On October 6, 2017, FERC accepted a tariff filing from ISO New England Inc. (“ISO-NE”) proposing updated calculations for various Forward Capacity Market input values, including Cost of New Entry (“CONE”), Net CONE, and Offer Review Trigger Price (“ORTP”). As part of its order, FERC also approved ISO-NE’s choice of a simple cycle gas turbine as the reference technology for establishing CONE and Net CONE values—thereby replacing the combined cycle natural gas turbine that had been used as a reference technology by ISO-NE since 2014.

In ISO-NE’s annual Forward Capacity Market auction, resources compete to provide capacity to the New England region for a set delivery year scheduled three years in advance. If a resource clears the auction, in exchange for monthly capacity payments, the resource must offer its capacity into the day-ahead and real-time energy markets every day during the delivery year established in the auction. ISO-NE calculates estimates of the entry costs, called ORTP values, for all resource types that are likely to participate in the Forward Capacity Market. To establish the auction starting price, ISO-NE estimates the cost of developing a new resource, without any adjustment for revenues potentially earned outside the capacity market (known as “gross CONE”), as well as the cost of a new market entrant minus the profit that resource would likely earn from energy, ancillary services, or other services (known as “Net CONE”). Both CONE and Net CONE are based on a reference resource representing the technology that is “expected to be the most efficient and that is commercially available to new capacity suppliers” in New England.

As required by its tariff, every three years, ISO-NE must submit updated values for CONE, Net CONE, and ORTPs for FERC approval, which it did in this instance on January 13, 2017. As part of its recalculations of CONE and Net CONE, ISO-NE determined that the most efficient and commercially available technology for new capacity suppliers was a simple cycle natural gas turbine—a departure from the combined cycle natural gas turbine that had been previously used as the reference technology. The revised values proposed by ISO-NE in the instant filing are intended to be used in the February 2018 Forward Capacity Auction (for delivery in June 2021-May 2022), and in the two following annual capacity auctions.

Following ISO-NE’s filing, various parties intervened and filed comments, while the New England Power Generators Association, Inc. (“NEGPA”) filed a protest. Among other claims, NEGPA argued that ISO-NE failed to follow FERC’s requirements in determining reference technologies and, thus, in the case of recalculating CONE and Net CONE, ISO-NE should not have selected a simple cycle gas turbine to replace the combined cycle gas turbine previously used as the reference technology. NEGPA also took issue with ISO-NE’s updated ORTP value for onshore wind resources, because the ORTP value incorporated the federal Production Tax Credit, which is currently being phased-out and set to expire in December 2019.

In its order, FERC found that ISO-NE’s proposed CONE and Net CONE values, and the selection of a single cycle natural gas turbine as the reference technology, were all just and reasonable. FERC agreed that it is important to use consistent criteria in updating reference technologies due to the significant cost-recovery implications of such updates, but also clarified that maintaining a level of consistency does not mean the reference technology “can never change.” FERC noted that ISO-NE’s choice of a simple cycle turbine not only supported the ISO’s stated reliability objectives, but it also met the reference technology selection criteria FERC had established in 2014, specifically: (1) that the technology is likely to be developed in New England; (2) that ISO-NE could develop cost and revenue estimates for the technology with confidence; and (3) the technology would result in a demand curve that “should produce prices high enough to meet the reliability standard but not so high as to add unnecessary costs.” Among the other findings and conclusions in its order, FERC also rejected NEGPA’s challenge to the updated onshore wind ORTP value, determining that ISO-NE’s use of the Production Tax Credit was reasonable since the credit is still currently available for developers.

A copy of FERC’s order can be found here.