the need for controversial arrangements known as “reliability must run” agreements.  But just recently, ISO moved to institute new must-run agreements, which guarantee payments to power plant owners for running specific plants the ISO says are needed for reliability. These payments represent another layer of costs and are just as “out-of-market” as any state public policy choice. The creation of the capacity market was intended to render such agreements unnecessary. Instead, 12 years later, the ISO is seeking them to ensure reliability because the capacity market is not working as intended.

Reliability is absolutely critical, but “keeping the lights on” cannot come at a price so high that consumers cannot afford to flip the switch.  We believe energy policy can be implemented in a way that ensures reliability while keeping customer costs in mind, as consumer-owned utilities have done for well over 100 years.

The governors urged ISO-New England to “ensure that affordability and rate impacts be expressly considered and analyzed with respect to proposed market rules and initiatives,” and call for any new market actions to be accompanied by a “full accounting of the benefits and costs to regional consumers.”  Further, the governors say that “[w]hen considering market design options, the ISO-NE must also examine whether existing markets that provide similar services are providing benefits commensurate with the costs borne by New England customers.”

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Utility organizations

Utility associations, Northeast Public Power Association, American Public Power Association, National Rural Electric Cooperatives Association, and Transmission Access Policy Study Group
The undersigned companies and organizations support and endorse these directives, and we urge ISO-New England to consider FERC’s mandate – to ensure just and reasonable rates – as a mandate focused on ensuring just and reasonable rates for consumers, not just its constituent companies.

This open letter was written jointly by the Northeast Public Power Association, which represents community-owned utilities, and its national counterpart, the American Public Power Association. The other co-writers were the National Rural Electric Cooperatives Association, which represents utilities owned by their customers, and the Transmission Access Policy Study Group, a coalition of transmission-dependent utilities.