Customers and common sense won out last week in an important ruling by federal regulators on ensuring adequate electricity supply during cold snaps next winter.
In July, we reported about ISO-NE’s solution to the winter operability challenge, which reduces the availability of natural gas as a result of increased demand for home heating. Specifically, the plan would provide financial incentives for the generators who fill the gap, largely generation fueled by oil, so they have adequate inventory to generate over a prolonged cold snap like we had last winter.
While supporting the plan, we disagreed with who should pay the cost. The ISO, with the support of the six-state New England Power Pool (NEPOOL), placed the cost on all customers through delivery charges from local distribution companies. We thought, as did National Grid, that suppliers of load should pay the costs and have recovery of costs dictated strictly by contractual arrangements with customers. National Grid took on the ISO before the Federal Energy Regulatory Commission (FERC) during its review of the plan. FERC approved the plan but rejected the ISO cost recovery mechanism and sided with National Grid.
This is a very important victory for consumers. While the costs are not significant on a system-wide basis ($17 million to $40 million), the principle is important. Suppliers complained that they could not recover these costs from customers because the costs were not anticipated and reflected in prices. But, as FERC concluded, these costs are no different than other market costs and should be paid by those who cause them on a real time basis.
Most customers, particularly PowerOptions customers, are on fixed all-in price contracts. Unlike most other supply contracts, the PowerOptions contract provides the supplier with limited ability to pass through additional costs as a result of changes in the market or regulations. Customers know they pay a premium for the surety that comes with this type of protection but choose it because it provides much-needed predictability and certainty for their energy costs.
As a consequence, suppliers are already compensated for the types of costs they incur under the winter operability rules. They should not be allowed to claim the need for an additional premium as a result of this ruling or shift these costs to customers who have already paid that premium.
Bravo, National Grid and FERC.