The Federal Energy Regulatory Commission (FERC or Commission) continues to look askance at utility requests for guaranteed income streams for their generation resources. Most recently, R.E. Ginna Nuclear Power Plant, LLC (Ginna) received a lukewarm reception to its request to establish a rate schedule and guaranteed revenue stream for its nuclear facility located near Rochester, New York. On February 13, 2015, Ginna filed with the FERC a Reliability Support Services Agreement (Agreement)[1] between Ginna and the local electric utility, Rochester Gas and Electric Corporation (RGE), the purpose of which is to stave off the retirement of the Ginna facility to ensure its continued operation for reliability purposes.

The Agreement's initial term runs from April 1, 2015, through September 30, 2018, during which time Ginna would receive a cost-of-service-based monthly compensation payment of $17.5 million and payment of 15 percent of the Ginna facility's energy and capacity market revenues. The Agreement includes an option to extend the term for an additional 18 months beyond September 2018, during which time the monthly payment increases to $18.4 million. Also included are terms addressing the early termination of the Agreement, as well as the operation of the Ginna facility beyond the expiration of the Agreement, in which case Ginna would owe to RGE amounts related to certain capital investments made to the Ginna facility during the term of the Agreement.

On April 14, 2015, the FERC conditionally accepted the Agreement for filing, suspended it for a nominal period and set the matter for hearing and settlement judge procedures.[2] The FERC conditioned its acceptance on the removal of the Agreement's provisions concerning any extension beyond the initial term because it found that the reliability need, which underlies the initial term, has not been demonstrated for the future period. The FERC also conditioned its acceptance on the elimination of payments constituting 15 percent of the energy and capacity market revenues because such compensation is not cost-based and could cause Ginna to receive revenues in excess of the Ginna facility's full cost of service.

The Commission held that the Agreement's remaining provisions present issues of material fact that cannot be resolved based the existing record. Significantly, the Commission provided guidance applicable to the settlement and hearing procedures. First, the Commission noted that compensation owed to generators under reliability-based agreements is circumscribed such that the compensation amount cannot be less than the going-forward costs while not exceeding the full cost of service. Second, the Commission explained that should settlement procedures prove unsuccessful, the hearing procedures are to develop a record to support a compensation level consistent with such limits. Third, the Commission held that while it views the return of capital investment costs to RGE should the Ginna facility operate beyond the expiration of the Agreement as an acceptable provision, those capital investment amounts must be addressed by the settlement or hearing procedures.

While the order acknowledges the FERC's prior directive to the New York Independent System Operator, Inc. (NYISO) to develop and adopt tariff provisions concerning reliability-based generator agreements,[3] this order does not prejudge the NYISO's anticipated tariff filing and will not require Ginna to enter into another agreement for the initial term once an NYISO pro-forma agreement has been accepted.

On their exterior, reliability-must-run agreements may appear isolated to a single generation facility and its local utility customers; however, as market-driven solutions, cost allocation and environmental effects have become de rigueur topics of interest before the Commission, the electric industry confluence of merchant generation, continued nuclear power plant operation, reliability-must-run stopgaps and capacity markets will likely require a more comprehensive—and perhaps innovative—solution.