[Federal Register Volume 69, Number 113 (Monday, June 14, 2004)]
[Notices]
[Pages 33001-33015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12921]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. ER03-563-030 and EL04-102-000]


Devon Power LLC, et al.; Order on Compliance Filing and 
Establishing Hearing Procedures

Issued June 2, 2004.
Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, and 
Joseph T. Kelliher

I. Introduction

    1. On March 1, 2004, ISO New England Inc. (ISO-NE) submitted a 
filing in compliance with the Commission's directive in Devon Power 
LLC, et al. that a locational installed capacity (LICAP) market or 
deliverability requirements be implemented in New England by June 1, 
2004.\1\ Installed Capacity (ICAP) obligations are intended to ensure 
that there is sufficient capacity to supply system peak load under all 
contingencies taking into account events such as generator outages. In 
this order, the Commission establishes hearing procedures regarding 
ISO-NE's filing, and delays the implementation of a LICAP market until 
the conclusion of those proceedings. The Commission will direct the 
presiding judge to issue an initial decision by June 1, 2005. The 
Commission will defer implementation of the LICAP proposal, as modified 
in this order, until January 1, 2006. The Commission believes that 
deferring implementation until then will not only allow for a 
comprehensive examination of the issues at hearing but will also allow 
for completion of needed infrastructure upgrades in New England's 
constrained areas. Consistent with the recent policy on Reliability 
Compensation Issues, the Commission's goal in establishing these 
hearing procedures is to arrive at a final LICAP market design that 
will appropriately compensate generators needed for reliability and 
attract and retain necessary infrastructure to assure long-term 
reliability. Along with deferring the implementation date, the 
Commission directs ISO-NE to file reports updating progress made in the 
siting, permitting and construction of transmission and generation 
upgrades within the New England control area, with particular emphasis 
on progress within Designated Congested Areas (DCAs). ISO-NE is 
directed to file these reports every 90 days, beginning 90 days after 
the date of this order.
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    \1\ Devon Power LLC, et al., 103 FERC ] 61,082 (2003) (April 25 
Order).
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    2. In this order, the Commission agrees with two broad concepts in 
ISO-NE's proposal. First, the Commission finds it appropriate to 
establish ICAP regions, but is concerned that the specific regions 
proposed by ISO-NE do not adequately reflect where infrastructure 
investment is needed, especially with regard to the constrained area of 
Southwest Connecticut (SWCT). Based on the analytical approach to 
Reliability Compensation Issues established in the May 6, 2004 PJM 
Order \2\, the Commission believes that a separate ICAP region for SWCT 
may be appropriate, and is considering revising ISO-NE's proposal to 
incorporate a separate SWCT region. Accordingly, this order directs 
ISO-NE to submit a further filing addressing whether the Commission 
should revise ISO-NE's proposal to create a separate import-constrained 
ICAP region for SWCT. Additionally, ISO-NE has indicated that an ICAP 
region cannot be a subset of an energy load zone. The Commission 
acknowledges this potential problem, and finds that the institution of 
a separate energy load zone for SWCT in advance of the implementation 
of LICAP may be appropriate, as it would send more appropriate price 
signals and more appropriately distribute reliability costs to those 
who benefit from them. Thus, the Commission also institutes an 
investigation and paper hearing in Docket No. EL04-102-000 regarding 
whether a separate energy load zone should be created for SWCT, and 
whether it should be implemented in advance of the implementation of 
LICAP.
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    \2\ PJM Interconnection, L.L.C., 107 FERC ] 61,112 (2004).
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    3. Second, the Commission agrees with the overarching concept of a 
demand curve, but finds that more information is necessary to 
appropriately set the parameters of the demand curve for each ICAP 
region and is establishing a hearing for that purpose. For example, 
ISO-NE has proposed a methodology that may understate the level of 
capacity that may be transferred between ICAP regions. The Commission 
finds that, as a result, ISO-NE has not justified its proposed method 
for calculating the Capacity Transfer Limits (CTLs). The hearing 
established by the Commission, in addition to determining the demand 
curve parameters, shall also determine the proper method for 
calculating CTLs, the appropriate method for determining the amount of 
Capacity Transfer Rights (CTRs) to be allocated, and the proper 
allocation of CTRs.
    4. Until LICAP is implemented, the Commission will extend the 
Peaking Unit Safe Harbor (PUSH) mechanism, and will consider 
reliability-must-run (RMR) contracts to ensure that market participants 
are appropriately compensated for reliability services in the short-
term. This order benefits customers by ensuring that there is 
sufficient generation available in New England to meet current and 
long-term needs.

II. Background and Procedural History

A. Procedural History

    5. This proceeding began on February 26, 2003, when Devon Power 
LLC, Middletown Power LLC, Montville Power LLC, Norwalk Power LLC and 
NRG Power Marketing Inc. (collectively NRG) filed, pursuant to section 
205 of the Federal Power Act (FPA),\3\ four cost-of-service RMR 
agreements covering 1,728 MW of generating capacity located within 
Connecticut and the SWCT DCAs. These agreements were negotiated between 
NRG and ISO-NE in accordance with New England Power Pool (NEPOOL) 
Market Rule 17.3 to provide compensation for generating units (and 
associated reliability projects) necessary for reliability in SWCT and 
Connecticut. NRG contended in its filing that the recently-approved New 
England Standard Market Design (NE-SMD) market would not provide

[[Page 33002]]

adequate compensation to the units covered by the contracts.
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    \3\ 16 U.S.C. 824d (2000).
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    6. On March 12, 2003, NRG filed an emergency motion seeking 
expedited issuance of an order accepting the RMR agreements for filing. 
In that motion, it contended that without assurance of cost-recovery, 
needed maintenance projects on the generating units could not be 
completed before the summer peak season. On March 25, 2003, the 
Commission issued an order accepting only a portion of the RMR 
agreements, which allowed NRG to collect funds for needed summer 
maintenance through a tracking mechanism administered by ISO-NE.\4\
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    \4\ Devon Power LLC, et.al., 102 FERC ] 61,314 (2003) (March 25 
Order).
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    7. The April 25 Order addressed the entirety of the RMR agreements. 
In that order, the Commission rejected the RMR agreements, and allowed 
collection of only going-forward maintenance costs through the tracking 
mechanism approved in the March 25 Order. In so doing, the Commission 
expressed concerns about the effect RMR contracts have on the 
competitive market, and stated that ISO-NE, ``rather than focusing on 
and using stand-alone RMR agreements, should incorporate the effect of 
those agreements into a market-type mechanism.'' \5\ Pursuant to 
section 206 of the FPA,\6\ the Commission directed revisions to NEPOOL 
Market Rule 1 to lessen the need for RMR agreements. These revisions 
allowed low-capacity factor generating units operating in DCAs to 
increase their bids to recover their fixed and variable costs, and 
allowed the energy bids of peaking units to determine the locational 
marginal price (LMP) by creating the PUSH bidding mechanism. The 
Commission also eliminated the CT Proxy mechanism for mitigation. 
Additionally, the Commission directed ISO-NE ``to file no later than 
March 1, 2004 for implementation no later than June 1, 2004, a 
mechanism that implements location or deliverability requirements in 
the ICAP or resource adequacy market * * * so that DCAs may be 
appropriately compensated for reliability.'' \7\ In its order on 
rehearing, the Commission affirmed PUSH bidding, and clarified its 
section 206 finding.\8\ During the time-period in which these orders 
were issued, the Commission also rejected similar RMR contracts filed 
by PPL Wallingford Energy LLC, reiterating the concerns expressed in 
the April 25 Order and the revisions directed by that order.\9\
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    \5\ Id. at P 29.
    \6\ 16 U.S.C. 824e (2000).
    \7\ April 25 Order at P 37.
    \8\ Devon Power Company et al., 104 FERC ] 61,123 (2003) (July 
24 Order).
    \9\ See PPL Wallingford Energy LLC, 103 FERC ] 61,185 (2003); 
PPL Wallingford Energy LLC et al., 105 FERC ] 61,324 (2003).
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    8. In early 2004, NRG returned to the Commission to again seek RMR 
agreements for the Devon, Montville and Middletown generating units. 
NRG also asked the Commission to extend the tracking mechanism for 
collecting going forward maintenance costs for an additional year. In 
an order issued March 22, 2004, the Commission accepted the RMR 
agreements, set the costs included in the agreements for hearing, and 
conditioned them to terminate on the day a LICAP market or 
deliverability requirement is implemented in accordance with the April 
25 Order.\10\ The Commission reasoned that accepting the agreements for 
a limited term was appropriate given the poor performance under PUSH of 
uniquely situated and aging Devon, Montville and Middletown generating 
units.\11\ In an order issued on April 1, 2004, the Commission also 
accepted an extension of the tracking mechanism for maintenance costs, 
and conditioned the mechanism to terminate the day a LICAP market or 
deliverability requirement is implemented.\12\ Again, the Commission 
reasoned that continuing the tracker is a reasonable interim measure 
until market changes could be put into place.\13\ In both orders, the 
Commission expressed confidence that once the market changes directed 
in the April 25 Order were implemented, out-of-market arrangements like 
RMR agreements and cost trackers would no longer be necessary.\14\
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    \10\ Devon Power LLC et al., 106 FERC ] 61,264 (2004) (March 22 
Order).
    \11\ Id. at P 18.
    \12\ Devon Power LLC et al., 107 FERC ] 61,002 (2004) (April 1 
Order).
    \13\ Id. at P 10.
    \14\ See March 22 Order at P 28; April 1 Order at P 10.
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B. ISO-NE's Compliance Filing

    9. In compliance with the April 25 Order, ISO-NE filed a LICAP 
proposal on March 1, 2004. New England currently has a non-locational 
ICAP mechanism in place. In meeting its ICAP requirement currently, a 
load-serving entity (LSE) may procure resources located anywhere within 
the NEPOOL control area.\15\ However, because of transmission 
constraints, not all energy produced from qualified ICAP resources can 
be physically deliverable to all loads in New England.\16\ ISO-NE's 
LICAP proposal would take account of transmission constraints by 
imposing separate ICAP requirements for each of four regions: Maine 
(classified as an export-constrained region), Connecticut and 
Northeastern Massachusetts/Boston (NEMA/Boston) (classified as import-
constrained regions), and the remainder of New England (Rest of Pool). 
The amount of capacity that LSEs in one region could procure from 
another region would be limited by the CTLs established by the ISO 
between the two regions. ISO-NE states that the CTLs would be set at 
levels based on planning criteria that may be below the actual amount 
of real-time electric flow that the transmission interface is capable 
of accommodating.
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    \15\ Under certain circumstances that are not relevant to this 
discussion, an LSE may also procure ICAP from resources that are not 
located within New England.
    \16\ In particular, there are more generation resources within 
Maine than are necessary to meet local requirements within Maine or 
that can be exported from Maine. Additionally, ISO-NE has identified 
two areas Southwest Connecticut and Northeastern Massachusetts as 
being load pockets. Because of transmission constraints, there are 
limitations on the amount of power that can be imported into these 
regions. As a result, at times resources located within the load 
pockets must be used to meet demand in the load pockets.
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    10. Currently, an LSE is required to procure a specified amount of 
ICAP each month based on its projected peak demand. All LSEs within New 
England can procure the resources from any units that are eligible to 
sell ICAP. ISO-NE proposes through the use of a demand curve to move 
from this set amount of monthly ICAP to an amount that can vary monthly 
within certain parameters. Additionally, ISO-NE proposes to impose 
certain limitations, based on the location of the resources, that can 
be used to satisfy an LSEs obligation to procure ICAP. To implement 
these restrictions, ISO-NE proposes to use four zones for ICAP. The 
price of ICAP for each of the four regions would be determined monthly 
through the interplay of ICAP supply bids and an administratively-
determined demand curve in a monthly ISO-administered capacity auction. 
In essence, the ICAP requirement in a region and the regional ICAP 
price would be established at the point where supply (as reflected in 
suppliers' bids) and demand (as reflected in the administratively-
determined demand curve) clear. The demand curve is designed to allow 
for more predictable ICAP revenues and more gradual price movements. It 
also ensures that the region will compensate ICAP resources above and 
beyond 100 percent of the current capacity requirement (referred to as 
the Objective Capability) in New

[[Page 33003]]

England, which is 112 percent of peak load.
    11. When a demand curve is used to determine LSEs' ICAP 
obligations, the amount and price of that ICAP will be determined based 
on the height and slope that is used for the particular demand curve. 
The design of the demand curve--its height and slope--requires 
selection of two points. The selection of these points will affect the 
price and quantity of ICAP that LSEs must procure. The first point sets 
the ICAP price at the point where average surplus capacity is equal to 
the cost of new entry. ISO-NE calculated the average surplus as 106.7 
percent of the capacity requirement. ISO-NE states that this figure is 
intended to reflect the average surplus since 1989, when New England 
became a summer peaking system. ISO-NE believes it is reasonable to 
assume that, on average, there will be surplus capacity in the 
electricity market over time. ISO-NE uses $6.66 per kilowatt month, the 
current ICAP deficiency charge in the current capacity market, as the 
cost of new entry. The ISO proposes to adjust the demand curve downward 
to account for infra-marginal revenue from the energy market and 
ancillary service market. This moves (lowers) the first point lower, 
from $6.66 per kilowatt month to $4.56 per kilowatt month. ISO-NE 
derived this amount based on the annual average infra-marginal revenue 
for a gas turbine over the period of May 1999 through December 2003 
which is estimated as $2.10 per kilowatt month.
    12. The second point is the point where the price of capacity is 
equal to zero, which is where the demand curve itself crosses the x 
axis. ISO-NE set this point at 118 percent of the capacity requirement. 
ISO-NE selected this value for several reasons. First, it contends that 
planning studies showed that additional capacity has little impact on 
system reliability after achieving 18 percent surplus. Second, ISO-NE 
believes that the demand curve should include all surplus capacity 
conditions that are likely to occur and that there is little likelihood 
that the surplus capacity will exceed that level. Finally, ISO-NE 
asserts that the 118 percent value also makes New England's demand 
curve consistent with the NYISO's statewide ICAP demand curve.\17\ The 
demand curve is thus constructed by drawing the linear function that 
intersects the two points. ISO-NE states that the linear demand curve 
provides a good first approximation of several different functional 
forms and has as well a moderate slope that may deter the exercise of 
market power by making it more difficult to withhold output in order to 
increase price.
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    \17\ New England's capacity requirement is set at 12 percent 
above peak, while New York's is 18 percent above peak. New York's 
demand curve sets the price of capacity to zero at a surplus 
capacity value of 12 percent above Objective Capability, while New 
England's sets the value at 18 percent above. In each case the 
requirement is approximately 1.12 multiplied by 1.18, or about 1.32.
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    13. Finally, the proposed curve becomes horizontal to the left of 
95 percent of the capacity requirement. Thus, the ICAP price would be 
the same for all capacity levels between 0 percent and 95 percent of 
the capacity requirement. ISO-NE believes that this last feature is 
unlikely to affect prices.
[GRAPHIC] [TIFF OMITTED] TN14JN04.006

    14. ISO-NE proposes to phase-in the demand curve over five years 
for import-constrained regions, in part to avoid significant price 
shocks there.\18\ During the phase-in period, prices derived by 
application of the demand

[[Page 33004]]

curve in these constrained sub-regions would be capped at $1.00 per 
kilowatt month in the first year, and would increase by $1.00 per year 
to $5.00 in the fifth year. After the fifth year, prices in the four 
regions would be determined without the use of price caps. The five-
year period coincides with the projected completion of key transmission 
projects in Connecticut and NEMA/Boston which, the ISO believes, 
provides sufficient time for the development of additional capacity.
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    \18\ ISO-NE states that, over the first two years, the phase-in 
reduces the impact on Connecticut and NEMA/Boston by approximately 
$250 million and $215 million, respectively.
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    15. During the five year transition period, generating units in 
NEMA/Boston and Connecticut that had capacity factors of 15 percent or 
less in 2003 and that are needed for reliability would be paid 
``transition payments'' of $5.34 per kilowatt month.\19\ A resource 
would actually receive the transition payment minus the spot auction 
clearing price for the constrained region. Thus, the transition payment 
would function as a cap on the revenues above variable costs that a 
unit would be able to earn. ISO-NE argues that the use of transition 
payments would allow for the elimination of the PUSH mechanism 
entirely, and would allow for the phase-out of RMR contracts. A unit 
that qualifies for the transition payment that is not operating under 
an RMR contract would receive the transition payment until the end of 
the phase-in period or until ISO-NE determines the unit is no longer 
needed for reliability. The costs of the transition payments would be 
allocated to network load within each ICAP region, the same manner in 
which the costs of RMR contracts are allocated currently. As a result, 
ISO-NE states that ``one of the unfortunate features of the transition 
payments is that they cannot be hedged because they are an additional 
above-market payment needed to maintain reliability.'' \20\ Thus, a 
customer in an import-constrained region (NEMA/Boston and Connecticut) 
would still incur the costs of transition payments even if that 
customer has contracted bilaterally for ICAP.
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    \19\ The $5.34 figure is based on the average cost of service 
approved by the Commission for PUSH units located in Connecticut and 
NEMA/Boston.
    \20\ Transmittal Letter of ISO-NE at 31.
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    16. Under ISO-NE's proposal, a generator selling ICAP would be paid 
the market clearing price in the region in which the resource is 
located; a participant serving load would buy ICAP at the market 
clearing price in the region where the load is located. When the 
transfer capability between regions limits the ability to import 
capacity into one region in the ICAP market, the ICAP prices in the two 
regions would differ. The difference in regional prices represents a 
type of ICAP congestion charge, similar to the congestion charge that 
arises when transmission capacity is congested in the spot energy 
market. ISO-NE proposes to create Capacity Transfer Rights to allow 
market participants to hedge these ICAP congestion costs. Capacity 
Transfer Rights in the ICAP market are similar to financial 
transmission rights (FTRs) in the spot energy market. The holder of a 
Capacity Transfer Right between two regions would receive congestion 
revenue--i.e., the difference in ICAP prices--between the two regions, 
just as the holder of an FTR receives congestion revenue from the spot 
energy market. ISO-NE proposes to allocate these ICAP congestion 
revenues to entities holding Capacity Transfer Rights in the export and 
import constrained regions. Capacity Transfer Rights would be allocated 
to loads in import-constrained regions (i.e., NEMA/Boston and 
Connecticut) and to generators in export-constrained regions (i.e., 
Maine). In addition, Capacity Transfer Rights allocations would be made 
to original holders of entitlements to municipal utility resources 
constructed as pool planned units with life-of-the-unit contracts. 
Pursuant to section 8.9.6 of Market Rule 1, this ``special allocation'' 
of Capacity Transfer Rights would be made to certain municipal utility 
resources constructed as pool planned units in import-constrained 
regions. Finally, any transmission upgrades not funded through pool 
transmission rates that result in additional transfer capability that 
is associated with additional Capacity Transfer Rights would be 
allocated to the entities that pay for the upgrades.
    17. As part of the LICAP proposal, ISO-NE revised Market Rule 1 to 
include corresponding mitigation provisions. Based on the limited 
competition situation in the import-constrained ICAP regions, the 
mitigation measures would apply to all resources in such regions that 
are authorized to sell capacity. ISO-NE proposes to evaluate and deny 
requests by participants in import-constrained ICAP regions to cease 
selling ICAP within New England (delisting).
    Chiefly, the resource requesting to cease or reduce its ICAP sales 
would need to demonstrate that this was an economic decision for that 
unit. To do so the resource must demonstrate that the expected revenue 
or the expected cost savings associated with the external sale or lack 
of a sale will exceed the expected ICAP revenues, applicable transition 
payments, and other market revenues that the resource would otherwise 
receive.
    18. ISO-NE also proposes conduct and market impact thresholds for 
the LICAP market in import-constrained ICAP regions.\21\ ISO-NE's 
proposal would employ a conduct and impact test and a reference level-
based mitigation scheme. The ICAP reference level could be established 
in one of three ways: (1) The ISO would be authorized to determine the 
reference level based on a resource's estimated going-forward costs net 
of expected market revenues; (2) a resource may submit a proposed 
reference level with supporting documentation for review by the ISO; or 
(3) where no reference level is submitted or there is inadequate 
information to set a level, a default ICAP reference level of $1.00 per 
kilowatt month, which is intended to roughly account for a resource's 
costs of providing ICAP rather than being delisted. ISO-NE would 
utilize a conduct threshold of $1.00 per kilowatt month in import-
constrained regions to identify economic withholding and a market 
impact threshold of $1.00 per kilowatt month.\22\ Prior to mitigating a 
resource's offer, the ISO would attempt to contact the resource owner 
to provide an opportunity to explain the observed behavior. In the 
event mitigation is necessary, a default offer is established as the 
greater of $1.00 per kilowatt month, the ICAP reference level, or the 
estimated ICAP clearing price in the Rest of Pool region. Modifications 
have also been made to the energy market mitigation thresholds 
applicable to units receiving transition payments. In import-
constrained regions, such units would be subject to a reduced energy 
offer price threshold of $12.50/MWh, and tighter start-up and no-load 
thresholds of 25 percent. These units will also face a tighter 
operating reserve credit threshold of 50 percent.
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    \21\ Under these measures, mitigation could occur if a unit bid 
a predetermined amount above a reference price based on historical 
bids by the unit (conduct test) and if these bids were accepted it 
would result in a predetermined increase in the market price (impact 
test). To be mitigated, a unit's bids would have to be sufficiently 
high and have a sufficient impact on the market price to fail to 
satisfy both the conduct and impact test.
    \22\ The ISO may impose the ICAP Default Offer in an import-
constrained region if the offer exceeds the reference level by the 
applicable threshold and the conduct would affect the market-
clearing price by the applicable threshold.
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    19. Finally, ISO-NE states that the submitted proposal is ``not 
intended to be the final word on resource adequacy in New England.'' In 
conjunction with the LICAP process, the ISO initiated a Regional 
Dialogue, which includes a more general initiative to address

[[Page 33005]]

regional resource adequacy and to work toward a long-term solution. 
This forum includes market participants and state regulators. The ISO 
recognizes that the current LICAP Proposal may be modified or replaced 
by a different long-term regional resource adequacy mechanism. Thus, 
ISO-NE commits to continuing the Regional Dialogue for at least 18 
months from the date of implementation to continue to work toward a 
long-term regional resource adequacy mechanism. ISO-NE will evaluate 
the performance of LICAP after one year of operation, and eighteen 
months after implementation will be prepared to file a plan regarding 
long-term regional resource adequacy in New England that could affirm, 
modify, augment, or replace the instant proposal.
    20. ISO-NE requests that the Commission provide guidance on the 
issue of what entity should bear the responsibility for longer-term 
capacity procurement and long-term reliability. ISO-NE states that the 
Regional Dialogue has not yet produced a consensus as to which entity 
should be responsible for ensuring long-term resource adequacy. ISO-
NE's view is that the state regulatory officials, and the distribution 
companies within each state regulated by those officials, are best 
positioned to fulfill this role. ISO-NE believes that Commission 
guidance on this issue would significantly narrow the issues that must 
be addressed by New England's stakeholders in the Regional Dialogue.

III. Notice of Filing, Protests, Comments and Interventions

    21. Notice of Applicants' filing was published in the Federal 
Register,\23\ with comments, protests or interventions due on or before 
March 22, 2004. The entities filing timely motions to intervene, or who 
are parties to this proceeding by virtue of their earlier intervention 
in this docket and submission of a protest or comments regarding the 
instant filing, are listed in Appendix A to this order. Several parties 
filed protests, comments, or motions to reject the filing. These 
parties are listed in Appendix B to this order.
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    \23\ 69 FR 11,611 (2004).
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    22. On April 2, 2004, ISO-NE filed a motion for leave to answer. On 
April 6, 2004, National Grid USA (National Grid) filed a response to 
certain comments and protests made by other parties, and The Indicated 
Suppliers (Indicated Suppliers) \24\ filed a motion for leave to answer 
and answer to certain of the comments and protests previously 
submitted. On April 12, 2004, Consolidated Edison Energy, Inc. (ConEd) 
filed an answer to ISO-NE's answer. On April 16, 2004, FPL Energy, LLC 
(FPL) filed a motion for leave to answer and answer to ISO-NE's answer. 
On April 19, 2004, Calpine Eastern filed an answer to National Grid's 
response, and PSEG Energy Resources & Trade LLC filed a motion for 
leave to answer and answer to Indicated Suppliers answer. On April 26, 
2004, the Long Island Power Authority (LIPA) filed a motion for leave 
to respond and response to ISO-NE's answer.
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    \24\ The Indicated Suppliers include: American National Power, 
various Entergy parties, Millennium Power Partners, various Mirant 
parties, and USGen New England.
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    23. Additionally, on April 26, 2004, the New England Suppliers 
Coalition (Suppliers Coalition) \25\ filed a motion to lodge in the 
record a press release issued by ISO-NE on April 16, 2004 regarding the 
results of its Gap Request for Proposals (Gap RFP) to procure 
reliability products and services in SWCT for a four-year period 
beginning in June 2004. On April 29, 2004, the Connecticut Department 
of Public Utility Control (CT DPUC) and the Connecticut Office of 
Consumer Counsel (CT OCC) filed a joint answer in opposition to the 
motion to lodge. On May 11, 2004, Fitchburg Gas and Electric Light 
Company and Unitil Energy Systems, Inc. filed a response to the motion 
to lodge.
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    \25\ The New England Suppliers Coalition includes: American 
National Power, Inc, Consolidated Edison Energy Inc., Duke Energy 
North America, LLC, Energy Nuclear Generation Company, FPL Energy, 
LLC, Mirant Americas Energy Marketing, L.P., Mirant New England, 
Inc, Mirant Kendall, LLC, Mirant Canal, LLC, Milford Power Company, 
LLC, NRG Energy, Inc., PPL EnergyPlus, LLC, PPL Wallingford, LLC, 
PSEG Energy Resources & Trade LLC, and USGen New England, Inc.
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    24. On May 20, 2004, several entities, including National Grid, 
NSTAR Electric and Gas Corporation, and various state governmental 
entities, jointly filed supplemental comments and a motion to 
lodge.\26\ The motion seeks to lodge in the record in this proceeding 
an Ancillary Services Market Enhancements White Paper prepared by ISO-
NE.
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    \26\ The entities joining in the supplemental comments and 
motion to lodge are: National Grid, NSTAR Electric and Gas 
Corporation, Maine Office of the Public Advocate, New Hampshire 
Office of Consumer Advocate, Rhode Island Office of the Attorney 
General, Rhode Island Division of Public Utilities and Carriers, 
Associated Industries of Massachusetts, Strategic Energy L.L.C., and 
Vermont Electric Power Company.
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IV. Discussion

A. Procedural Matters

    25. Pursuant to Rule 214 of the Commission's Rules of Practice and 
Procedure,\27\ 18 CFR 385.214 (2003), the notices of intervention and 
timely, unopposed motions to intervene serve to make the entities that 
filed them parties to this proceeding. In addition, several of the 
entities listed as parties in Appendix A are proper parties to this 
proceeding by virtue of their previous interventions in the instant 
docket.\28\ Motions to intervene out-of-time were filed by several 
entities.\29\ Pursuant to Rule 214(d) of the Commission's Rules of 
Practice and Procedure,\30\ given the interest of these entities in 
this proceeding and the absence of any undue prejudice or delay, the 
Commission finds good cause to grant their untimely, unopposed motions 
to intervene out-of-time. Rule 213(a)(2) of the Commission's Rules of 
Practice and Procedure \31\ prohibits an answer to a protest and answer 
unless otherwise ordered by the decisional authority. We will accept 
the answers filed in the instant proceeding because they provided 
information that helped us in our decision-making process. 
Additionally, in the interest of developing a full record for 
consideration during the subsequent procedures directed in this order, 
the Commission will grant the motions to lodge filed by the Suppliers 
Coalition and National Grid, et al.
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    \27\ 18 CFR 385.214 (2003).
    \28\ See New England Power Pool/ISO New England Inc., et al., 87 
FERC ] 61,244 (1999).
    \29\ These entities include Calpine Eastern Corporation and 
Calpine Energy Services, L.P., the NRG Companies, and the Energy 
Consortium.
    \30\ 18 CFR 385.214(d).
    \31\ 18 CFR 385.213(a)(2) (2003).
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1. Applicable Statutory Standard of Review
    26. As noted above, ISO-NE submitted the instant filing as a 
compliance filing pursuant to Rule 1907 of the Commission's Rules of 
Practice and Procedure,\32\ in response to the Commission's directive 
in the April 25 Order to ``establish a mechanism implementing location 
or deliverability requirements in the Installed Capacity * * * or 
resource adequacy market, in a manner that reduces reliance on 
Reliability Must Run * * * agreements.'' \33\ Several entities have 
raised issues in their comments and protests regarding the propriety of 
submitting the instant filing as a compliance filing, and whether 
section

[[Page 33006]]

205 \34\ or section 206 \35\ of the FPA should apply.
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    \32\ 18 CFR 385.1907 (2003).
    \33\ Transmittal Letter of ISO-NE at 1.
    \34\ 16 U.S.C. 824d.
    \35\ 16 U.S.C. 824e.
---------------------------------------------------------------------------

    27. Several parties question whether ISO-NE properly filed the 
instant proposal as a ``compliance filing.'' The CT DPUC and CT OCC, 
for example, moved to reject the instant filing as an improper 
compliance filing, arguing that the comprehensive nature of the market 
changes proposed in the filing, and the rate increase ISO-NE 
acknowledges may result, should not be approved by the Commission 
through a compliance filing because to do so would ``depriv[e] 
potential objectors of the protections normally accorded for tariff 
increases.'' \36\ They also contend that ISO-NE's filing is an improper 
compliance filing under 18 CFR 154.203(b) (2003) \37\ because it 
proposes to increase rates, which they argue the April 25 Order did not 
authorize. United Illuminating (UI) similarly states that the 
transitional payments included in the instant proposal amount to a new 
rate, which it argues cannot be proposed and approved through a 
compliance filing.
---------------------------------------------------------------------------

    \36\ See Joint Motion to Reject, Protest, and Request for 
Hearing and Suspension of Rates of CT DPUC and CT OCC at 6-7.
    \37\ 18 CFR 154.203(b) provides that compliance filings made by 
gas pipelines ``must include only those changes required to comply 
with the order [and] * * * may not be combined with other rate or 
tariff change filings,'' and further states that ``[a] compliance 
filing that includes other changes or that does not comply with the 
applicable order in every respect may be rejected.'' This regulation 
applies only to filings made pursuant to section 4 of the Natural 
Gas Act and thus does not apply to filings made by public utilities 
such as ISO-NE.
---------------------------------------------------------------------------

    28. Additionally, many of the parties to this proceeding generally 
raise the issue of whether ISO-NE should have submitted the instant 
filing under section 205 or section 206 of the FPA. Of the entities 
raising this issue, most contend that section 206 should apply. CT DPUC 
and CT OCC, for example, contend that the only possible basis for the 
instant filing is section 206, noting that ISO-NE does not have 
exclusive rights to make a section 205 filing and that the Commission's 
original direction to make a compliance filing was issued pursuant to 
section 206. Several other parties, including the Attorneys General of 
Massachusetts and Rhode Island, the Massachusetts Division of Energy 
Resources and Rhode Island Commission, and the New Hampshire Office of 
Consumer Advocate similarly contend that the standards of section 206 
should apply to the instant proceeding.\38\
---------------------------------------------------------------------------

    \38\ See, e.g., Motion to Intervene and Protest of the Attorney 
General of Massachusetts, Attorney General of Rhode Island, and the 
Rhode Island Division of Public Utilities and Carriers at 7; Protest 
by Attorney General of Massachusetts, Attorney General of Rhode 
Island, Massachusetts Division of Energy Resources, New Hampshire 
Office of Consumer Advocate, Rhode Island Division of Public 
Utilities and Carriers, Associated Industries of Massachusetts, 
NSTAR Electric and Gas Corporation, National Grid USA, Vermont 
Electric Power (in part) and Strategic Energy LLC (in part) 
(hereinafter Mass. AG et al.) at 7-8.
---------------------------------------------------------------------------

    29. Commission Response. The Commission will apply the standards of 
section 206 of the FPA to the instant proceeding. In the April 25 Order 
the Commission directed revisions to NEPOOL Market Rule 1 ``pursuant to 
section 206 of the Federal Power Act.'' \39\ Specifically, the 
Commission directed ISO-NE to file ``a mechanism that implements 
location or deliverability requirements in the ICAP or resource 
adequacy market * * * so that capacity within DCAs may be appropriately 
compensated for reliability.'' \40\ In the July 24 Order on rehearing, 
the Commission clarified that it was taking action under section 206 of 
the FPA, formally stating that it ``found that Market Rule 1 * * * 
created an unjust and unreasonable result, requiring a revision in the 
rule to solve these problems.'' \41\ In light of these findings, the 
Commission finds it appropriate to continue to apply the standards of 
section 206 in its consideration of the instant compliance filing.
---------------------------------------------------------------------------

    \39\ April 25 Order at P 33.
    \40\ Id. at P 37.
    \41\ July 24 Order at P 33.
---------------------------------------------------------------------------

    30. Applying the standard of section 206 of the FPA, the issues 
here are whether the current market rules for ICAP in New England are 
``unjust, unreasonable, unduly discriminatory or preferential,'' and 
whether new market rules approved or ordered by the Commission are just 
and reasonable.\42\ As noted above, the Commission has already 
satisfied the first requirement in this proceeding, finding in the 
April 25 Order and July 24 Order that Market Rule 1 as it then existed 
``created an unjust and unreasonable result.'' As discussed in more 
detail below, ISO-NE's proposal must be modified to achieve a just and 
reasonable long-term solution. Therefore, in the interim the Commission 
will retain the PUSH mechanism and allow for the filing of RMR 
contracts where justified until the LICAP market is implemented. The 
Commission finds that this provides a just and reasonable method of 
solving the Reliability Compensation Issues present in New England.
---------------------------------------------------------------------------

    \42\ See 16 U.S.C. 824e(a).
---------------------------------------------------------------------------

    31. Additionally, we are not persuaded by the contention that the 
instant filing is an improper compliance filing. First, given the use 
of the section 206 procedures in this case, the Commission has not 
deprived any party of an opportunity to comment or protest, contrary to 
the assertions of CT DPUC and CT OCC. Notice of the ISO-NE's filing was 
published in the Federal Register, and a large number of parties 
submitted written comments or protests at the invitation of that 
notice. The Commission has carefully considered all of the comments and 
protests, and as a result has provided substantial due process to all 
the parties before it, in accordance with section 206 of the FPA. 
Furthermore, we do not accept the assertions of CT DPUC and CT OCC, 
among others, that the instant filing is an improper compliance filing 
because of its comprehensive nature and possibility for increased 
rates. The Commission rule cited by CT DPUC requiring that compliance 
filings ``include only those changes required to comply with the 
order,'' and prohibiting such filings from including ``other rate or 
tariff change filings,'' is inapplicable to the present proceeding.\43\ 
Additionally, we note that here, ISO-NE was directed to file ``a 
mechanism that implements location or deliverability requirements in 
the ICAP or resource adequacy market.'' \44\ The tariff and rate 
changes included in the filing, while extensive, are directly related 
to the directive, and are not separate rate or tariff changes. 
Therefore, rejection of the filing is not warranted.
---------------------------------------------------------------------------

    \43\ 18 CFR 154.203(b) only applies to filings and proceedings 
held pursuant to section 4 of the Natural Gas Act. See 18 CFR 
154.1(a) (2003); see also Cambridge Electric Light Company, 95 FERC 
] 61,162, 61,523 n. 9 (2001).
    \44\ April 25 Order at P 37.
---------------------------------------------------------------------------

B. Analysis of ISO-NE's Proposal and Commission Response

    32. The Commission agrees with two broad concepts: ICAP regions and 
the use of a demand curve. The Commission rejects the transition 
mechanism, directs ISO-NE to submit a further filing addressing whether 
the Commission should revise its proposal to create an additional ICAP 
region for SWCT, establishes an investigation and paper hearing 
regarding the establishment of a separate SWCT energy load zone in 
advance of LICAP, and establishes a hearing before an Administrative 
Law Judge regarding the parameters of the demand curve and related 
issues. As a result of these changes we will delay full implementation 
of the LICAP market until the conclusion of these proceedings. We 
anticipate that this will permit implementation of LICAP in New England 
by January 1, 2006. We

[[Page 33007]]

discuss our reasoning for this decision in the analysis that follows.
    33. In the PJM Order, the Commission outlined an analytical 
approach it intends to follow in addressing Reliability Compensation 
Issues such as those at issue in this proceeding. This process begins 
with posing the question: does this organized market exhibit material 
short-term or long-term Reliability Compensation Issues? \45\ Short-
term Reliability Compensation Issues relate principally to the 
appropriate compensation for units that are needed for reliability and 
are subject to mitigation with the result that the units are receiving 
non-compensatory revenue impacting their ability to provide service. 
Long-term Reliability Compensation Issues relate principally to local 
capacity shortages identified in the organized market's reliability-
based planning process resulting from the reasonably expected 
retirement of units or the need for new infrastructure that is not 
anticipated to be installed.
---------------------------------------------------------------------------

    \45\ PJM Order at P 16.
---------------------------------------------------------------------------

    34. If the inquiry shows that the organized market exhibits 
material Reliability Compensation Issues, the next step is to evaluate 
whether market design improvements can be implemented that will work to 
resolve the issues. Conversely, if the inquiry does not find that the 
organized market exhibits material Reliability Compensation Issues and 
the issue is of sufficiently narrow scope, then significant focus on 
general design issues is not required and targeted approaches (such as 
unit specific contracts or compensation schemes) may be appropriate. 
Such demonstration must include a showing that the revenue produced by 
the proposed solution is adequate to actually solve the problem at hand 
and that the proposed solution includes safeguards to prevent the 
unwarranted exercise of market power beyond the recovery of such 
necessary revenue.
    35. In the case of ISO-NE, the Commission determines that it 
exhibits both short and long-term Reliability Compensation Issues. 
These issues have been clearly demonstrated in the filings for RMR 
contracts in NEMA/Boston and SWCT. These contracts were filed by ISO-NE 
because these units were not able to earn sufficient revenues through 
the markets to justify their continued operation. In NEMA/Boston these 
reliability concerns have been limited to the need for RMR contracts 
for a limited number of specific units that are needed to satisfy 
reliability because of the location of these units. The RMR contracts 
were filed because specific units were needed, not because there were 
inadequate resources within NEMA/Boston in general. As such, 
reliability compensation appears to be more of a short-term issue in 
NEMA/Boston.\46\
---------------------------------------------------------------------------

    \46\ See Exelon New Boston, LLC, 106 FERC ] 61,191 (2004).
---------------------------------------------------------------------------

    36. In contrast, the reliability problems in SWCT have involved the 
need to retain all or nearly all units within this region to maintain 
reliable service.\47\ Many of these units are old and inefficient and 
are unable to receive sufficient funds through the operation of the 
markets to justify their continued operation. Thus, the concerns 
regarding SWCT are long-term in nature.
---------------------------------------------------------------------------

    \47\ See March 22 Order; see also ISO New England LLC, 105 FERC 
] 61,236 (2003).
---------------------------------------------------------------------------

    37. Under the policy developed in the PJM Order, the next step is 
to examine whether market design improvements can be implemented within 
New England to resolve these issues.\48\ As discussed further below, we 
believe that while the record is unclear on whether market design 
changes could resolve the issues within NEMA/Boston, market design 
changes could be implemented to resolve the Reliability Compensation 
Issues within SWCT.\49\ One market design change that was suggested in 
the PJM Order was the use of locational markets for installed capacity 
or operating reserves for the constrained area. The Commission believes 
that designing and implementing a well-functioning and equitable LICAP 
market represents a significant step in resolving Reliability 
Compensation Issues. In fact, we have identified locational installed 
capacity as a market design feature that can serve as a solution.\50\ 
The New England market as a whole appears to have adequate capacity. At 
the same time, nearly all existing units within SWCT are needed for 
reliability. Additionally, ISO-NE has also recently conducted a Request 
for Proposals to obtain additional resources in SWCT. Thus, the use of 
a local capacity market would better reflect the value of capacity in 
SWCT than the existing system-wide capacity market. Thus, the use of a 
locational capacity market could be a solution to the Reliability 
Compensation Issues in SWCT.
---------------------------------------------------------------------------

    \48\ See PJM Order at P 17.
    \49\ PJM Order at P 17. It is not clear if the issues in NEMA 
are sufficiently narrow in scope so that a market design solution 
targeted to NEMA is necessary to resolve the Reliability 
Compensation Issues. If the problem is related to a need for a 
limited number of specific resources for reliability, unit specific 
contracts may be more appropriate.
    \50\ Id. at P 19.
---------------------------------------------------------------------------

    38. ISO-NE has filed a proposal that contains a locational capacity 
market. The Commission believes that ISO-NE's LICAP proposal has 
elements that would help resolve the Reliability Compensation Issues in 
New England. In particular, the concept of a demand curve for installed 
capacity has merit. Additionally, the use of separate prices for 
capacity in different areas in New England also moves toward a LICAP 
market. However, as discussed further below, we find that there are 
factual questions regarding certain elements of this proposal that need 
to be further explored at hearing.
    39. The Commission finds that there are other elements of ISO-NE's 
proposal that do not satisfy the criteria outlined in the PJM Order. 
Specifically, the Commission is concerned that certain elements of ISO-
NE's proposal rely on non-market solutions to attempt to resolve these 
Reliability Compensation Issues and that the regions chosen for the 
LICAP may not match the specific areas where capacity is constrained 
within New England. Thus, the regions may not sufficiently value 
capacity within the constrained areas.
    40. First, under the Commission's policy, the market design changes 
should provide sufficient revenues to satisfy the Reliability 
Compensation Issues. The Commission cannot reasonably determine that 
ISO-NE's proposed transition payments together with its proposed five-
year phase-in of LICAP will yield sufficient revenues for all 
generating resources during the phase-in period. Under the proposal, 
ISO-NE would cap the price that would be available to generators in the 
constrained areas during the phase-in period. In the first year, the 
price caps would be $1.00 per kilowatt month. This would not be a 
sufficient amount to resolve the Reliability Compensation Issues within 
the constrained areas.
    41. However, since the price caps would result in lower prices than 
those generated by the demand curve, ISO-NE also proposes to pay a 
transition payment to low load-factor units within the constrained 
areas. The transition payments are set at $5.34 per kilowatt month for 
the first five years of the market.\51\ The $5.34 figure is based on 
the average cost of PUSH units in Connecticut and NEMA/Boston. There 
was significant debate among intervening parties over whether or not 
this aspect of the proposal provides sufficient revenues. Since the 
payment is based on an average of the PUSH limits, it may not work to 
provide

[[Page 33008]]

sufficient revenues for all generating units. In particular, the units 
within SWCT had a much higher cost than those located within NEMA/
Boston. Since ISO-NE would still allow RMR contracts for individual 
units, its proposal may only appeal to those units whose costs were at 
or below the average PUSH limits. For other more expensive units, it 
would appear that they would still have the option of obtaining RMR 
contracts.
---------------------------------------------------------------------------

    \51\ ISO-NE states: ``The transition payment will be reduced 
each month by the locational capacity-clearing price in the 
appropriate import constrained sub-region so that the transition 
payment will function as a capped price.'' Transmittal Letter of 
ISO-NE at 29.
---------------------------------------------------------------------------

    42. More importantly, the transition payments create an unhedgeable 
cost to LSEs in import-constrained regions. In other words, the 
transition payments would be a non-market cost to LSEs within the 
import constrained areas. The Commission stated in the PJM Order that 
ideally, the market should encourage LSEs to engage in long-term 
bilateral contracting and locational requirements for ICAP could 
promote such contracting.\52\ However, ISO-NE's transition payment 
proposal will not adequately promote bilateral contracting and in fact 
may discourage it. ISO-NE's proposal requires those parties who have 
contracted bilaterally for ICAP to pay the same transition payments as 
those LSEs that have not contracted bilaterally for ICAP. Thus, the 
transition payments do not provide adequate incentives for LSEs to 
contract for supplies locationally to reduce their total costs. The 
allocation method will also penalize LSEs that have already entered 
into bilateral arrangements. The Commission does not believe that a 
non-market solution such as the transition payments is consistent with 
the policy developed for Reliability Compensation Issues in the PJM 
Order. Therefore, the Commission does not believe that ISO-NE's 
proposal provides a market solution that is consistent with the 
criteria discussed in the PJM order.
---------------------------------------------------------------------------

    \52\ PJM Order at P 20.
---------------------------------------------------------------------------

    43. The Commission is also concerned that the proposed 
configuration of import-constrained regions may not be appropriate. 
ISO-NE proposes a single ICAP region for the entire State of 
Connecticut. This is consistent with its current market design. 
However, there is a clear and extensive record that demonstrates a 
distinction, in terms of reliability, between SWCT and the other parts 
of Connecticut. This record includes reports and filings that detail 
the difficulties SWCT faces with regard to reliability. For example, 
ISO-NE concluded that ``the existing southwestern Connecticut electric 
power system does not meet North American Electric Reliability Council 
(NERC), Northeast Power Coordinating Council (NPCC) and NEPOOL 
reliability performance standards.'' \53\ Furthermore, when ISO-NE 
developed DCAs with special measures for mitigating market power, it 
classified SWCT as a DCA distinct from the remainder of Connecticut. 
ISO-NE provides no justification for failing to acknowledge this 
distinction in its LICAP proposal. The Commission is concerned that 
ISO-NE's proposal may not adequately recognize the value of resources 
within SWCT. It also may result in customers in other parts of 
Connecticut subsidizing customers within SWCT. Therefore, the 
Commission is not convinced that a single import-constrained area in 
Connecticut would produce incentives to locate infrastructure in SWCT, 
the location where it is most needed. Additionally, it may not provide 
adequate compensation for resources to remain in SWCT, thus failing to 
satisfy Reliability Compensation requirements of the Commission's 
policy.
---------------------------------------------------------------------------

    \53\ See, ISO-NE, Volume I of Southwestern Connecticut Electric 
Reliability Study, presented by the ISO-NE Southwestern Connecticut 
Working Group, December 2002.
---------------------------------------------------------------------------

    44. Thus, the Commission finds that while a market design solution 
would provide a reasonable solution to the Reliability Compensation 
Issues in SWCT, ISO-NE's proposal must be revised to meet that 
objective.
    45. Consequently, the Commission will adopt a market design 
solution for New England but will defer implementation of the LICAP 
proposal until the conclusion of the hearing proceedings established in 
this order. The delay in implementation will allow time for a hearing 
to resolve the contested issues regarding the LICAP mechanism. In 
addition, it will also provide a firm timeline for implementation and 
thus an incentive to participants in the constrained areas to develop 
resources or transmission alternatives to help mitigate the rate impact 
of a LICAP mechanism. In the interim, to compensate resources within 
the constrained areas, the Commission will continue the operation of 
the PUSH mechanism to reduce the impact of the mitigation measures on 
units that run infrequently. Additionally, the Commission will continue 
the use of RMR contracts for units that are needed for reliability but 
cannot earn sufficient revenues from the markets to continue operation.
    46. Finally, the Commission believes that there may be merit in the 
early implementation of a separate energy load zone for SWCT.\54\ The 
use of the entire State of Connecticut may diminish the price signals 
in the constrained portion of the state. Since the cost of RMR 
contracts will also be paid by all load within the zone, the use of a 
larger zone may result in some customers in Connecticut subsidizing 
others. Therefore, as discussed further below, the Commission will 
institute an investigation and paper hearing in Docket No. EL04-102-000 
regarding whether a separate energy load zone should be created for 
SWCT, and whether it should be implemented in advance of the 
implementation of LICAP. ISO-NE is directed to address whether a 
separate energy load zone should be established for SWCT and 
implemented before LICAP.
---------------------------------------------------------------------------

    \54\ ISO-NE, in its answer, states that in order to create an 
ICAP region covering SWCT, ISO-NE states that Connecticut must also 
be divided into separate energy load zones, with one load zone for 
energy covering SWCT.
---------------------------------------------------------------------------

    47. The Commission addresses specific comments, protests, and 
issues related to the proposed LICAP mechanism in the paragraphs which 
follow.
1. ICAP Regions
    48. As noted above, ISO-NE's proposal includes four regions for 
purposes of setting ICAP prices: Maine, Connecticut, NEMA/Boston, and 
the remainder of New England. Connecticut is defined as an import 
constrained ICAP region equal to the Connecticut load zone. However, 
some parties argue that SWCT should be its own import-constrained ICAP 
region. LIPA argues that ISO-NE has not justified why Connecticut and 
SWCT were combined as one import-constrained region. Moreover, LIPA 
argues that studies used during consideration of this proposal clearly 
justify creating a separate region for SWCT. LIPA asserts that 
maintaining Connecticut as a single constrained region distorts the 
market signals that LICAP is intended to send. LIPA argues that 
additional ICAP resources need to be located within SWCT to truly 
satisfy reliability concerns. PPL Parties argue that, in establishing 
an import-constrained region for Connecticut as a whole, ISO-NE's 
proposal would equate the locational value of a unit in severely 
constrained SWCT with the locational value of a unit in the relatively 
unconstrained areas in the rest of Connecticut, thus undervaluing units 
in the most needed locations and providing no incentive to direct new 
generation entry to the most critical sites.
    49. Commission Response. The two geographic areas in New England 
that have reliability problems are NEMA/Boston and SWCT, which 
currently are identified as DCAs. While ISO-NE's

[[Page 33009]]

proposal separates NEMA/Boston into its own region, there is 
significant evidence that SWCT is the most heavily constrained area 
within New England. Recently, the state of Connecticut has stressed the 
need to focus on potential reliability problems in SWCT. In a July 3, 
2002 report, the CT DPUC stated that ``inadequate local generation and 
transmission congestion in SWCT make the region vulnerable to 
reliability problems in the event that demand is higher than expected 
or generation units or transmission lines serving the area are 
unavailable.'' \55\ In December 2003, the Connecticut Siting Council 
(CSC) submitted a ten-year forecast of loads and resources within the 
State which reported that ``some sub-regions such as SWCT are 
threatened with supply deficiencies and voltage instability problems 
due to insufficient transmission and inadequate resources within the 
region.'' \56\ That report also notes that ``[i]t is increasingly 
important for resources to be strategically located on the grid to 
ensure electric supply can technically and economically serve pockets 
of high demand.'' \57\ Additionally, in its comments in this 
proceeding, NRG points to the Gap RFP, through which ISO-NE procured 
reliability services which it could call on during possible emergency 
situations. In this submittal ISO-NE stated that ``as in years past, 
the ISO expects that the combination of electric load and operating 
reserve requirements in SWCT will exceed the resources available for 
the sub-region in the summer of 2004.'' \58\ NRG also notes a recent 
ISO-NE-commissioned study which concluded that while New England has 
sufficient capacity available to it in aggregate, the capacity is not 
optimally located in the areas where it is needed for reliability. 
Specifically, SWCT is identified in that study as an area where the 
amounts of capacity are verging on deficient. The study concluded that 
capacity shortages in constrained areas of New England are most severe 
in SWCT, and are much more severe than NEMA/Boston.
---------------------------------------------------------------------------

    \55\ See DPUC Investigation into Possible Shortages of 
Electricity in Southwest Connecticut During Summer Periods of Peak 
Demand, July 3, 2002.
    \56\ See CSC Review of the Connecticut Electric Utilities' Ten-
Year Forecasts of Loads and Resources, December 23, 2003.
    \57\ Id.
    \58\ See Motion to Intervene and Comments of ISO-NE, Docket No. 
ER04-335-000.
---------------------------------------------------------------------------

    50. Based on the assessments conducted by the state of Connecticut 
and ISO-NE, as well as the comments and protests considered by the 
Commission in the instant proceeding, the Commission is concerned that 
the ICAP regions proposed by ISO-NE do not adequately reflect where 
infrastructure additions are needed most. The infrastructure problem in 
SWCT has been accurately defined, but the proposal submitted by ISO-NE 
does not appear to the Commission to create the incentives needed to 
remedy this problem. Grouping SWCT with the rest of the State unfairly 
burdens Connecticut customers that are not affected by limitations in 
transmission capacity in SWCT. With this proposal, for example, 
capacity would be priced the same outside of SWCT as it is in SWCT. 
This price signal sends the inaccurate message to potential investors 
that capacity is needed just as much in outside of SWCT as it is needed 
in SWCT. Additionally, the Commission fails to understand why NEMA/
Boston, as a DCA in New England, is classified as a separate LICAP 
region while SWCT is not.
    51. Based on the foregoing, the Commission believes that a separate 
SWCT ICAP region may be appropriate, to ensure that the LICAP market in 
New England achieves the goals we outlined in the PJM Order. As a 
result, ISO-NE is directed to submit a further filing in Docket No. 
ER03-563-030 addressing whether the Commission should revise its 
proposal to create a separate import-constrained ICAP region for SWCT. 
The Commission will require ISO-NE to submit this filing within 30 days 
from the date of this order, and will permit responses to ISO-NE's 
submittal to be filed within 21 days from the date ISO-NE makes its 
filing. Furthermore, the Commission notes that ISO-NE states in its 
answer that creating a separate ICAP region for SWCT would also involve 
creating a separate load zone in SWCT for pricing energy. As noted 
above, the Commission believes that creating this separate load zone 
could have significant benefits, even in advance of the implementation 
of LICAP. As a result, pursuant to section 206 of the FPA, the 
Commission will institute an investigation and paper hearing in Docket 
No. EL04-102-000 regarding whether a separate energy load zone should 
be created for SWCT, and whether it should be implemented in advance of 
the implementation of LICAP. The Commission will require ISO-NE to 
address the issue of whether a separate energy load zone should be 
created for SWCT, and whether it should be implemented in advance of 
the implementation of LICAP, in a filing to be made within 30 days from 
the date of this order in Docket No. EL04-102-000. The Commission will 
issue notice of ISO-NE's filing, and permit interested parties to 
intervene and file responses within 21 days of the date ISO-NE makes 
its filing.
    52. In cases where, as here, the Commission institutes a section 
206 proceeding on its own motion, section 206(b) requires that the 
Commission establish a refund effective date that is no earlier than 60 
days after publication of notice of the Commission's investigation in 
the Federal Register, and no later than five months subsequent to 
expiration of the 60-day period. We will establish the statutorily-
directed refund effective date, in this context for the determination 
of regions in Connecticut, 60 days after publication in the Federal 
Register of this order initiating the Commission's investigation in 
Docket No. EL04-102-000. In addition, section 206 requires that, if no 
final decision has been rendered by that date, the Commission must 
provide its estimate as to when it reasonably expects to make such a 
decision. Given the times for filing identified in this order, and the 
nature and complexity of the matters to be resolved, the Commission 
estimates that it will be able to reach a final decision by October 31, 
2005.
2. Demand Curve and Capacity Transfer
    53. As described above, ISO-NE's proposed demand curve is 
structured on the basis of two points. While there are numerous 
protests addressing the parameters of the demand curve, there appears 
to be very little objection to the concept of a demand curve. In fact, 
many parties advocate a downwardly sloping demand curve. The protests 
focus on the precise points that ISO-NE proposed to determine the 
height and slope of the demand curve. In general, representatives of 
LSEs and State government entities recommend changing the parameters in 
a way that would lower ICAP prices.\59\ By contrast, representatives of 
suppliers either support the ISO-NE's parameters or recommend 
parameters that would raise ICAP prices.\60\ For example, ConEd favors 
raising the point at which the

[[Page 33010]]

ICAP price becomes zero to 127 percent of Objective Capability.\61\
---------------------------------------------------------------------------

    \59\ For example, the New England Conference of Public Utility 
Commissioners (NECPUC) argues that the point on the demand curve 
where the price covers the net cost of a new peaker (net of 
inframarginal energy revenues) should be where capacity is just 
equal to New England's Objective Capability, which is less than ISO-
NE's proposal. NECPUC also advocates setting the point where the 
ICAP price becomes zero (i.e., where the demand curve crosses the 
horizontal axis) at 110 percent of Objective Capability, rather than 
at 118 percent of Objective Capability as proposed by ISO-NE.
    \60\ Motion to Intervene, Protest, Objection to Proposed 
Effective Date, and Request for Hearing of NECPUC at 20-21.
    \61\ Motion to Intervene and Protest of ConEd Energy at 2-3.
---------------------------------------------------------------------------

    54. Some parties, including Indicated Suppliers and ConEd, urge the 
Commission to implement a Compromise Proposal that was approved in the 
New England stakeholder process by the Markets Committee and received a 
majority (58 percent) vote from the Participants Committee.\62\ The 
major difference between the Compromise Proposal and the proposal 
ultimately filed by ISO-NE is that the former included price floors for 
the Maine and Rest of Pool regions as well as higher price caps and 
transition payments for generators in constrained areas, both of which 
would result in higher ICAP payments in the relevant areas. The 
Compromise Proposal is supported by HQ Energy Services, ConEd, and the 
Electric Power Supply Association (EPSA).
---------------------------------------------------------------------------

    \62\ A proposal requires a two-thirds majority to receive 
approval from the Participants Committee.
---------------------------------------------------------------------------

    55. A group consisting of state governmental entities and 
transmission owners in NEMA/Boston (Mass. AG et. al.) filed another 
alternative proposal, also using a demand curve. Under this option, the 
locational feature of the ISO's proposal would be removed, and ICAP 
resources would be bought and sold through a single, region-wide market 
instead of separate locational markets.\63\
---------------------------------------------------------------------------

    \63\ The price at which generators would recover the cost of a 
peaking unit (net of energy market revenues) would be set at 100% of 
Objective Capability, rather than at 106.7 percent as proposed by 
ISO-NE. Second, the MW level at which the ICAP price would become $0 
(i.e., where the demand curve crosses the horizontal axis) would be 
reduced to 112 percent of Objective Capability. This proposal would 
also impose additional requirements on generators. Finally, the 
proposal would also adopt locational operating reserve markets and 
fully integrate new generators receiving ICAP payments into the 
regional grid.
---------------------------------------------------------------------------

    56. National Grid asserts that LICAP will not alleviate the 
fundamental constraints that cause the formation of load pockets and 
argues that the best way to ensure transmission adequacy would be to 
mandate a deliverability requirement across the transmission grid. In 
its answer, ISO-NE did not take a position on the merits of a 
deliverability requirement, noting that there is nothing about the 
LICAP proposal that would preclude the adoption of a deliverability 
requirement if the stakeholders and the Commission conclude that it 
would be beneficial.
    57. Commission Response. We agree with ISO-NE's overarching 
proposal to use a demand curve, and in particular a downward sloping 
demand curve, as part of the eventual LICAP mechanism in New England. 
The Commission finds that implementing a demand curve for ICAP will 
allow ISO-NE's market design to more closely resemble that of the 
neighboring ISO (NYISO) and to contribute to the elimination of seams 
between the two. NYISO currently uses a demand curve to set ICAP prices 
within its territory. NYISO also has locational requirement for 
procuring ICAP for LSEs located within New York City and Long Island. 
The adoption of LICAP by ISO-NE would make its market design more 
consistent with that in effect in NYISO.
    58. While we agree with ISO-NE's concept of a sloped demand curve, 
we find that ISO-NE has not justified the specific parameters it 
proposes to determine the slope and height of the demand curve. 
Commenters raise important questions about these parameters that cannot 
be resolved based on the record in this proceeding. These questions 
include: If the height of the curve is to be determined, at least in 
part, by the cost of new entry, what is the cost of new entry, and does 
that cost vary among the regions? What is a reasonable estimate of the 
net inframarginal revenues that could be expected from the energy 
markets, and does that revenue vary among regions? Should the ICAP 
price reflect the cost of new entry (net of inframarginal energy 
revenues) when capacity equals (i) Objective Capability, (ii) the 
historical average level of capacity relative to Objective Capability, 
or (iii) some other level? At what capacity level should the ICAP price 
fall to $0? Should the height and slope of the curve be based on the 
cost of new entry or on other factors, such as an estimate of the 
reliability value to loads of alternative levels of capacity, and if 
the latter, what are reasonable estimates of such reliability values? 
To what extent do the parameters of the demand curve used by the NYISO 
affect the ability of New England to attract ICAP capacity, and thus, 
how should the New York parameters affect the parameters for New 
England?\64\ The Commission finds that the use of price floors, as 
proposed in the Compromise Proposal, are non-market mechanisms that may 
not send accurate price signals and may artificially inflate ICAP 
prices in regions with more-than-adequate capacity levels.
---------------------------------------------------------------------------

    \64\ We note, for example, that the highest price for capacity 
in New England under ISO-NE's proposal (after the transition period 
has expired) would be about $9.28/kW-month, which is the price when 
the market clears at less than 95 percent of Objective Capability. 
By contrast, prices higher than $9.28 cleared the capacity market in 
the monthly auctions held by the NYISO for the summer 2004 
capability period for Long Island and New York City. Specifically, 
the price for capacity on Long Island for June 2004 was $9.50, while 
the prices for capacity in New York City ranged between $11.16 and 
$11.42 for the months of June through October. (See, http://www.nyiso.com/market/icap_auctions/summer_2004/june_2004_auction.pdf.) The hearing should explore whether regions such as 
SWCT, which is near New York City and Long Island, would be able to 
attract adequate capacity under ISO-NE's proposed parameters if 
prices in New York City and Long Island exceed the highest possible 
price in New England.
---------------------------------------------------------------------------

    59. Based upon the foregoing, and the Commission's own preliminary 
analysis, we find that the parameters underlying the proposed demand 
curve have not been shown to be just and reasonable, and may be unjust, 
unreasonable, unduly discriminatory or preferential, or otherwise 
unlawful. Accordingly, while we agree with the concept of a demand 
curve for the ICAP market, we will set the parameters which will 
determine the slope and height of that curve for hearing procedures for 
the purpose of determining the just and reasonable ICAP demand curve 
for each ICAP region. These hearing procedures will be limited to one 
year to ensure that the specific parameters of the curve are in place 
in advance of the January 1, 2006 implementation date of the LICAP 
market, so that market participants can adequately prepare. The 
Commission will direct the presiding judge to ensure that an initial 
decision or settlement is issued by June 1, 2005. The presiding ALJ 
should structure the hearing schedule accordingly.
    60. Certain parties have argued that the Commission should adopt a 
deliverability requirement for ICAP supplies in New England rather than 
adopt a LICAP.\65\ The Commission directed ISO-NE to develop ``a 
mechanism that implements location or deliverability requirements in 
the ICAP or resource adequacy market'' in the April 25 Order.\66\ ISO-
NE elected to pursue a locational ICAP mechanism in the near-term for, 
among other things, reasons of costs.\67\ A reliable and extensive 
transmission system without substantial load pockets is important for a 
deliverability requirement. The current transmission system in New

[[Page 33011]]

England does not allow for deliverability across the entire region, and 
the Commission has been given no indication as to when the New England 
system would be physically capable of supporting a deliverability 
requirement. The Commission believes that the development of a 
transmission system that effectively eliminated import- and export-
constrained regions in New England is an admirable objective. However, 
we recognize that the development of such infrastructure will take time 
and concerted effort. ISO-NE has indicated that acceptance and 
implementation of the LICAP proposal would not preclude the 
introduction of a deliverability requirement at some point in the 
future. The Commission would welcome a proposal to implement a 
deliverability requirement in New England, if and when ISO-NE and New 
England stakeholders collectively choose to pursue that. Until such 
time, the Commission believes that the LICAP proposal, with the 
modifications discussed in this order represents an appropriate 
response to the Reliability Compensation Issues we currently observe in 
New England.
i. Level of Capacity Available for Transfer Between Regions
---------------------------------------------------------------------------

    \65\ A deliverability requirement would require the construction 
of sufficient transmission to ensure that resources are deliverable 
to load throughout the region. Only units that satisfy the 
deliverability requirements would be able to sell ICAP in New 
England.
    \66\ ``We will direct ISO-NE to file no later than March 1, 2004 
for implementation no later than June 1, 2004, a mechanism that as 
discussed in the September 20 Order.'' April 25 Order at P 37.
    \67\ In its transmittal letter, ISO-NE concluded that, in the 
short term, a deliverability requirement is not practical or cost-
effective due to the substantial investments, construction, and 
timeline involved. Transmittal Letter of ISO-NE at 3.
---------------------------------------------------------------------------

    61. As noted earlier, ISO-NE proposes to establish CTLs between 
ICAP regions at levels below the actual amount of real-time electric 
flow that the transmission interfaces are capable of accommodating. 
NECPUC, Mass. AG et al. and others object to ISO-NE's proposal to 
underestimate the amount of capacity that can be delivered into the 
import-constrained regions.
    62. In its answer, ISO-NE argues that increasing its proposed CTLs 
would be detrimental to the market. ISO-NE asserts that setting 
transfer limits while recognizing excess capacity may depress prices 
and undervalue the resources within the import-constrained region, 
which decreases the likelihood of either new generation entry or 
transmission expansion in the constrained region.
    63. Commission Response. The commenters' criticisms of ISO-NE's 
proposed method for determining CTLs raise issues that the Commission 
will set for hearing to determine the costs and benefits of 
understating the amount of transmission transfer capability that is 
actually available to procure ICAP resources across regions. The 
presiding judge is directed to consider the appropriate method for 
calculating CTLs in the hearing that we establish in this order.
ii. Capacity Transfer Rights
    64. As noted earlier, ISO-NE proposes to allocate a portion of the 
Capacity Transfer Rights across the NEMA/Boston Import Interface (the 
transmission interface between the NEMA/Boston and Rest of Pool) to 
municipal utilities in NEMA/Boston that have ownership entitlements in 
pool planned units in Rest of Pool. TransCanada Power Marketing Ltd. 
(TransCanada) and Indicated Suppliers disagree with the proposal. 
TransCanada argues that this special award of Capacity Transfer Rights 
has no direct relationship to the actual load served by the municipal 
utilities in NEMA/Boston and improperly presumes that the municipal 
utilities should be given priority rights over the limited transfer 
capacity into the region. Indicated Suppliers argue that a ``special 
allocation'' of Capacity Transfer Rights should be extended to other 
participants with long-term contracts for capacity located outside of 
constrained areas. Conversely, Massachusetts Municipal Wholesale 
Electric Company and Reading Municipal Light Department (MMWEC and 
Reading) urge the Commission to ensure that the ``special'' Capacity 
Transfer Right allocation be maintained as essential to any 
determination that the LICAP proposal is just and reasonable. MMWEC and 
Reading believe that any imposition of LICAP in New England should 
include a proper recognition of prior investments in pool planned units 
and should minimize the impact of a new regulatory paradigm upon those 
long-term investments.
    65. Duke Energy North American, LLC (Duke) seeks to clarify that 
generators that have increased transfer capability on constrained ICAP 
interfaces prior to the proposal's effective date would be allocated 
Capacity Transfer Rights as described in section 8.9.4 of the proposal. 
Additionally, MMWEC and Reading have uncovered two problems that they 
assert must be addressed. First, MMWEC and Reading believe that ISO-
NE's proposed text of section 8.9.6 reads as though the allocation is 
to the pool planned unit itself. Second, in reviewing Table 1 to 
section 8.9.6, which lists the municipal utilities receiving special 
Capacity Transfer Rights, MMWEC and Reading believe that it does not 
include the Wakefield Municipal Gas & Light Department, which is a 
NEMA-based, municipal utility and thus entitled to a share of whatever 
Capacity Transfer Rights based on pool planned units allocation is 
accepted or approved by the Commission.
    66. Commission Response. Capacity Transfer Rights should be 
allocated in a way that allows the benefits of Capacity Transfer Rights 
to be received by those who ultimately pay the costs of the 
transmission system, including market participants that have funded 
specific upgrades that increased transfer capacity. That is because 
Capacity Transfer Rights depend on the amount of transmission capacity 
in New England, so those paying for the transmission capacity should 
receive its benefits. We endorsed a similar policy with respect to the 
allocation of Auction Revenue Rights (ARRs) in New England in an order 
issued December 20, 2002.\68\ ARRs entitle the holder to receive the 
revenues from the sale at auction of FTRs, which (like Capacity 
Transfer Rights) depend on the amount of transmission capacity in New 
England.
---------------------------------------------------------------------------

    \68\ New England Power Pool and ISO New England, Inc., 101 FERC 
] 61,344 at P 55-64 (2002).
---------------------------------------------------------------------------

    67. This is not to say, however, that Capacity Transfer Rights must 
always be allocated to those who directly pay for the embedded costs of 
New England's transmission grid. Indeed, in the December 20, 2002 
order, we accepted a proposal to allocate ARRs to ``Congestion Paying 
LSEs,'' \69\ even though not all Congestion Paying LSEs pay 
transmission costs. We did so because we expected that such Congestion 
Paying LSEs would pass on the benefits of ARRs to the retail loads that 
they serve, and these retail loads would ultimately also bear the costs 
of the transmission system. \70\ Similarly, we would find it acceptable 
to allocate

[[Page 33012]]

Capacity Transfer Rights either to those who directly pay the fixed 
costs of the New England transmission system or to those who serve the 
retail loads that ultimately pay these fixed costs. However, as a 
general matter, we would not find it acceptable to allocate Capacity 
Transfer Rights to generators in Maine that have not contributed to the 
cost of the transmission system, although it would be acceptable to 
allocate Capacity Transfer Rights to generators in Maine (or in other 
regions of New England) that have contributed to the cost of the 
transmission system.
---------------------------------------------------------------------------

    \69\ A Congestion Paying LSE is defined as ``a Participant or 
Non-Participant that is responsible for paying for Congestion Costs 
as a Transmission Customer paying for Regional Network Service or 
Long-Term Firm Point-to-Point Transmission Service under the NEPOOL 
Tariff, unless such Transmission Customer has transferred its 
obligation to supply load in accordance with NEPOOL System Rules, in 
which case the Congestion Paying LSE shall be the Participant 
supplying the transferred load obligation.'' See id. at P 55.
    \70\ In New England, Transmission Customers taking Regional 
Network Service or Long-Term Firm Point-to-Point Transmission 
Service pay rates that recover fixed transmission costs. However, 
not all Congestion Paying LSEs are such Transmission Customers who 
pay for transmission costs. Some Congestion Paying LSEs have taken 
over the responsibility for serving load from a Transmission 
Customer, while the Transmission Customer retains the responsibility 
to provide Transmission Service to the load and to pay the 
associated transmission costs. The Commission found it acceptable to 
allocate ARRs to Congestion Paying LSEs that do not pay transmission 
costs because the retail loads served by the Congestion Paying LSEs 
ultimately paid the transmission costs, and because the Commission 
expected that the benefits of the ARRs allocated to the LSEs would 
be flowed through to these same retail loads. Thus, the retail loads 
that ultimately paid transmission costs would also receive the 
benefits of the ARRs.
---------------------------------------------------------------------------

    68. The Commission is unable to determine whether ISO-NE's proposed 
allocation of Capacity Transfer Rights is consistent with this 
principle, and thus we will set for hearing the issue of the allocation 
of Capacity Transfer Rights. In particular, the hearing should 
determine whether, and to what extent, particular generators in Maine 
have paid for transmission upgrades that increase transfer capability 
with the rest of the pool and thus should be assigned corresponding 
Capacity Transfer Rights. The hearing should also determine the 
appropriate allocation of Capacity Transfer Rights for those LSEs, 
including municipal utilities, who are the original holders of life-of-
the-unit contracts for pool planned units. The hearing should also 
address the extent to which LSEs outside of the import-constrained 
regions should be allocated Capacity Transfer Rights.
3. Implementation Date and Transition Mechanisms
    69. ISO-NE's proposal relies on two transition mechanisms: (1) a 
transition payment of $5.34 per kilowatt month to be paid to those 
units in constrained sub-regions which had 2003 capacity factors of 15 
percent or less, and (2) a series of price caps in import-constrained 
regions over a five-year phase-in period.\71\ After the fifth year 
(ending May 2009), the caps would expire, leaving prices in all sub-
regions determined by the downward-sloping demand curve. During the 
phase-in period, the constrained sub-regions would clear at the higher 
of the cap or the price in the Rest of Pool sub-region. Numerous 
parties argue against the implementation of these transition 
mechanisms.
---------------------------------------------------------------------------

    \71\ The cap during the first year (June 2004 through the end of 
May 2005) would be $1.00, and would increase by $1.00 each year 
(i.e., a cap of $2.00 in year 2; $3.00 in year 3; $4.00 in year 4; 
and $5.00 in year 5).
---------------------------------------------------------------------------

    70. Commission Response. For the reasons that follow, the 
Commission will reject the proposed transition mechanisms and the 
proposed transition payments. Instead, the Commission directs that the 
LICAP mechanism, when implemented by January 1, 2006, as directed by 
this order, become effective without the use of the phase-in or 
transition provisions.
    71. Several intervenors argued that the Commission should defer 
implementation of the LICAP proposal to accommodate the 18 month 
Regional Dialogue process that ISO-NE proposed. The Commission will 
defer implementation until January 1, 2006 but does not believe it 
would be appropriate to direct ISO-NE and stakeholders to develop a 
modified LICAP proposal in the Regional Dialogue process. The 
Commission directed ISO-NE and its stakeholders to develop a mechanism 
in the April 25 Order. However, these discussions did not produce 
consensus on a mechanism. Further, the Commission does not believe that 
ISO-NE's proposal, if implemented without modification, would resolve 
New England's Reliability Compensation Issues. Therefore, the 
Commission does not believe it is appropriate to delay action on ISO-
NE's proposal to allow additional time for stakeholder discussions. 
Rather, the Commission believes that the approach taken in this order, 
which is to identify the date when LICAP will be implemented and 
establish proceedings to address remaining issues, will better address 
the situation. We believe that deferring the implementation of LICAP 
until January 1, 2006 will allow participants in import-constrained 
regions an opportunity to move toward the development of needed 
infrastructure prior to the realization of full LICAP rates. 
Infrastructure projects are proceeding in both Connecticut and NEMA/
Boston and a deferral of LICAP should provide an incentive for timely 
completion of the addition of infrastructure in these areas. The 
Commission finds a delay in the implementation date of LICAP is 
preferable to the transition mechanisms proposed by ISO-NE, which were 
in large part simply out-of-market arrangements. To monitor the 
progress of infrastructure development, the Commission will require 
ISO-NE to submit a report to the Commission every 90 days, beginning 90 
days from the date of this order, updating the progress made in the 
siting, permitting and construction of transmission and generation 
upgrades within the New England control area, with particular emphasis 
on progress within DCAs. While we recognize that ISO-NE is not the 
entity responsible for siting and permitting decisions, it is in the 
best position to keep the Commission informed regarding the progress of 
infrastructure development in New England.
    72. Until implementation, the New England market will continue to 
operate under the existing ICAP rules, as well as the existing PUSH 
mechanism, and any existing RMR agreements. If additional RMR contracts 
are needed or require renewal, the Commission expects the parties to 
those contracts and ISO-NE to negotiate, and file under section 205 of 
the FPA, one-term contracts, with the single term expiring when the 
LICAP mechanism is implemented. The Commission will consider the need 
for these contracts, and the justness and reasonableness of the rates 
proposed therein, as they are filed. While using current ICAP rules in 
the period between now and January 1, 2006 is not where the Commission 
envisioned the NEPOOL capacity market to be, the stakeholder process 
did not result in a mechanism that is just and reasonable and can be 
implemented in the near term. Our decision to delay implementation and 
rely on the existing rules and RMR agreements will produce a just and 
reasonable result in the short-term, while allowing changes to be made 
and infrastructure to be built, which will allow the basic LICAP 
framework we approve in this order to produce a just and reasonable 
result in the long-term.
4. Miscellaneous Issues
i. Mitigation Measures
    73. The mitigation measures proposed by ISO-NE did not elicit many 
comments or protests. LIPA argues that ISO-NE's proposed tests for de-
listing units--which would require that the de-listing resource 
demonstrate that expected revenues or cost savings associated with the 
external sale or de-listing would exceed the expected revenues the 
resource would otherwise receive--will inhibit transactions between 
markets.\72\ LIPA asserts that there are multiple reasons for a 
resource to de-list beyond short term revenue tests, such as lower 
revenues that result from a longer-term capacity commitment or the 
perceived stronger creditworthiness of a commitment with an external 
party. PSEG requests that the Commission reject this mitigation 
measure, arguing that it would allow

[[Page 33013]]

ISO-NE to employ a market power mitigation measure without any finding 
that the proposed actions would have a significant market impact, as 
with other mitigation rules.
---------------------------------------------------------------------------

    \72\ PSEG Energy Resources and Trade LLC (PSEG) argues that ISO-
NE's market design should permit partial de-listing of capacity 
resources. In the NE-SMD Order, the Commission addressed the issue 
of partial de-listing of resources. See New England Power Pool and 
ISO New England, Inc., 100 FERC ] 61,287 at P 110 (2002).
---------------------------------------------------------------------------

    74. Commission Response: The Commission will accept the mitigation 
measures proposed by ISO-NE with respect to reference level 
calculations and conduct and impact thresholds but rejects the de-
listing measures. Under ISO-NE's proposal, participants seeking to de-
list any resource in an import-constrained ICAP region would be 
required to demonstrate to ISO-NE that the expected revenue associated 
with sale of ICAP outside of the NEPOOL control area or the expected 
cost savings attributable to de-listing will exceed the expected ICAP 
revenues and other market revenues that the resource would receive if 
it did not de-list. Where unable to make such a demonstration, ISO-NE 
proposes to have the authority to deny any delisting request. The 
Commission finds that ISO-NE should not have the authority to second-
guess a generator's business decisions regarding whether to sell into 
the ICAP market and thus rejects this provision. Moreover, since 
participation in the ICAP market is voluntary, it is not appropriate to 
prohibit or limit a generator's decision to cease participating in the 
ICAP market. The Commission will not accept additional measures that 
are designed for the energy markets.\73\ These measures are primarily 
designed for units that receive transition payments. The Commission is 
eliminating transition payments. Consequently this proposed measure 
will not apply.
---------------------------------------------------------------------------

    \73\ ISO-NE proposes to subject units receiving transition 
payments to a reduced energy offer price threshold and tighter 
start-up and no-load thresholds. Such units would also face tighter 
operating reserve credit thresholds.
---------------------------------------------------------------------------

ii. Role of the ISO
    75. ISO-NE has sought guidance on the issue of what entity should 
bear the responsibility for longer-term capacity procurement and long-
term reliability. The Commission addressed a similar issue in the PJM 
Order. As a general matter, the Commission believes that the market 
design of the RTO or ISO should be structured to send appropriate price 
signals and thus provide an incentive for load to procure capacity to 
meet their long-term requirements. Through the regional transmission 
planning process and the determination of the appropriate ICAP 
requirements for LSEs, ISO-NE's role is to establish the infrastructure 
levels needed for the system to operate reliably. However, it is LSEs 
that have the primary responsibility for longer-term capacity 
procurement and obtaining sufficient supplies to ensure long-term 
reliability. The role of the RTO or ISO in this process is, at most, to 
provide a backstop to these efforts. However, the Commission is 
concerned that if an RTO or ISO negotiates contracts to procure power, 
it may assume an interest in market prices which could sacrifice its 
independence and change its incentives. Thus, the Commission would only 
consider a backstop role for the ISO or RTO after a showing that 
appropriate changes to the market design had been implemented and had 
not proven sufficient to solve the problem or that market design 
changes are infeasible.
iii. Local Scarcity Pricing and a Co-Optimized Market for Energy and 
Operating Reserves
    76.0 We noted in the PJM Order that ``recognizing short-term 
scarcity of operating reserves may be a valuable component of an 
overall market design. * * * The inclusion of such a feature could also 
in part reduce generator reliance upon unit specific agreements in 
situations where units needed for reliability are not recovering their 
costs and are eligible for a contract.''\74\ High locational prices in 
ISO-NE's spot markets can signal when and where there is a need for 
additional capacity. ISO-NE recently added a scarcity pricing feature 
to spot market rules for its markets whereby spot market prices would 
be increased, at times up to $1,000/MWh, during periods of scarce 
supplies, when New England as a whole is experiencing shortages of 
operating reserves.\75\ This pricing feature is valuable because it 
sends a strong signal when capacity is tight that capacity is needed. 
The resulting high prices also provide revenue to owners of generation 
capacity that is operated during a limited number of hours of very high 
demand, and thus, may reduce the need for RMR contracts for units that 
otherwise receive insufficient market revenue to support their 
operations.
---------------------------------------------------------------------------

    \74\ PJM Order at P 82-83.
    \75\ See ISO New England Inc., 104 FERC ] 61,130 (2003).
---------------------------------------------------------------------------

    77. ISO-NE's scarcity pricing is triggered only by New England-wide 
reserve shortages. However, because of transmission constraints, 
scarcity conditions may arise in smaller areas within New England 
(reflected in an inability to fully meet local reliability 
requirements) even when capacity throughout New England as a whole is 
sufficient to meet load and operating reserves. Any scarcity conditions 
that arise in smaller areas within New England do not trigger the 
scarcity pricing provisions. This feature may limit the ability of spot 
market prices to signal the need for additional capacity in local 
areas. Modifying ISO-NE's scarcity pricing mechanism so that prices 
would automatically increase in local areas that experience local 
scarcity conditions might improve the market's price signals and 
increase the ability of generators needed for local reliability to 
recover their costs in the market. Such a modification could complement 
and reinforce a LICAP mechanism. For example, local scarcity pricing 
could further encourage LSEs in a capacity-tight region to enter into 
contracts with resources in order to hedge against possible high spot 
energy prices. However, local scarcity pricing may be easier to 
implement in the presence of a locational operating reserves spot 
market that is co-optimized with the spot energy market, which would 
recognize operating reserve requirements in local areas. ISO-NE does 
not currently operate a locational operating reserves market, but it 
has indicated that it is planning to implement co-optimized energy and 
reserves markets in 2005.
    78. We wish to ensure that a broad array of options is considered 
for addressing New England's locational needs for capacity. Therefore, 
we will require ISO-NE to consider the advantages and disadvantages of 
modifying its existing scarcity pricing mechanism so that it would 
trigger as a result of local scarcity conditions. ISO-NE's process 
should include stakeholder input and consideration of stakeholder 
proposals. We will require ISO-NE to file a report on this 
investigation and the results of the stakeholder process within 180 
days of this order. If ISO-NE files to implement co-optimized energy 
and reserves markets within 180 days of this order, it may elect to 
include the report on scarcity pricing as part of the filing.
    The Commission orders:
    (A) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
section 402(a) of the Department of Energy Organization Act and by the 
Federal Power Act, particularly section 206 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR Chapter I), a public hearing shall 
be held in Docket No. ER03-563-030 concerning the appropriate 
methodology for determining capacity transfer limits between ICAP 
regions, the amount and

[[Page 33014]]

allocation of capacity transfer rights for purposes of the LICAP 
market, and the parameters of the demand curve that will apply in each 
ICAP region, as discussed in the body of this order.
    (B) A presiding judge, to be designated by the Chief Judge, shall, 
within 15 days of the date of this order, convene a conference in 
Docket No. ER03-563-030, in a hearing room of the Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. 
Such conference shall be held for the purpose of establishing a 
procedural schedule. The presiding judge is authorized to establish 
procedural dates, and to rule on all motions (except motions to 
dismiss) as provided in the Commission's Rules of Practice and 
Procedure and is directed to issue an initial decision on or before 
June 1, 2005.
    (C) ISO-NE is directed to submit an additional filing in Docket No. 
ER03-563-030 within 30 days from the date of this order addressing 
whether the Commission should revise its proposal to create a separate 
import-constrained ICAP region for SWCT, as discussed in the body of 
this order.
    (D) The parties to Docket No. ER03-563-030 will be permitted to 
file responses to the additional filing of ISO-NE directed in Paragraph 
(C) within 21 days from the date ISO-NE makes such filing.
    (E) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
section 402(a) of the Department of Energy Organization Act and the 
Federal Power Act, particularly section 206 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR Chapter I), the Commission hereby 
institutes an investigation in Docket No. EL04-102-000 regarding 
whether a separate energy load zone should be created for SWCT, and 
whether it should be implemented in advance of the implementation of 
LICAP, as discussed in the body of this order.
    (F) ISO-NE is hereby directed to address whether a separate energy 
load zone should be created for SWCT, and whether it should be 
implemented in advance of the implementation of LICAP, in a filing to 
be made in Docket No. EL04-102-000 within 30 days from the date of this 
order, as discussed in the body of this order.
    (G) Any interested person desiring to be heard in the proceedings 
in Docket No. EL04-102-000 should file a notice of intervention or 
motion to intervene with the Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, in accordance with Rule 214 of 
the Commission's Rules of Practice and Procedure (18 CFR 385.214) 
within 21 days of the date ISO-NE makes the filing directed in 
Paragraph (F) above.
    (H) Responses to the submission of ISO-NE filed pursuant to 
Paragraph (F) above may be submitted within 21 days of the date ISO-NE 
makes its filing.
    (I) The refund effective date in Docket No. EL04-102-000 will be 60 
days from the date of publication of this order in the Federal 
Register.
    (J) ISO-NE's requested implementation date of June 1, 2004 is 
rejected, and delayed until the conclusion of the proceedings 
established herein or by January 1, 2006, as discussed in the body of 
this order.
    (K) ISO-NE is directed to file a report every 90 days, beginning 90 
days from the date of this order, updating progress made in the siting, 
permitting and construction of transmission and generation upgrades 
within the New England control area, with particular emphasis on 
progress within Designated Congested Areas.
    (L) ISO-NE is directed to file a report on its investigation of 
adding a local scarcity triggering mechanism to its existing scarcity 
pricing mechanism with 180 days of the date of this order, as discussed 
in the body of this order.
    (M) The Secretary shall promptly publish a copy of this order in 
the Federal Register.

By the Commission. Commissioner Kelliher concurring with a separate 
statement attached. Commissioner Kelly not participating.
Linda Mitry,
Acting Secretary.
    Issued June 2, 2004.

Appendix A

    American Forest & Paper Association
    American National Power, Inc.
    Associated Industries of Massachusetts
    Calpine Eastern Corporation and Calpine Energy Services, LP
    Central Maine Power Company
    Central Vermont Public Service Corporation
    Attorney General for the State of Connecticut
    Connecticut Department of Public Utility Control
    Connecticut Office of Consumer Counsel
    Connecticut Municipal Electric Energy Cooperative
    Consolidated Edison Energy, Inc.
    Coral Power, L.L.C.
    Dominion Resources, Inc., Dominion Energy Marketing, Inc., and 
Dominion Nuclear Connecticut, Inc.
    Duke Energy North America, LLC
    Electricity Consumer Resource Council and American Iron and 
Steel Institute
    The Energy Consortium
    Entergy Nuclear Generating Company, LLC and Entergy Nuclear 
Vermont Yankee, LLC
    Electric Power Supply Association
    Fitchburg Gas and Electric Light Company and Unitil Energy 
Systems, Inc.
    FPL Energy, LLC
    HQ Energy Services (U.S.), Inc.
    Independent Energy Producers of Maine
    Indicated Suppliers
    Industrial Energy Consumer Group
    Interconnection Rights Holders Management Committee
    Keyspan-Ravenswood, LLC
    Long Island Power Authority and LIPA
    Maine Public Advocate
    Maine Public Utilities Commission
    Attorney General of Massachusetts, Attorney General of Rhode 
Island, and the Rhode Island Division of Public Utilities and 
Carriers
    Massachusetts Department of Telecommunications and Energy
    Massachusetts Municipal Wholesale Electric Company and Reading 
Municipal Light Department
    Milford Power Company, LLC
    Morgan Stanley Capital Group
    National Grid USA
    NEPOOL Industrial Customer Coalition
    New England Conference of Public Utilities Commissioners
    New England Consumer-Owned Entities
    New England Demand Response Providers
    New Hampshire Office of Consumer Advocate
    Northeast Utilities Service Company
    NRG Devon Power LLC, Middletown Power LLC, Norwalk Harbor LLC 
and NRG Power Marketing
    New York Independent System Operator
    NSTAR Electric and Gas Corporation
    NXGEN, Inc.
    Potomac Economics, Ltd.
    PPL Energy Plus, LLC and PPL Wallingford Energy LLC
    PSEG Energy Resources and Trade LLC
    Strategic Energy LLC
    TransCanada Power Marketing Ltd.
    United Illuminating Company
    Vermont Department of Public Service
    Vermont Electric Power Company
    Wellesley Municipal Lighting Plant

Appendix B

Protests

    Calpine Eastern Corporation and Calpine Energy Services, L.P.
    Attorney General of the State of Connecticut
    Connecticut Department of Public Utility Control
    Connecticut Office of Consumer Counsel
    Connecticut Municipal Electric Energy Cooperative
    Consolidated Edison Energy, Inc.
    Duke Energy North America, LLC
    FPL Energy, LLC
    HQ Energy Services (U.S.), Inc.
    Independent Energy Producers of Maine
    Long Island Power Authority and LIPA
    Maine Public Utilities Commission
    Attorney General of Massachusetts, Attorney General of Rhode 
Island, and the Rhode Island Division of Public Utilities and 
Carriers

[[Page 33015]]

    Associated Industries of Massachusetts
    Massachusetts Department of Telecommunications and Energy
    Massachusetts Municipal Wholesale Electric Company and Reading 
Municipal Light Department
    Milford Power Company, LLC
    NEPOOL Industrial Customer Coalition
    New England Conference of Public Utilities Commissioners
    New Hampshire Office of Consumer Advocate
    NRG Devon Power LLC, Middletown Power LLC, Norwalk Harbor LLC 
and NRG Power Marketing
    NSTAR Electric and Gas Corporation
    PPL Energy Plus, LLC and PPL Wallingford Energy LLC
    PSEG Energy Resources and Trade LLC
    United Illuminating Company
    Vermont Department of Public Service
    Vermont Electric Power Company
    Wellesley Municipal Lighting Plant

Comments

    Coral Power, L.L.C.
    Dominion Resources, Inc., Dominion Energy Marketing, Inc., and 
Dominion Nuclear Connecticut, Inc.
    Electricity Consumer Resource Council and American Iron and 
Steel Institute
    The Energy Consortium
    Electric Power Supply Association
    Fitchburg Gas and Electric Light Company and Unitil Energy 
Systems, Inc.
    Independent Energy Producers of Maine
    Industrial Energy Consumer Group
    Keyspan-Ravenswood, LLC
    Maine Public Advocate
    National Grid USA
    New England Consumer-Owned Entities
    New England Demand Response Providers
    Northeast Utilities Service Company
    Potomac Economics, Ltd.
    TransCanada Power Marketing Ltd.

[Docket No. ER-03-563-030; EL04-102-000]

Devon Power LLC, et al.

Issued June 2, 2004

    Joseph T. Kelliher, Commissioner concurring:
    I am writing separately to explain my views on the implementation 
date of a locational installed capacity (LICAP) market in New England.
    I concur with the order that a LICAP market should not be 
implemented before January 1, 2006. The purpose of establishing a LICAP 
market is to ensure there is adequate electricity generation in New 
England, particularly in Southwest Connecticut and Northeastern 
Massachusetts/Boston. The record shows that there is insufficient 
generation in these two areas of New England.
    For a LICAP market to be effective, the transmission system must be 
strong enough to permit generation interconnections. Unfortunately, the 
transmission system in Southwest Connecticut is notoriously weak, and 
at present cannot accommodate significant generation additions.
    It is important to give New England enough time to make necessary 
transmission upgrades. The order provides for an initial decision from 
an administrative law judge by June 1, 2005 to define the appropriate 
methodology for determining capacity transfer limits between ICAP 
regions, the amount and allocation of capacity transfer rights for 
purposes of each LICAP market, and the parameters of the demand curve 
that will apply in each ICAP region. The order also sets an 
implementation date for LICAP markets of January 1, 2006. I would have 
deferred selecting a specific implementation date for LICAP markets 
until after the initial decision. That would have given the Commission 
the flexibility to select an appropriate date for implementing LICAP 
based on an understanding of the progress--if any--towards 
strengthening the transmission grid in Southwest Connecticut and 
Northeastern Massachusetts/Boston.
    Until implementation of a LICAP market, the Commission will extend 
the Peaking Unit Safe Harbor (PUSH) mechanism, and consider 
reliability-must-run contracts to ensure generators receive just and 
reasonable compensation. Experience with the PUSH mechanism has proved 
disappointing, and reliability-must-run contracts may be the superior 
means to assure just and reasonable compensation during the interim.

Joseph T. Kelliher,

Commissioner.

[FR Doc. 04-12921 Filed 6-10-04; 8:45 am]
BILLING CODE 6717-01-P