UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) ) ) COMMENTS OF NATIONAL GRID

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Grid Reliability and Resilience Pricing ) ) ) Docket No. RM COMMENTS OF NATIONAL GRID National Grid respectfully submits these comments in response to the Federal Energy Regulatory Commission s ( Commission ) October 2, 2017 Notice Inviting Comments 1 on the Secretary of Energy s ( Secretary ) September 28, 2017 letter directing the Commission to issue a proposed rule on grid reliability and resilience pricing. 2 National Grid is a transmission owner in New York and New England, under the operating authority of the New York Independent System Operator (the NYISO ) and ISO New England ( ISO-NE ). National Grid serves approximately 3.4 million electric customers and owns and operates approximately 9,000 miles of overhead line in Massachusetts, New York, New Hampshire and Rhode Island, 377 transmission substations and 763 distribution substations. In addition, National Grid owns approximately 4,000 MW of mostly natural gasfired electric generation on Long Island, New York. National Grid is also the largest distributor of natural gas in the northeastern United States, delivering gas to over 3.6 million customers in upstate New York, New York City, Long Island, Massachusetts and Rhode Island. 1 Grid Reliability and Resilience Pricing, Notice Inviting Comments, Docket No. RM (issued Oct. 2, 2017). 2 Grid Reliability and Resilience Pricing, Secretary of Energy s Direction that the Federal Energy Regulatory Commission Issue Grid Resiliency Rules Pursuant to the Secretary s Authority Under Section 403 of the Department of Energy Organization Act, Docket No. RM (issued Sept. 28, 2017) ( DOE Proposed Rule ).

2 SUMMARY National Grid agrees with the Secretary that ensuring that American families and their businesses have access to reliable, resilient and affordable electricity is vital to the economy, national security and quality of life. We also agree that the resilience of the grid is a vital and important attribute that is not today captured in the competitive markets. National Grid, however, believes that there are many possible approaches to enhancing resilience and a thorough and deliberate review of the entire market framework may be required. For this reason we are concerned that the rulemaking process prescribed in the NOPR is wholly inadequate to provide the thorough review and analysis that is required, and we urge the Commission to instead employ its traditional notice and comment rulemaking in this proceeding. National Grid also notes that the current record is both inadequate to support a final rule and is unduly limited in scope to the eastern ISO/RTO regions. National Grid believes that if resilience really is a national security issue, the analysis of the system s needs should be expanded nationwide. If, after due consideration, the Commission determines that it is necessary to issue a final rule to enhance the resilience and reliability of the grid, National Grid strongly believes that it should be consistent with the current competitive market model. In this regard, it should be possible to add consideration of resilience attributes to the Commission s existing review of ways to accommodate state public policy goals in existing competitive market structures. We also believe that any rulemaking proceeding must consider the cost to customers, and finally, we urge the Commission to allow sufficient time for each region to conduct its own analysis of its resilience requirements, weigh the costs and benefits of alternative approaches, and design and implement solutions that best reflect each region s unique regulatory landscape and system needs. 2

3 BACKGROUND On September 28, 2017, pursuant to section 403 of the Department of Energy Organization Act, 3 the Secretary submitted a proposed rule for consideration and final action by the Commission. The Secretary asserts that the premature retirement of traditional baseload generation, especially coal and nuclear plants, and distorted price signals in the organized markets are jeopardizing the reliability and resiliency of the electric grid. 4 To address these concerns, the Secretary proposed that the organized markets be required to develop and implement market rules that accurately price grid reliability and resilience benefits by allowing for the full recovery of costs of certain eligible units. 5 The Secretary defined eligible units as those units participating in the organized energy and capacity markets that (1) provide essential energy and ancillary reliability services; (2) have a 90-day fuel supply on site; (3) are dispatched during grid operations; (4) are not subject to cost-of-service regulation; and (5) meet all environmental requirements. 6 The Secretary directed the Commission to consider and take final action on the proposed rule within 60 days from the date of its publication in the Federal Register, or in the alternative, to issue the proposed rule as an interim final rule, effective immediately. 7 The Secretary stated that comments on the proposed rule should be due 45 days after publication in the Federal Register and that the Regional Transmission Organizations ( RTOs ) and 3 42 U.S.C (2012). 4 DOE Proposed Rule at Id. at Id. 7 Id. at 12. 3

4 Independent System Operators ( ISOs ) must submit a compliance filing demonstrating that they meet the final rule s requirements within 15 days of the effective date of the final rule. 8 COMMENTS I. The Commission Should Follow Its Usual Procedures In A Rulemaking Of This Magnitude. In PPL EnergyPlus v. Nazarian 9, the Fourth Circuit Court of Appeals laid out the history and functions of the federal wholesale markets and concluded that they are a finelywrought scheme that is carefully calibrated to protect a host of competing interests. 10 Importantly, the court then added the observation that the federal market represents a comprehensive program of regulation that is quite sensitive to external tampering. 11 With this NOPR the Secretary is proposing profound and far-reaching changes to the federal markets, but his proposal provides an unprecedented and wholly unrealistic schedule for the consideration and adoption of the proposed rule. National Grid is concerned that enacting such momentous changes absent the Commission s traditionally careful, thorough and deliberate rulemaking process risks unbalancing and undermining this finely-wrought scheme. National Grid is also concerned that the Secretary s September 28, 2017 letter and NOPR have not adequately demonstrated the need for the proposed rule, nor do they provide sufficient analysis to show that the proposed remedy 90 days of on-site fuel supply is an effective or just and reasonable solution. For example, it is hard to see how having a 90 day fuel supply on site would have prevented widespread outages or restored power any more quickly in the case of 8 Id. at F.3d 476 (4 th Cir. 2014). 10 Id. at Id. (emphasis added). 4

5 Superstorm Sandy or the recent hurricanes; while much less than a 90 day on-site fuel supply would have been needed to ensure reliability during the 2014 Polar Vortex. The failure to create a record sufficient to support regulatory action is evident from the long list of questions posed by Commission Staff in its October 4, 2017 request for further information. 12 These questions are a fine start to any consideration of reliability and resilience, but the proposed schedule does not permit adequate time to address the myriad issues raised by these questions and, without more, this limited process cannot replace a well-developed record. We fear that if the Commission accedes to the Secretary s proposed schedule there will not be an adequate record to support a final rule. Not only will this be detrimental to the effectiveness any final rule that emerges from this process, but it will leave the final rule much more vulnerable to a potential challenge in the federal courts. National Grid agrees with the Secretary that grid resilience is a valid and important attribute that is not captured today in the wholesale markets. We note, however, that there are multiple ways to address resilience, and a thorough and deliberate review of the entire market framework is required. Because of this, National Grid believes that the Commission should follow its traditional course of action and create a proceeding that allows adequate time to carefully consider all relevant information provided by interested parties. For example, the Commission could a hold technical conference or issue a new, more detailed Notice of Proposed Rulemaking followed by an adequate period of notice and comment rulemaking. Stakeholders in National Grid s service territory, in both New York and New England, have had a long and successful history of collaborating to develop solutions to complex problems facing the 12 Grid Reliability and Resilience Pricing, Request for Information, Docket No. RM (issued Oct. 4, 2017). 5

6 wholesale markets. The Commission should allow sufficient time to obtain meaningful feedback from these expert stakeholders. This is not to suggest that the Commission should sanction a long, drawn-out process that takes years. If necessary, the Commission s traditional notice and comment rulemaking can be expedited to reflect the importance of maintaining reliability and resilience in the market. The current abbreviated schedule, however, is tantamount to skipping the entire analytical process, and National Grid is concerned that this is likely to result in a lessthan-optimal final rule with a real potential for detrimental unintended consequences. In addition, if the NOPR results in a final rule, the Commission must allow a reasonable time period for each RTO and ISO to submit a compliance filing. The Secretary s proposed 15 day period is unprecedented and would not permit meaningful stakeholder involvement. National Grid believes that a minimum of three months would be necessary to allow for a compliance filing of this nature. Anything less risks falling short of the Commission s statutory obligation to engage in reasoned decision-making and to avoid arbitrary and capricious decisions. 13 II. The Department of Energy s NOPR Lacks Needed Clarity And The Reach of the Proposed Rule is Unduly Limited If the Commission intends to move forward on the DOE s Proposed Rule, it should first define the RTOs/ISOs to which any new requirements would apply. Today different versions of the Secretary s proposal have substantially different scope. In the Secretary s September 29 th submission to FERC, the proposed changes would apply to RTOs/ISOs with a day-ahead and a real-time market or the functional equivalent. 14 However, the version posted in the Federal 13 5 U.S.C. 706(2) (2012). 14 Grid Reliability and Resilience Pricing, Notice of Proposed Rulemaking, Docket No. RM (submitted to FERC Sept. 29, 2017) at page 18. 6

7 Register states that the proposal would apply to RTOs/ISOs with energy and capacity markets and a tariff that contains a day-ahead and a real-time market or the functional equivalent. 15 This appears to shrink the number of applicable RTOs/ISOs to ISO-NE, NYISO, PJM Interconnection (PJM) and, perhaps, the Midcontinent Independent System Operator (MISO). However, in making such a significant revision shrinking the scope of the proposal, the Department of Energy (DOE) provides no explanation of why the NOPR should be limited to the eastern RTOs/ISOs. In fact the Secretary s September 28 th letter suggests that the need for additional resilience may be broader than the eastern RTO/ISOs, in that it references the 2014 Polar Vortex and states that a number of fuel-secure plants that were scheduled for retirement, including coal units owned by Southern Company, were called upon to meet the need for electricity, and the letter implies that once these plants retire, these regions may be less able to weather the next unseasonably cold winter. 16 In fact National Grid believes that there is no logical basis for limiting the scope of the NOPR to those ISO/RTO regions with energy and capacity markets. Generators operating in vertically-integrated non-rto states may have access to full cost-of-service recovery and may not be on the verge of retiring due to inadequate market revenues, but it does not necessarily follow that they have on-site access to an adequate and secure fuel supply that will allow them to continue to operate in times of fuel scarcity. National Grid believes that if fuel security is indeed a matter of national security, the resilience of our generation fleet nationwide should be subject to investigation. 15 Grid Reliability and Resilience Pricing, Notice of Proposed Rulemaking, Docket No. RM (published in the Federal Register on Oct. 10, 2017) at page Secretary of the DOE s Letter of September 28 th, 2017 at 3. 7

8 FERC and/or DOE must also define the desired services and/or products that they wish to incentivize. DOE s submission to FERC defines an eligible resource as one that, among other things, has a 90-day fuel supply on site and is able to provide essential energy and ancillary reliability services, including but not limited to voltage support, frequency services, operating reserves, and reactive power. As an initial matter, there is no definition of resilience provided in the DOE submission to FERC and, as a recent report written by the DOE Staff noted, criteria for resilience are not explicitly defined or quantified today. 17 While the North American Electric Reliability Corporation s definitions of reliability and resilience, which are cited in the DOE Staff report, 18 provide a foundation, the concept of resilience is subject to varying interpretations and differences of opinion. This must be addressed as a threshold issue. The DOE Proposed Rule also fails to define essential energy and ancillary reliability services ; it merely indicates that those include a series of ancillary services that are already provided for in the northeast by by ISO-NE and NYISO. 19 provide any clearer definition or identification of services. The DOE Staff Report does not Instead of defining essential reliability services, the DOE Staff Report only notes that the reliable operation of the bulk power system requires a suite of essential reliability services. 20 This is inadequate. Should the Commission move forward on the proposal, it must clearly define the products and/or services it would require eligible resources to provide. If the Commission, at the behest of DOE, goes so 17 U.S. Department of Energy, Staff Report to the Secretary on Electricity Markets and Reliability (issued August 2017) at 128. (DOE Staff Report). 18 DOE Staff Report at ISO-NE and NYISO already provide for a range of ancillary services, including voltage support, frequency services, operating reserves, and reactive power. It is therefore not clear why the NOPR proposes to create a separate duplicative cost recovery mechanism for a subset of units that are able to provide some of these services. 20 DOE Staff Report at 68. 8

9 far as to provide recovery of a resource s fully allocated costs and a fair return on equity, it must be clear on exactly what energy and ancillary reliability services that resource is being compensated to provide. III. Any Action By FERC On The DOE Proposed Rule Should Be Consistent With The Existing Competitive Market Model The attributes associated with resilience include not only security of fuel supplies, but also fuel diversity and a host of other measures designed to allow both the power grid (the wires) and generators to withstand and recover from natural or man-made disruptions. Examples may include flood defenses, duel fuel capabilities, and wires and transformers capable of handling hotter and more extreme temperatures. Today s markets were not designed to promote these or a host of other attributes that are in demand today as a result of state de-carbonization programs. National Grid believes that changing the underlying design of wholesale electricity markets in a way that values the attributes required by today s power grid (e.g., resilience, fast ramp capabilities) and/ or externalities (e.g., carbon emissions from generating operations) is the most efficient way to incentivize the development of resources to meet those policy goals. Valuing attributes or externalities through markets has several benefits. First, it supports the reliable and efficient operation of wholesale electricity markets and relies on the independence and expertise of the RTOs/ISOs. Second, it does not pick winners and is fair and economically efficient. Third, it produces transparent price signals and permits innovative technologies and resources to participate. Any mechanism which seeks to value attributes, including reliability and resilience or clean/low carbon energy resources should be structured in a manner that can be integrated into the wholesale markets. National Grid believes that the wholesale markets should only seek to account for public policies that are reasonably connected to the production and delivery of 9

10 electric energy, capacity, or ancillary services, including the environmental externalities caused by those activities. We do not believe that it would be just and reasonable to address policies devoted to other public policy objectives (e.g., maintaining jobs, protecting a specific industry or preserving tax base). Any mechanism adopted should also be fuel neutral and should be able to accommodate both existing and new technologies that meet the applicable criteria. Only as necessary when the wholesale markets cannot efficiently and effectively procure such attributes should alternative non-market mechanisms be contemplated. These types of arrangements, while sometimes necessary, transfer wholesale market risk from investors and developers to utilities and their customers by guaranteeing payments to generators. This is contrary to a fundamental premise of the market model. New England s experience with Reliability Must Run (RMR) contracts illustrates this risk transfer very well: Prior to the resolution of constraints on the transmission system, customers were burdened with supporting the costs of generation required for reliability. RMR contacts provided for the retention of generation units wishing to deactivate, often because they became uneconomic, but which were needed for transmission system reliability. These RMR contracts were out-or-market mechanisms that distorted market pricing and provided no incentive for future investments. By the time ISO-NE implemented its Forward Capacity Market, RMR agreements had proliferated to the point that roughly 3,200 megawatts of RMR contracts were in place, with a total annual fixed revenue requirement of around $290 million. IV. FERC Should Add Any Needed Attributes To Its Review Of Existing Wholesale Market Structures And State Public Policy Goals In the event that the Commission moves forward with the DOE Proposed Rule, it cannot ignore the substantial record created in an existing docket, AD , which the Commission 10

11 created earlier this year. In May, FERC held a technical conference to examine, among other things, long-term expectations regarding the relative roles of competitive wholesale markets and state policies in the Eastern RTOs/ISOs in shaping the quantity and composition of resources needed to cost-effectively meet future reliability and operational needs. 21 At the technical conference FERC Commissioners, Staff, and a range of participants discussed state objectives in prioritizing resources and/or resource attributes, explored market mechanisms to achieve those objectives, and identified the implications of such policies for wholesale energy markets. 22 The DOE Proposed Rule raises many of the same issues and is applicable to the same set of RTOs/ISOs. Any evaluation of baseload reliability and resilience driven by the DOE Proposed Rule should be considered supplementary to the existing evidence submitted to the Commission in Docket No. AD National Grid notes that each of the Eastern RTOs/ISOs is already exploring ways of integrating state policies into the wholesale markets and some of these policies are intended to preserve existing zero-emissions nuclear generation resources as a bridge to the clean energy future. 23 Any final rule should recognize the existence of zero-emission credits ( ZECs ) and similar state programs and avoid duplicative or unnecessary subsidies. Moreover, in New York, NYISO and New York Department of Public Service ( DPS ) recently issued a report from The Brattle Group entitled Pricing Carbon into NYISO s Wholesale Energy Market to Support New 21 AD , Supplemental Notice of Technical Conference, April 13, We note that none of the participants at the technical conference advocated for full cost recovery and return on equity for units that have a 90-day fuel supply on site. 23 New York Public Service Commission, Cases 15-E-0302 and 16-E-0270, Order Adopting a Clean Energy Standard, issued August 1, 2016 at page 1. 11

12 York s Decarbonization Goals. 24 Going forward, a joint team from the NYISO, DPS and New York State Energy Research & Development Authority ( NYSERDA ) is working to develop a proposal for de-carbonization. After considering feedback from interested parties on concepts/proposals for incorporating carbon pricing into wholesale markets, the joint team intends to issue a proposal by February In New England, discussions regarding potential wholesale market changes to advance state public policy objectives have been underway since NEPOOL, with participation by ISO-NE and New England states, established the Integrating Markets and Public Policy ( IMAPP ) initiative. ISO-NE is currently developing a short-term proposal CASPR (Competitive Auctions with Sponsored Policy Resources) to accommodate certain policy-supported resources into the Forward Capacity Market and to preserve competitively based capacity pricing for other resources. National Grid is working with other stakeholders and participants to achieve a longer term, market-based solution for states to use in procuring new and existing clean energy resources to satisfy state goals. These existing protocols and stakeholder initiatives could be adopted as a vehicle to analyze the need for incremental reliability and resilience in the regional power grids and develop region-specific solutions within the wholesale markets. V. The Cost Impact To Customers Must Be Carefully Considered In The Final Rule If, after due consideration, the Commission determines that it is appropriate to proceed with measures designed to enhance reliability and resilience in the nation s power grid, National 24 See: s/ _brattle_study_overview.pdf. 12

13 Grid believes that the Commission must give careful consideration to mitigating customer bill impacts. The Secretary s proposal to provide full cost recovery for coal and nuclear resources contained no estimate of the cost to consumers of the measure and, thus far, no cost estimate has been calculated. National Grid believes that it is essential to calculate the effect on customer bills as part of any rulemaking proceeding. National Grid also believes that it is important that any final rule reflects the most costeffective and efficient method of satisfying the need for incremental reliability and resilience. Power grid resilience can be enhanced by a wide variety of existing and emerging technologies and regulatory approaches. These include regulations that require generators to have dual fuel capabilities, policies that promote fuel diversity in a region, RMR contracts that retain generators needed for system reliability until alternative arrangements can be made, energy storage resources, renewable technologies that are immune from disruption to the fuel supply chain, and a robust transmission system. Further, each region s reliability and resilience needs will differ based on a host of factors, including its unique geography, proximity to natural gas pipelines, the current fuel mix of its generation fleet, and the resilience of its transmission system. A final rule that simply favors baseload coal and nuclear generation is therefore unlikely to have the resilience benefits the Secretary is seeking and is likely to be economically inefficient for many regions. Any final rule should permit regions to focus customer resources on those regulatory approaches and technologies best suited to provide for that region s unique reliability and resilience needs. Whatever the cost of a final rule, National Grid believes that it should be allocated in accordance with the Commission s traditional beneficiary pays approach. Costs should reflect 13

14 the incremental benefits to each region separately, and within multistate RTO/ISO regions, costs should be further allocated through the existing RTO/ISO stakeholder process. VI. Any Final Rule Should Accommodate Regional Differences It follows from the foregoing discussion that the Commission should allow the RTOs/ISOs and their stakeholders sufficient time to analyze each region s unique reliability and resilience needs, and if necessary to compare competing approaches and technologies and ultimately to develop and implement the solution or suite of solutions that best meet that region s needs. There are important differences between ISO/RTO regions that make the adoption of a one size fits all approach untenable. Most notably, the Eastern RTOs/ISOs have very different resource mixes and production profiles. In ISO-NE, natural gas continues to be the dominant fuel source accounting for 49% of total energy production in However, in PJM, coal and nuclear remain the major sources of generation, producing a combined total of almost 70% of PJM s electricity in In NYISO, natural gas-fired power plants and dual-fuel power plants that rely primarily on natural gas produced 44% of the electricity Energy Production by fuel type ISO-NE PJM NYISO Nuclear 31% 34% 31% Gas 49% 27% 7% Oil 1% 0.3% N/A Gas & Oil 37% Coal 2% 34% 1% Renewables 10% 3% 5% Hydro 7% 2% 19% These RTOs/ISOs also differ in important ways in the area of market rules and structures. ISO-NE and PJM each have forward capacity markets that rely on capacity auctions 3-plus years in advance of the relevant commitment periods. NYISO s capacity market relies on a monthly 14

15 capacity market structure. The New York State Reliability Council has established minimum oil burn procedures, which require that during forecasted high electric system load days, certain incity generators must maintain either a minimum level of oil as part of the generator fuel burn mixture, or have the ability to automatically swap to a liquid fuel source to guard against the sudden interruption of gas fuel supply to the generator. Rushing to implement a single solution across these very different markets, without first thoroughly exploring the potential effects of such a change, risks undermining the very markets that have served numerous regions well for nearly two decades. Existing regional initiatives also provide an opportunity for integrating reliability and resilience in the markets. As noted above, different proposals to incorporate state policy objectives in the wholesale markets are under development in NYISO and ISO-NE, and also in PJM. These programs might be expanded to include reliability and resilience. It is worth noting that both PJM and ISO-NE instituted changes in their capacity market structures to address concerns over fuel security and resource performance as a direct result of the Polar Vortex of The Commission should take advantage of this experience and expertise in the current docket. 15

16 CONCLUSION WHEREFORE, for the foregoing reasons, National Grid respectfully requests that the Commission consider these comments when taking action on the Secretary s proposed rule. Respectfully submitted, /s/ David C. Lodemore Senior Counsel, National Grid 40 Sylvan Road Waltham MA david.lodemore@nationalgrid.com Dated: October 23,

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18 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list in this proceeding in accordance with the requirements of Rule 2010 of the Commission s Rules of Practice and Procedure. Dated at Washington, D.C. this 23 rd day of October, /s/