147 FERC ¶ 61,172

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Cheryl A. LaFleur, Acting Chairman;

 Philip D. Moeller, John R. Norris,

and Tony Clark.

ISO New England Inc. and

New England Power Pool

Docket Nos. ER14-1050-000

ER14-1050-001

EL14-52-000

ORDER ON TARIFF FILING AND INSTITUTING SECTION 206 PROCEEDING

(Issued May 30, 2014)

1. On January 17, 2014, ISO New England Inc. (ISO-NE) and the New England 

Power Pool (NEPOOL) Participants Committee jointly submitted, pursuant to 

section 205 of the Federal Power Act (FPA)1 and section 11.1.5 of the ISO-NE 

Participants Agreement,2 two alternate proposals to revise ISO-NE’s Transmission, 

Markets and Services Tariff (Tariff). Each proposal is intended to address fleet-wide 

resource performance problems in New England. ISO-NE’s proposal involves significant 

changes to the Forward Capacity Market (FCM) design, while NEPOOL’s proposal 

involves incremental changes to the energy and ancillary services market and the FCM 

while largely maintaining the existing FCM rules. We find that neither proposal standing 

alone has been shown to be just and reasonable. We will institute a proceeding under 

1 16 U.S.C. § 824d (2012).

2 Section 11.1.5 of the Participants Agreement, commonly referred to as the 

“jump ball” provision, provides, in pertinent part, that if a Market Rule proposal that 

differs from that proposed by ISO-NE is approved by a Participants Committee vote of 

60 percent or more, ISO-NE “shall, as part of any required Section 205 filing,” describe 

the alternate Market Rule proposal in sufficient detail to permit reasonable review by the 

Commission and also explain its reasons for not adopting the alternate proposal and why 

it believes its own proposal is superior. Section 11.1.5 provides that the Commission 

may “adopt any or all of ISO[-NE]'s Market Rule proposal or the alternate Market Rule 

proposal as it finds ... to be just and reasonable and preferable.”

 
Docket No. ER14-1050-000, et al. - 2 -

section 206 of the FPA3 in Docket No. EL14-52-000 and require ISO-NE to submit Tariff 

revisions reflecting a modified version of its proposal and an increase in the Reserve 

Constraint Penalty Factors, consistent with NEPOOL’s proposal. We will also establish a 

refund effective date of the date on which the Secretary publishes the notice of the 

Commission’s section 206 proceeding in the Federal Register.

I. Background

2. ISO-NE operates the FCM through which it procures capacity on a three-year 

forward basis.

4

 Capacity suppliers make offers into an annual Forward Capacity Auction 

(FCA) in which ISO-NE procures the amount of capacity needed in a one-year period 

(the Installed Capacity Requirement), and suppliers of the capacity that clears each FCA 

take on Capacity Supply Obligations, committing to provide capacity for the relevant 

Capacity Commitment Period, three years in the future. This Capacity Supply Obligation 

requires a capacity resource to, among other things, offer into the day-ahead energy 

market, leave that offer open throughout the operating day, and follow ISO-NE’s dispatch 

instructions. In addition, a capacity resource must be available to operate during certain 

Tariff-defined reserve deficiencies, known as Shortage Events,5 or the resource will be 

subject to penalties under the Tariff. In exchange for the Capacity Supply Obligation, the 

capacity resource receives capacity payments in each month of the Capacity Commitment 

Period. 

II. Summary of the Instant Filings

A. ISO-NE’s Proposal

3. According to ISO-NE, the current FCM design contains a flawed incentive 

structure that perpetuates fleet-wide resource performance problems and, as a result, is 

3 16 U.S.C. § 824e (2012).

4 ISO-NE determines the Installed Capacity Requirement such that the probability 

of disconnecting non-interruptible customers due to resource deficiency will be, on 

average, no more than once in ten years. Tariff, § III.12, III.12 Calculation of Capacity 

Requirements, 8.0.0 (2013).

5 A Shortage Event is a period of 30 or more contiguous minutes during which the 

supply of energy and reserves is insufficient to meet the demand for energy and the realtime reserve requirement. Tariff § III.13.7.1.1.1.

 
Docket No. ER14-1050-000, et al. - 3 -

now failing to ensure reliability in a cost-effective manner.

6

 ISO-NE argues that capacity 

resources rarely face financial consequences for failing to perform, and therefore have 

little incentive to make investments to ensure that they can reliably provide what the 

region needs: energy and reserves when supply is scarce. ISO-NE asserts that the

“negligible” consequences for non-performance under the current FCM design results in 

adverse selection of capacity resources, and encourages resources that are likely to be 

poor performers to participate in the market when they should exit. 

4. ISO-NE proposes to address these problems by linking capacity revenues to 

resource performance during reserve deficiencies. Describing its proposed fix as a “Pay 

for Performance” market design, ISO-NE seeks to implement a two-settlement process, 

whereby a capacity resource’s total capacity revenue is comprised of a Capacity Base 

Payment and a Capacity Performance Payment (two-settlement capacity market design).

5. The first settlement entails a Capacity Base Payment established through the FCA. 

Resources that take on a Capacity Supply Obligation receive a Capacity Base Payment, 

which is determined for each resource by multiplying the amount of MW associated with 

its Capacity Supply Obligation by the FCA clearing price. ISO-NE states that a resource 

that clears in the FCA takes on a “forward position,” meaning that it acquires both a 

physical obligation to offer the MW amount of its Capacity Supply Obligation into the 

energy market during the Capacity Commitment Period, as well as a financial obligation 

to cover the resource’s share of the system’s total energy and reserve requirements during 

Capacity Scarcity Conditions. A Capacity Scarcity Condition is measured in 5-minute 

intervals and exists in a Capacity Zone whenever the real-time energy price includes a 

Reserve Constraint Penalty Factor7 triggered by (1) the system minimum 30-minute 

6 ISO-NE identifies several specific flaws in the current FCM that it alleges are 

inconsistent with sound market design: (1) the Shortage Event mechanism bases a 

resource’s capacity payments on the resource’s “availability” rather than its performance;

(2) the Shortage Event mechanism allows numerous exemptions for non-performance 

under which resources are deemed fully “available” despite their inability to provide 

energy or reserves; (3) a resource’s capacity payments may not be reduced by more than 

its total FCM revenue, which means it cannot lose money by taking on a Capacity Supply 

Obligation even if it entirely fails to perform; (4) the penalty rate is needlessly complex, 

too low to be effective, and “defies economic logic” because the penalties “actually 

decrease, rapidly, as the length of the scarcity condition increases;” and (5) results in a 

“systemic bias towards clearing less reliable resources.” ISO-NE Tariff Filing at 

Att. I-1a, 10-17.

7 Reserve Constraint Penalty Factors are rates, in $/MWh, that are used within the 

real-time dispatch and pricing algorithm to reflect the value of Operating Reserve 

 

(continued..)
Docket No. ER14-1050-000, et al. - 4 -

reserve requirement, (2) the system 10-minute reserve requirement, or (3) the zonal 

30-minute reserve requirements.

6. The second settlement entails a Capacity Performance Payment, determined for 

each resource by measuring its performance against its forward position (i.e., its share of 

the system’s requirements at the time of each Capacity Scarcity Condition). If a resource 

provides more than its share of energy and reserves, it will receive a positive Capacity 

Performance Payment; if it provides less than its share, it will receive a negative Capacity 

Performance Payment. The Capacity Performance Payment is calculated using an 

administratively-determined rate specified in the Tariff, known as the Capacity 

Performance Payment Rate.

8

 ISO-NE states that the Capacity Performance Payment 

Rate is calculated based on two economic principles. First, when new entry is necessary 

to satisfy the Installed Capacity Requirement, the sum of the prospective entrant’s 

Capacity Base Payment and the expected Capacity Performance Payment is at least as 

large as the net cost of new entry. Second, if a resource’s expected performance is zero 

during scarcity conditions over the entire Capacity Commitment Period, its total expected 

negative Capacity Performance Payment should fully offset the Capacity Base Payments. 

ISO-NE states that the Capacity Performance Payment Rate is designed to achieve its 

loss-of-load probability standard of “one day in ten years,” as described in its Planning 

Procedure No. 3. 

7. ISO-NE states that even resources without Capacity Supply Obligations are 

eligible to receive Capacity Performance Payments, in order to incent all resources to 

provide energy and reserves when system reliability is at heightened risk. Further, 

because capacity resources are able to offer their capacity in blocks with different prices, 

allowing all resources to be eligible for Capacity Performance Payments will allow 

capacity resources to receive Capacity Performance Payments for blocks of their capacity 

that do not clear in the FCA but nonetheless provide energy and reserves during Capacity 

Scarcity Conditions. 

8. As detailed below, ISO-NE proposes no exemptions from negative Capacity 

Performance Payments for non-performance, so if a capacity resource deviates from its 

forward position, its Capacity Performance Payments are adjusted regardless of what 

Shortages. ISO-NE Tariff § I.2.2. The Reserve Constraint Penalty Factor acts as a cap 

on the price that ISO-NE may pay to procure additional reserves. Reaching this cap 

signals that the system is in a reserve deficiency.

8 ISO-NE proposes to phase-in this rate as follows: $2,000/MWh for the period 

June 1, 2018 through May 31, 2021; $3,500/MWh for the period June 1, 2021 through 

May 31, 2024; and $5,455/MWh for the open-ended period starting June 1, 2024.

 
Docket No. ER14-1050-000, et al. - 5 -

caused the deviation. In order to lessen a resource’s downside risk, however, ISO-NE’s 

proposal contains a “stop-loss” mechanism that limits—on both a monthly and annual 

basis—the amount of money a resource can lose as a result of its performance. Further, 

under ISO-NE’s proposed bidding rules and market monitoring provisions, the risk 

premium that a resource includes in its bid is separate from the net-going forward cost 

reflected in the bid, in order to allow the market monitor to analyze the two components 

separately. 

9. ISO-NE also seeks to raise the current trigger for Internal Market Monitor review 

of de-list bids, from $1.00/kW-month to $3.94/kW-month; the Internal Market Monitor

would mitigate bids above the increased threshold only if the bid is from a resource 

associated with a Lead Market Participant that is found to be a pivotal supplier. A Lead 

Market Participant will be considered pivotal if any of the capacity from the existing 

resources controlled by that Lead Market Participant is needed to satisfy the capacity 

requirements either system-wide or in an import-constrained Capacity Zone.

10. ISO-NE’s proposal also provides a mechanism for resources to trade their 

performance bilaterally under certain conditions, to mitigate the risk of negative Capacity 

Performance Payments during periods shorter than a month, or on shorter notice than a 

Capacity Supply Obligation can be shed. ISO-NE explains that these bilaterals do not 

affect either party’s Capacity Supply Obligation, or the associated rights and obligations 

under their Capacity Supply Obligations; rather, the bilaterals serve only to modify each 

resource’s Capacity Performance Score9 for purposes of calculating their Capacity 

Performance Payments.

B. NEPOOL’s Proposal

11. NEPOOL agrees there are fleet-wide performance problems but proposes to 

address those problems by increasing performance incentives in ISO-NE’s energy and 

ancillary services markets and modifying the current FCM design to include a new 

“performance” metric for measuring “availability.” NEPOOL states that its proposal 

reflects a preferred approach that better addresses the concerns that are motivating 

changes to the New England markets through incremental change to the reserve and 

capacity markets rather than a “major and unnecessary redefinition of the FCM 

9 A resource’s Capacity Performance Score, for each five-minute interval in which 

a Capacity Scarcity Condition exists in the Capacity Zone in which the resource is 

located, shall equal the resource’s Actual Capacity Provided during the interval minus the 

product of the resource’s Capacity Supply Obligation and the applicable Capacity 

Balancing Ratio. Tariff § III.13.7.2.4.

 
Docket No. ER14-1050-000, et al. - 6 -

product.”10 NEPOOL further states that rule changes to the energy and ancillary services 

markets, rather than to the capacity market, can better ensure adequate procurement of 

energy and operating reserves. Thus, NEPOOL asserts that, with “implementation of 

reforms to the Energy and Ancillary Services markets — those made in the recent past, 

those approved and to be implemented, and those included in the NEPOOL Proposal — a 

redesigned capacity product as dramatic as ISO-NE is proposing is unnecessary and 

unjustified.”11

12. In the energy market, NEPOOL proposes to increase the existing Reserve 

Constraint Penalty Factors for 30-Minute Operating Reserves, from $500/MWh to 

$1,000/MWh, and for 10-Minute Non-Spinning Reserves, from $850/MWh to 

$1,500/MWh. These changes to the Reserve Constraint Penalty Factors would increase 

the price that ISO-NE may pay to procure energy and reserves in real-time. NEPOOL 

asserts that this will enhance performance incentives by addressing real-time price 

formation in the hourly markets, rather than trying to “mimic” those real-time incentives 

by redefining the capacity product.

13. In the FCM, NEPOOL proposes to replace the existing Shortage Event mechanism 

with a new Equivalent Peak Period Forced Outage Rate, or “EFORp,” metric that 

measures “performance based on availability during all ‘EFORp Hours.’”12 NEPOOL 

states that ISO-NE would calculate an annual EFORp Hour Availability Score for each 

capacity resource, based on the resource’s availability in the EFORp Hours of that 

Capacity Commitment Period and using the definition of “availability” in the existing 

FCM.

13 NEPOOL states that ISO-NE would then compare the resource’s EFORp Hour 

Availability Score for that Capacity Commitment Period to the resource’s average 

10 NEPOOL Transmittal at 14.

11 NEPOOL Transmittal at 19.

12 EFORp Hours are defined as the hours from 1:00pm to 5:00pm, Monday 

through Friday (excluding holidays), during June, July, and August; and the hours from 

5:00pm to 7:00pm, Monday through Friday (excluding holidays), during December and 

January. ISO-NE Tariff Filing at Att. N-1a (NEPOOL Transmittal), 12. 

13 For each Shortage Event, ISO-NE calculates a Shortage Event Availability 

Score for each resource having a Capacity Supply Obligation. The score is the resource’s 

“available” MW divided by its Capacity Supply Obligation, subject to exemptions for 

unavailability due to following ISO-NE’s dispatch, starting or ramping limitations, 

transmission outages, having a self-schedule request denied by ISO-NE, or transmission 

construction delays. Tariff § III.13.7.1.1.3(a)-(j).

 
Docket No. ER14-1050-000, et al. - 7 -

EFORp Hour Availability Score during the historical 5-year period used to establish the 

Installed Capacity Requirement for that Capacity Commitment Period. 

14. NEPOOL states that at the end of each Capacity Commitment Period, ISO-NE 

would calculate charges and credits for each resource at 150 percent of the FCA clearing 

price, subject to annual caps, based on how each resource’s availability in that Capacity 

Commitment Period compared to its five-year historical availability. NEPOOL states 

that ISO-NE would then aggregate these charges and credits and, based on whether there 

is a net surplus or deficit, would either refund or charge load based on the Capacity Load 

Obligation of each Load Serving Entity.

III. Notice of Filing, Interventions, Comments, Protests, and Answers 

15. Notice of the tariff filing was published in the Federal Register, 79 Fed. 

Reg. 4683 (2014), with interventions and protests due on or before February 7, 

2014. On January 17, 2014, ISO-NE and NEPOOL jointly filed a motion to extend 

the comment date to February 12, 2014. On January 23, 2014, the Commission granted 

ISO-NE and NEPOOL’s joint motion.

16. Numerous entities filed interventions, and many of those entities also filed 

comments, protests, or both.

14 

17. On February 12, 2014, ISO-NE filed an answer in opposition to NEPOOL’s 

proposal (ISO-NE February 12 Answer). On February 27, 2014, NRG, Indicated 

Generators, and NEPOOL filed answers to ISO-NE’s February 12 Answer; Maine PUC 

and Maine Public Advocate filed an answer to ISO-NE’s February 12 Answer and to 

ISO-NE’s External Market Monitor’s comments; and GDF SUEZ, Connecticut, Rhode 

Island PUC, and United Illuminating, Dominion, and Entergy Nuclear filed answers to 

various comments and protests in this proceeding.

15 On March 3, 2014, ISO-NE filed an 

answer to protests and comments submitted in response to ISO-NE’s proposal (ISO-NE 

March 3 Answer). On March 18, 2014, NEPOOL filed an answer to ISO-NE’s March 3 

Answer. On March 28, 2014, NextEra filed an answer to ISO-NE’s March 3 Answer.

18. On February 27, 2014, NEPOOL filed a motion for discovery, requesting that the 

Commission direct ISO-NE to produce information related to market operations during 

the 2013-2014 winter season. On March 4, 2014, ISO-NE filed an answer to NEPOOL’s 

motion for discovery (ISO-NE March 4 Answer). On March 6, 2014, NEPOOL filed an 

14 See Appendix A.

15 On February 28, 2014, GDF SUEZ filed an errata to its answer.

 
Docket No. ER14-1050-000, et al. - 8 -

answer to ISO-NE’s March 4 Answer and Public Systems filed an answer in support of 

NEPOOL’s motion for discovery.16 On March 7, 2014, Connecticut, Rhode Island, and 

United Illuminating filed an answer to ISO-NE’s March 4 Answer. 

IV. Discussion

A. Procedural Matters

19. Pursuant to Rule 214 of the Commission’s Rules of Practice and Procedure, 

18 C.F.R. § 385.214 (2013), the notices of intervention and timely, unopposed motions to 

intervene serve to make the entities that filed them parties to this proceeding.

20. Pursuant to Rule 214(d) of the Commission’s Rules of Practice and Procedure, 

18 C.F.R. § 385.214(d) (2013), we will grant Brookfield’s and NextEra’s late-filed 

motions to intervene given their interests in the proceeding, the early stage of the

proceeding, and the absence of undue prejudice or delay. 

21. Rule 213(a)(2) of the Commission’s Rules of Practice and Procedure, 18 C.F.R. 

§ 385.213(a)(2) (2013), prohibits an answer to an answer or protest unless otherwise 

ordered by the decisional authority. We will accept the answers filed in this proceeding 

because they provided information that assisted us in our decision-making process.

22. We deny NEPOOL’s motion for discovery. NEPOOL filed its motion under Rule 

401 of the Commission’s Rules of Practice and Procedure, which is located in Subpart D 

of Part 385.17 Subpart D is entitled “Discovery Procedures for Matters Set for Hearing 

Under Subpart E.”18 Rule 401(a) under Subpart D provides that “this subpart applies to 

discovery in proceedings set for hearing under subpart E of this part, and to such other 

proceedings as the Commission may order.”19 Because we have not set this matter for 

hearing, formal discovery is not available in this proceeding. While the Commission has 

in rare circumstances directed discovery in proceedings not set for hearing, discovery is 

not necessary here because the written evidentiary record provides a sufficient basis for 

resolving the issues relevant to this proceeding.

16 On March 11, 2014, Public Systems filed an errata to its answer.

17 18 C.F.R. § 385.401 (2013).

18 18 C.F.R. Subpart D (2013).

19 18 C.F.R. § 385.401(a) (2013).

 
Docket No. ER14-1050-000, et al. - 9 -

B. Substantive Matters

23. As a threshold matter and pursuant to our authority under section 206 of the FPA, 

we find that ISO-NE’s existing Tariff is unjust and unreasonable, because it fails to 

provide adequate incentives for resource performance, thereby threatening reliable 

operation of the system and forcing consumers to pay for capacity without receiving 

commensurate reliability benefits. Turning to the proposals before us, we find that ISONE’s proposal to address the resource performance problems by correcting the flaws in 

the FCM payment design, has not been shown to be just and reasonable and may be 

unjust, unreasonable, unduly discriminatory or preferential as-filed. As discussed in 

more detail below, we find that ISO-NE’s proposal unduly discriminates against energy 

efficiency resources, and potentially sends improper price signals in the event of an intrazonal transmission constraint. Further, ISO-NE’s proposal does not respond to the 

region’s resource performance problems with the requisite speed. As ISO-NE 

acknowledges, the region’s resource performance problems are threatening system 

reliability now. However, the impact of ISO-NE’s proposal will not be fully reflected in

real-time resource performance until 2018. ISO-NE has not adequately demonstrated 

how a proposal that purports to address immediate resource performance problems but 

does not provide an increased performance incentive for the next four years is a just and 

reasonable solution.

24. We similarly find that NEPOOL’s proposal has not been shown to be just and 

reasonable. As noted above, NEPOOL’s proposal seeks to address the resource 

performance problems through a new performance metric—the EFORp metric—in the 

FCM and increased Reserve Constraint Penalty Factors to improve scarcity pricing in the 

real-time markets. While the increased Reserve Constraint Penalty Factors represent an 

incremental improvement in real-time price signals which provides an increased incentive 

for resources to perform in real-time, the proposal has not been shown to be just and 

reasonable in two primary respects. First, NEPOOL’s proposed EFORp metric is 

flawed.20 By measuring a resource’s performance only against its own historical 

20 Brookfield Comments at 15, Indicated Generators Protest at 33-34, Maine PUC 

Protest at 19, GDF SUEZ Comments at 3, ISO-NE February 12 Answer at 34-39, 

Massachusetts DPU and New Hampshire PUC Comments at 18-21, External Market 

Monitor Comments at 4. The External Market Monitor states that the proposed EFORp 

metric is flawed and proposed several revisions to the metric, including: (1) eliminate the 

50 percent excess payment or penalty for over- or under-performance; (2) measure overand under-performance against the historic average EFORp for all resources, not the 

historic average for the unit itself; (3) measure performance in the peak hours in which 

the resource is called upon; and (4) eliminate the stop loss provisions. External Market 

Monitor Comments at 26.

 
Docket No. ER14-1050-000, et al. - 10 -

performance, NEPOOL’s proposed EFORp metric may inappropriately reward poorlyperforming resources and penalize highly-performing resources, which could further 

erode reliability in the region.

21 Further, NEPOOL’s proposal to calculate charges and 

credits for each resource at 150 percent of the FCA clearing price, subject to annual caps, 

based on how each resource’s availability in that Capacity Commitment Period compared 

to its five-year historical availability, could provide an incentive for a capacity resource 

to reduce its measured performance over the next four years to lower the five-year 

historical EFORp Hour Availability Score against which its performance would be 

measured starting in the 2018-2019 Capacity Commitment Period. Second, NEPOOL’s 

proposal is deficient because, while the Reserve Constraint Penalty Factor changes are a 

step in the right direction, they alone do not provide a sufficient incentive to fully address 

the region’s resource performance problems and they do not correct the fundamental 

flaws in the FCM design, which NEPOOL acknowledges have contributed to poor 

resource performance.22 

25. Thus, while we find neither proposal to be just and reasonable, we find that most 

of the provisions in ISO-NE’s proposal, as modified herein, together with increases to the 

Reserve Constraint Penalty Factors, from NEPOOL’s proposal, provide a just and 

reasonable incentive structure that will help ensure reliability. Accordingly, as discussed 

below, we will largely adopt ISO-NE’s proposal, save for ISO-NE’s proposed treatment 

of energy efficiency resources, and direct further modifications. We will also adopt the 

Reserve Constraint Penalty Factor increases as reflected in NEPOOL’s proposal. We 

will direct ISO-NE to submit a compliance filing within 45 days of the date of this order 

with Tariff revisions reflecting the provisions directed herein. 

26. As nearly all parties in this proceeding—including ISO-NE and NEPOOL—

recognize, the performance of capacity resources in New England has substantially 

21 In addition, the EFORp mechanism, when measured using a resource’s own 

historical performance, may not provide a performance incentive over the long-term. 

While reduced performance in one year relative to a resource’s historical average 

performance will result in a penalty, this reduced performance will also lower that 

resource’s historical average performance (the 5-year average EFORp) which could then 

lead to increased payments in future years if the resource’s performance returns to its 

historical average level. 

22 While we acknowledge that the External Market Monitor’s revisions could 

improve NEPOOL’s EFORp metric, we find that the EFORp metric would still be flawed 

because it would measure performance in terms of “availability,” would do so only in 

certain peak hours of the year, and would maintain numerous exemptions for nonperformance. 

 
Docket No. ER14-1050-000, et al. - 11 -

declined in recent years to a level that has jeopardized ISO-NE’s ability to reliably 

operate the electric system.

23 As ISO-NE explains, the overall rate of unplanned 

outages across the entire New England generating fleet has more than doubled since 

2007, and the average response rate for generators dispatched following a contingency is 

only 71 percent.24 These conditions evidence that the current market construct has not 

sufficiently influenced capacity suppliers’ longer-term investment and retirement 

decisions to ensure that their resources can reliably provide energy and reserves when 

called upon, particularly during reserve deficiencies. For example, as multiple parties 

assert, the existing FCM treats many resources as if they are fully available to operate 

during Shortage Events, and pays them accordingly, even when those resources are 

unable to deliver energy or reserves at that time. These existing payment features of the 

FCM not only fail to incent resource performance, but also perversely select less reliable 

resources over more reliable resources because a capacity supplier’s decision to forego 

investments that would improve resource performance allows it to offer into the FCA at a 

lower price.25 For these reasons, we find that the existing Tariff, specifically, the FCM 

payment design, is unjust and unreasonable.

27. As detailed herein, we direct ISO-NE to submit a compliance filing within 45 days 

of the date of this order with Tariff revisions to (1) implement its two-settlement capacity

market design with the modifications discussed below, and (2) increase the Reserve 

Constraint Penalty Factors for 30-minute operating reserves to $1,000/MWh and for 

10-minute non-spinning reserves to $1,500/MWh. Because the increased Reserve 

Constraint Penalty Factors may impact specific elements of ISO-NE’s two-settlement 

capacity market design, including the ultimate Capacity Performance Payment Rate, we 

will also direct ISO-NE to include in its compliance filing either any Tariff adjustments 

that it believes are necessary in light of the Commission’s decision to implement the 

Reserve Constraint Penalty Factor changes, or an explanation as to why no such 

adjustments are necessary.

23 ISO-NE Transmittal at 10-11 (citing Att. I-1b, 2-5); NEPOOL Transmittal 

at 7; External Market Monitor Comments at 3; Massachusetts DPU and New Hampshire 

PUC Comments at 9-11; HQUS Comments at 3-5; New England Natural Gas Industry 

Comments at 1-2; Public Systems Protest at 2; NRG Protest at Test of Judith Lagano, 

3-4; Consumer Advocates at 11-12; National Grid Comments at 3-7; EnerNOC Protest 

at 1; Entergy Comments at 11; EMCOS Protest at 13; NGSA Comments at 5-7; and GDF 

SUEZ Comments at 2-4.

24 ISO-NE Transmittal at 11, n.17 (citing Att. I-1b at 36-52).

25 ISO-NE Transmittal at 3-4, ISO-NE Tariff Filing at Att. I-1C, 22.

 
Docket No. ER14-1050-000, et al. - 12 -

28. We next turn to disputed issues specific to either ISO-NE’s proposal or 

NEPOOL’s proposal. 

1. ISO-NE’s Proposal

a. Capacity Resource Performance Measurement

i. ISO-NE’s Proposal

29. As explained above, ISO-NE’s proposed two-settlement capacity market design

modifies the capacity product to measure resources’ performance based on their delivery 

of energy or reserves during Capacity Scarcity Conditions. In support of this change, 

ISO-NE states that the existing FCM poorly defines the capacity product and, as a result,

fails to procure the product the region needs, namely reliable energy and reserves when 

supply is scarce. ISO-NE explains that the existing FCM rules measure resources’ 

performance by their “availability,” but that the rules include numerous exemptions under 

which resources that are not able to provide energy or reserves during a reserve 

deficiency are nonetheless deemed “available” and eligible to collect their full capacity 

payments. 

ii. Comments, Protests, and Answers

30. GDF SUEZ, HQUS, National Grid, and the NGSA support ISO-NE’s proposal as 

filed, stating that it will provide the proper incentives for improved capacity resource 

performance and that it is resource neutral. Massachusetts DPU and New Hampshire 

PUC state that the reliability of the New England electricity grid could be at risk without

significant changes to the FCM’s system of incentives and penalties in the near term.26

31. However, most commenters object to ISO-NE’s proposal,

27

many of whom argue 

that the proposal fundamentally redefines the capacity product and inappropriately 

attempts to address resource performance concerns in the capacity market rather than in 

26 Massachusetts DPU and New Hampshire PUC Comments at 11. 

27 See comments or protests of: Brookfield at 1, Connecticut, Rhode Island PUC, 

United Illuminating at 16-18, Dominion at 1, EMCOS at 1 and 3, Energy Efficiency 

Stakeholders at 7-8, Energy Management at 1, Indicated Generators at 2, Industrial 

Energy Consumers at 1 and 5, Maine PUC at 1-2, NextEra at 5, Northeast Utilities at 4, 

NRG at 1, PSEG at 1, Public Systems at 9, and United Illuminating at 2. Of these 

protesters, five are from the generation sector and there are two from each of the 

following sectors: transmission, supplier, end users, publicly owned and state regulatory 

entities.

 
Docket No. ER14-1050-000, et al. - 13 -

the energy and ancillary services markets.28 Multiple parties assert that it is inappropriate 

to link resources’ capacity revenues to their real-time performance, and that a capacity 

market should provide stable revenues to facilitate long-term planning, while the type of 

performance incentive ISO-NE seeks should be provided through the energy and 

ancillary services markets.29 NRG states that suppliers face a “settlement for deviations” 

that occurs several years after the forward commitment is established, in contrast to the 

next-day settlement that takes place in the energy markets, and capacity payments are 

settled by evaluating a resource’s “performance” against a level of output that is almost 

certain to differ from the resource’s forward Capacity Supply Obligation. 

32. While Brookfield affirms that capacity resources are fully expected to perform 

when dispatched by ISO-NE in the energy market, it also argues that a clear separation of 

compensation, characteristics, incentives, and non-performance penalties should exist in 

each individual market in order to send appropriate price signals. Dominion states that 

ISO-NE’s proposal will distort price signals sent to load, explaining that instead of 

changing the manner in which scarcity is reflected in real-time prices, ISO-NE instead 

seeks to remove appropriate and needed energy scarcity pricing from the real-time energy 

markets and embed it in the capacity product. Dominion contends that from a market 

design standpoint, it is essential that both generation and load see the true cost of energy 

in real-time price signals and make investment decisions based on those signals.30 NRG

also states that ISO-NE’s proposal lacks the requisite price transparency of a wellfunctioning two-settlement capacity market design, stating that the price signals under 

ISO-NE’s proposal would be static and insensitive to the severity of real-time scarcity, 

and would flow through only to suppliers.31 Entergy Nuclear states that if the energy 

market is failing to provide adequate incentives or is providing artificially suppressed 

price signals, the energy market should be reformed instead of the FCM, and the FCM

should remain a long-term planning market.

33. NEPOOL asserts that the current FCM has provided a mechanism for reasonably 

predictable and stable revenues that are critical to longer-term retirement and investment 

28 See generally comments or protests of: Brookfield at 3, Connecticut, Rhode 

Island PUC, and United Illuminating at 3-4, Dominion at 21, Indicated Generators at 3, 

Maine PUC at 15, NEPOOL at 14, PSEG at 9, and Public Systems at 9.

29 Brookfield Comments at 4-5 and 15, Dominion Comments at 19-20, NEPOOL 

Comments at 15-16, and NRG Protest at 23-24.

30 Dominion Answer at 16.

31 NRG Answer at 3. 

 
Docket No. ER14-1050-000, et al. - 14 -

decisions.32 NEPOOL also asserts that one of ISO-NE’s primary goals is to incent 

certain flexible resources, such as fast-start, fast-ramping, or dual-fuel-capable units, but 

that the Forward Reserve Market, not the FCM, was designed for that purpose. 

34. Maine PUC contends that ISO-NE would be the only grid operator to change the 

capacity product so that operational incentives are embedded in the capacity market 

rather than in the energy and reserves markets. Thus, Maine PUC argues that ISO-NE’s 

proposal would move New England away from what they believe is the Commission’s 

interest in developing a common set of best practices.33

iii. ISO-NE’s Answer

35. ISO-NE contends that Commission policy and accepted capacity market Tariff 

provisions affirm that capacity market design can and does appropriately incorporate 

performance requirements.

34 ISO-NE states that in order to ensure that the reliability 

objective is met in a cost-effective manner, as would occur in a fully functional energyonly market, the capacity market must procure the actual delivery of energy and reserves 

during scarcity conditions. However, ISO-NE states that the current capacity market only 

pays resources to be available during scarcity conditions. Therefore, resources routinely 

receive their full capacity payments regardless of whether they do, or are even able to, 

provide energy or reserves during periods of scarcity. For example, ISO-NE states that it 

has documented capacity payments of $674 million to a set of resources that have 

provided on average only 17 percent of their Capacity Supply Obligations as actual 

energy or reserves.35

32 NEPOOL Comments at 7-8.

33 Maine PUC Protest at 15. 

34 ISO-NE February 12 Answer at 13 (also citing Commission staff report on 

Centralized Capacity Market Design Elements, Docket No. AD13-7-000 (August 23, 

2013). “[e]ffective performance requirements for capacity markets achieve their resource 

adequacy goals and customers receive the benefit of the capacity for which they paid.... 

[E]xisting [performance] requirements penaliz[e] capacity resources for outages after-thefact by reducing the amount of capacity they can offer in future auctions. However, 

ineffective performance incentives (or a lack of consequences for failure to meet the 

standards) have the potential to adversely affect the ability of centralized capacity 

markets to deliver on the goal of ensuring resource adequacy in real-time.”). 

35 ISO-NE February 12 Answer at 15-16 (citing White January 17 Testimony 

at 23-24).

 
Docket No. ER14-1050-000, et al. - 15 -

iv. Commission Determination

36. Based on the record before us, we are persuaded that ISO-NE’s proposal to modify 

the FCM to incorporate a two-settlement capacity market design that measures the 

performance of capacity resources during Capacity Scarcity Conditions represents a just 

and reasonable approach to addressing resource performance concerns in the New 

England region. The overarching goal of the FCM is to help ensure reliability by 

procuring adequate resources. However, the level of reliability the FCM provides is 

determined in large part by how the market rules define resource adequacy. Under the 

existing FCM design, if ISO-NE procures an amount of nameplate capacity that exceeds 

the region’s net Installed Capacity Requirement for a given Capacity Commitment 

Period, resource adequacy is assumed to have been achieved. While ISO-NE has met this 

standard in all Capacity Commitment Periods to date, this belies the largely undisputed 

evidence in this record of the region’s resource performance problems. As discussed 

above, the record here shows that resource performance in the region has deteriorated in 

recent years.36 We conclude that ISO-NE has persuasively demonstrated that revising its 

FCM market design to more closely link capacity revenues to real-time performance will 

address this concern by providing better incentives for investment decisions appropriate 

for the New England region. ISO-NE’s proposed approach to the problem of resource 

performance is also consistent with the overall purpose of the FCM: to help ensure 

reliability through resource adequacy.

37. We disagree with assertions that ISO-NE’s proposal inappropriately ties capacity 

revenues to real-time performance, or that the proposed two-settlement capacity market 

design is fundamentally at odds with the existing FCM construct. Compensating capacity 

resources based on their real-time performance, by increasing or decreasing their total 

capacity revenue, represents an approach that is similar to the current market construct 

that penalizes capacity resources for failing to perform in certain circumstances. Under 

the existing FCM rules, a resource’s “availability” during a Shortage Event is determined 

based on whether the resource is able to operate in a given hour. If a resource is partially 

or fully unavailable during a Shortage Event, the resource is subject to penalties under the 

Tariff.37 

38. Further, regardless of whether there is a Shortage Event, under the current FCM

rules a resource with a Capacity Supply Obligation must offer into the day-ahead energy 

market, leave that offer open throughout the operating day, and follow the ISO-NE 

36 Supra P 26.

37 Tariff § III.13.7.2.7.1.2 (“Availability Penalties”).

 
Docket No. ER14-1050-000, et al. - 16 -

dispatch instructions.38 The obligation to follow ISO-NE’s dispatch instructions is, in 

effect, an obligation to provide energy or reserves subject to the resource’s operating 

parameters, and the Commission has explicitly referred to New England capacity 

resources’ energy market obligations as “performance” obligations.39 A capacity 

resource’s failure to meet any of these energy market obligations may be a Tariff 

violation.

40

39. Thus, under the existing FCM, capacity revenues are already linked to real-time 

performance. ISO-NE’s proposal fortifies that existing link by not only providing for 

penalties, but also compensating capacity resources based on their real-time performance. 

This change, while significant, is not fundamentally at odds with the existing FCM

construct. 

40. As to arguments that operational performance is better incentivized through the 

energy and ancillary services markets than the capacity market, we acknowledge that 

similar results could potentially be achieved through each of these markets individually, 

or a combination thereof, as the Commission is directing be instituted in this proceeding. 

Here, ISO-NE chose to address this issue through the FCM, while NEPOOL sought to 

address it through the energy market. As we discuss above, based on the record here we

find that parts of each proposal, taken together, represent a just and reasonable approach 

to address the resource performance problems facing the New England region. 

Accordingly, we do not believe it is necessary in this proceeding to choose between 

addressing operational performance through the capacity market or the energy market.

41

38 See Tariff § III.13.6.1.1.1; Tariff § III.1.10.1A(d)(vi); Tariff § III.1.7.20(b); see 

also New England Power Generators Assoc., Inc. v. ISO New England Inc., 144 FERC ¶ 

61,157, at PP 48-49 (2013) (NEPGA) (“A plain reading of these provisions imposes on 

capacity resources straightforward requirements to: (1) offer into both the day-ahead and 

real-time energy markets a MW amount equal to or greater than its Capacity Supply 

Obligation when the resource is physically available; (2) respond to ISO-NE’s directives 

to start, shutdown or change output levels; and (3) keep supply offers open throughout

the operating day.”).

39NEPGA, 144 FERC ¶ 61,157 at P 55 (“Although the Tariff imposes strict 

performance obligations on capacity resources, it also recognizes that certain events may 

cause a capacity resource to be unable to follow dispatch instructions.”).

40 NEPGA, 144 FERC ¶ 61,157 at PP 60-61.

41 We note that this issue was discussed at length at the Commission’s 

September 25, 2013 Technical Conference on Centralized Capacity Markets in Regional 

 

(continued..)
Docket No. ER14-1050-000, et al. - 17 -

b. Performance Risk and Exemptions for Non-Performance

i. ISO-NE’s Proposal

41. As noted above, ISO-NE’s proposal contains no exemptions for non-performance, 

on the principle that suppliers, not consumers, are in the best position to manage risk and 

incorporate associated costs into their offers. If a capacity resource fails to deliver its 

share of energy or reserves during a reserve deficiency, its capacity payment is reduced 

regardless of the reason for its non-performance. ISO-NE explains that while a resource 

that performs poorly could lose more than the amount of its Capacity Base Payment, this 

is an important aspect of sound market design because it motivates suppliers to take steps 

to ensure that their resources are able to perform when needed and eliminates the “free 

option problem,” whereby it is profitable for even the poorest performing resources to 

remain in the capacity market because they have nothing to lose. However, ISO-NE’s 

proposal also contains multiple mechanisms to help mitigate the risk to suppliers, 

including: (1) a monthly and annual stop-loss mechanism, (2) Capacity Performance 

Bilaterals, and (3) the phase-in of the Capacity Performance Payment Rate.

42. Under the monthly stop-loss limit, in any one month, the maximum amount that 

can be subtracted from a resource’s Capacity Base Payment for that month is the 

resource’s Capacity Supply Obligation quantity times the FCA starting price. Under the 

annual stop-loss limit, the maximum amount that a capacity resource can lose is equal to 

three times the resource’s maximum monthly potential net loss. ISO-NE states that a

resource that hits its monthly or annual stop-loss limit early in the commitment period 

can, with strong performance in subsequent scarcity conditions, finish the year with a net 

financial position better than the monthly or annual stop-loss limit. ISO-NE asserts that 

this design element helps to reduce the frequency with which resources may reach the 

stop-loss limit and provides a resource an incentive to perform in the event that its losses 

have reached the monthly or annual stop-loss limit.

43. ISO-NE’s proposal also allows resources to mitigate their performance risk 

through Capacity Performance Bilaterals, which allow resources to bilaterally trade their 

Performance Scores to mitigate the risk of negative Capacity Performance Payments 

during periods shorter than a month, or on shorter notice than a Capacity Supply 

Obligation can be shed. A Capacity Performance Bilateral allows a resource with a 

Capacity Performance Score greater than zero during a particular five-minute interval of 

a Capacity Scarcity Condition to transfer some or all of its Capacity Performance Score 

to another resource for that same five-minute interval, but only if both resources were 

Transmission Organizations and Independent System Operators, Docket No. AD13-7-

000, as well as in the written post-technical conference comments in that proceeding.

 
Docket No. ER14-1050-000, et al. - 18 -

subject to the same Capacity Scarcity Condition. ISO-NE explains that these bilaterals 

do not affect either party’s Capacity Supply Obligation, or the associated rights and 

obligations thereunder; rather, the bilaterals serve only to modify each resource’s 

Capacity Performance Score for purposes of calculating their Capacity Performance 

Payments. 

44. Lastly, ISO-NE proposes to mitigate resources’ performance risk by phasing-in 

the Capacity Performance Payment Rate: $2,000/MWh for the period June 1, 2018 

through May 31, 2021; $3,500/MWh for the period June 1, 2021 through May 31, 2024; 

and $5,455/MWh for the open-ended period starting June 1, 2024. ISO-NE explains that 

the phase-in will provide participants with an opportunity to gain experience with the 

new market design before the full Capacity Performance Payment Rate goes into effect. 

ISO-NE also states that the phase-in will allow ISO-NE to evaluate market participants’ 

behavior in response to the new market design and potentially propose modifications to 

the Capacity Performance Payment Rate if appropriate.

ii. Comments and Protests 

45. As to the lack of exemptions, HQUS believes that the level of financial risk under 

ISO-NE’s proposed design is manageable and set at appropriate levels to incent 

performance. HQUS contends that without the risk of significant financial losses 

capacity suppliers will have little incentive to make changes to increase performance. 

46. National Grid supports ISO-NE’s proposed no-exemption structure, asserting that

exemptions break the link between performance and payment that is essential for 

reliability and cost-effectiveness. NGSA also argues that any new FCM payment 

structure should minimize exemptions that shift responsibility to other capacity 

suppliers.42

47. However, several commenters state that there should be certain exemptions for 

non-performance due to reasons outside the resource’s control.

43 These requested 

exemptions include: (1) either all, or only unplanned, transmission outages; (2) nonperformance due to following ISO-NE dispatch instructions; (3) force majeure events; 

(4) self-commitment denied by ISO-NE; (5) planned outages approved by ISO-NE; and, 

42 NGSA Comments at 11.

43 EnerNOC Comments at 8, Entergy Nuclear Comments at 7-9, Renewable 

Energy New England and First Wind Comments at 6-7, Massachusetts DPU and New 

Hampshire PUC Comments at 12-13, NESCOE Comments at 4-5, and Vermont Agencies 

Comments at 3.

 
Docket No. ER14-1050-000, et al. - 19 -

with the most support, (6) circumstances beyond the resource owner’s control.

44 NextEra 

seeks an exemption for unplanned or unforeseen transmission outage, rather than all 

transmission outages, because the risks of planned transmission outages can be managed 

through bilateral availability contracts. NextEra asserts that this narrow exemption would 

address ISO-NE’s concerns that a broad exemption for any transmission outage would 

create distortions in the market.45

48. Some protesters contend that without the referenced exemptions, ISO-NE’s 

proposal is unjust and unreasonable and will add unnecessary and unmanageable risk to 

the market, which will force generators to include risk premiums in their offers or exit the 

capacity market altogether.

46 According to protesters, this will cause consumers to pay 

more, either through higher prices due to risk premiums or as a result of needing to 

procure additional capacity resources to replace the exiting resources.

47

49. Energy Management asserts that ISO-NE’s no-exemption proposal would 

undermine investment in all new generation, but that the impact would be particularly 

adverse to investment in new renewable resources, and thus contrary to both federal and 

state energy policies. Specifically, Energy Management explains that while most 

renewable energy in New England would be intermittent in nature and thus subject to 

unpredictable weather events beyond control of the project owners, ISO-NE has refused 

to allow any accommodations that would exclude such resources from weather-related 

penalties. Energy Management explains that the rationale for imposing penalties depends 

upon the presumption that the affected party has some degree of control over the intended 

result; where a party has no such control, imposing a penalty is a purely punitive action 

that can have no effect on performance or reliability. Energy Management states that the 

Commission should reject ISO-NE’s penalty proposal or, in the alternative, condition its 

44 Indicated Generators Comments at 28-30, Entergy Nuclear Comments at 7-9, 

Renewable Energy New England and First Wind Comments at 7, NextEra Comments 

at 6-8. GDF SUEZ Answer at 1. While it originally filed comments supportive of having 

no exemptions, GDF SUEZ states in its answer that there should be an exemption due to 

transmission outages because ISO-NE and transmission operators can and do control the 

extent of outages on these facilities. 

45 NextEra Protest at 23-26.

46 Indicated Generators Comments at 6, Entergy Nuclear Comments at 6-7 

47 Renewable Energy New England and First Wind Comments at 7, NESCOE 

Comments at 4-5, Industrial Energy Consumers Comments at 13-14. 

 
Docket No. ER14-1050-000, et al. - 20 -

implementation upon an exemption for intermittent renewable resources regarding 

weather-related events beyond the control of project owners.48

50. NRG states that, when transmission constraints are binding in the day-ahead or 

real-time markets, the incentive the Capacity Performance Payment Rate is intended to 

provide will conflict with ISO-NE’s scheduling and dispatch objectives.49 NRG asserts 

that when there are transmission constraints, some generators will receive dispatch 

instructions to produce less energy than they are physically able to generate, and may not 

even be committed to run, even though there is a Capacity Scarcity Condition. NRG 

contends that in those situations capacity suppliers would be charged negative Capacity 

Performance Payments even though they may exceed their operating costs and, absent the 

transmission constraint, the suppliers’ resources could immediately provide energy and 

reserves to fulfill their full pro-rata allocation for the scarcity interval. NRG argues that 

generators in this situation will have an incentive to bid below their costs to avoid 

negative Capacity Performance Payments by increasing the likelihood that they will be 

dispatched to deliver energy and reserves.

51. Public Systems assert that ISO-NE’s proposal punishes resources that have made 

prudent investments, operate reliably, and follow ISO-NE’s dispatch instructions.50 

Public Systems state that since there are no exemptions even where a resource is out for 

scheduled maintenance, the penalty may have the perverse incentive of discouraging

maintenance because without such an exemption a resource faces greater performance 

risk during times when it is conducting maintenance. Public Systems also argue that 

because ISO-NE does not offer suppliers a clear mechanism to manage uncontrollable 

non-performance risks, consumers will ultimately pay for the costs of ISO-NE’s proposal 

because suppliers will increase their supply offers to account for the new, unhedgeable 

risk.

52. Brookfield argues that accepting ISO-NE’s proposal would impose undue 

penalties on resources following dispatch instructions to address transmission or voltage 

issues, posturing, or largest system contingency protection. Brookfield also opposes 

potentially lowering payments to intermittent resources, stating that intermittent resources 

48 Energy Management Comments at 5-6. 

49 NRG Protest at Test. of Susan Pope, 11-12.

50 Public Systems Comments at 21.

 
Docket No. ER14-1050-000, et al. - 21 -

are already penalized through the reduced qualification of megawatts relative to their 

nameplate ratings in the FCM.

51 

53. As to the phasing-in of the Capacity Performance Payment Rate, NESCOE and 

HQUS are supportive of ISO-NE’s proposal. They state that during the early years of 

ISO-NE’s proposal, market participants will have an opportunity to gain experience with 

this new design and modify, if needed, their offers to mitigate the financial risk.52

54. Entergy Nuclear and NextEra argue that the Capacity Performance Payment Rate

should not be phased-in. Entergy Nuclear states that with the discrete and limited 

exemptions, there should be more immediate robust penalties for unexcused capacity 

performance failures during Shortage Events. Entergy Nuclear contends that parties have 

more than three years notice and will be able to factor these new rates into their offers in 

the next FCA (which will be in February 2015 for delivery beginning June 2018).53 NRG 

contends that the lower Capacity Performance Payment Rate will expose existing 

capacity suppliers to significant potential losses, but will not send the appropriate price 

signal to justify new entry.54 

55. As to the stop-loss mechanism, HQUS is supportive, stating that because the limits 

are based on auction starting prices, capacity suppliers will have the ability to calculate, 

prior to the FCA, their total exposure to financial losses and incorporate these risks into 

their valuation of a Capacity Supply Obligation and offer into the auctions accordingly. 

However, NextEra suggests that the if the Commission adopts ISO-NE’s proposal, the 

Commission require ISO-NE to implement a monthly stop-loss threshold of 2.5 times the 

monthly clearing price, rather than tie the stop-loss to the FCA starting price. Brookfield 

requests that if ISO-NE’s proposal is accepted, the Commission require ISO-NE to 

specify that both import capacity resources and resources in different capacity zones can 

trade their Capacity Performance Scores bilaterally.55

56. The External Market Monitor supports ISO-NE’s proposal but recommends 

two modifications affecting the phase-in approach. First, the External Market Monitor 

51 Brookfield Comments at 6-9.

52 NESCOE Comments at 6 and HQUS Comments at 15-16. 

53 Entergy Nuclear Comments at 10-11 and NextEra Comments at 6-8.

54 NRG Protest at 11.

55 Brookfield Comments at 14. 

 
Docket No. ER14-1050-000, et al. - 22 -

recommends that the Commission reject ISO-NE’s proposed schedule to increase the 

Capacity Performance Payment Rate beyond the initial value of $2,000/MWh. The 

External Market Monitor states that the proposed initial Capacity Performance Payment 

Rate of $2,000/MWh is reasonable because it implies a value of lost load of roughly 

$30,000/MWh, which is consistent with the External Market Monitor’s estimated value 

of lost load of $20,000-30,000/MWh. However, it asserts that ISO-NE’s proposed 

Capacity Performance Payment Rate of $5,455/MWh, which would go into effect for the 

Capacity Commitment Period 2024-2025, implies a value of lost load of roughly 

$120,000/MWh based on actual shortages in 2013, a level that the External Market 

Monitor states exceeds even the highest estimates of the value of lost load.

56

57. Second, the External Market Monitor recommends that the Commission consider 

requiring the introduction of a slope or steps in the Capacity Performance Payment Rate

to distinguish between small and deep shortages. The External Market Monitor states 

that ISO-NE’s proposal does not appropriately recognize that the probability of losing 

load increases as the operating reserve shortage grows, and that, if the reliability value of 

a resource is based on its contribution to avoiding load-shedding events, efficient 

shortage pricing should be substantially lower for small shortages and much higher for 

deep shortages. The External Market Monitor asserts that, by failing to adhere to this 

principle, ISO-NE’s proposal will tend to shift overall compensation to more flexible 

resources in a manner that substantially exceeds the relative reliability value of these 

resources. The External Market Monitor suggests that this issue could be addressed 

through a Capacity Performance Payment Rate step structure, whereby ISO-NE could 

impose a $1,000/MWh rate for shortages less than one-half of its 30-minute reserves, 

$2,000/MWh for shortages greater than one-half of its 30-minute reserves, and 

$3,000/MWh for ten-minute reserve shortages.57

iii. Answers

58. ISO-NE states that exclusion of exemptions is required by sound economic and 

market design principles because a supplier’s pricing in of all risks of non-performance 

provides essential price signals of both a resource’s cost and its reliability.58 ISO-NE 

states that because its proposal employs a well-defined forward product definition, a

supplier can hedge non-performance risk, in whole or in part, with financial 

56 External Market Monitor Comments at 16-17.

57 External Market Monitor Comments at 17-19.

58 ISO-NE March 3 Answer at 37-38 (citing White January 17 Testimony at 51-52 

and ISO-NE February 12 Answer at 18-27). 

 
Docket No. ER14-1050-000, et al. - 23 -

intermediaries that are not capacity suppliers.59 ISO-NE explains that because most 

capacity resources either perform well or are owned by a supplier with a portfolio of 

capacity resources that naturally provides considerable diversification against 

performance risk, the actual number of resources that would incorporate a positive risk 

premium in their capacity supply offers is small. ISO-NE disputes NEPOOL’s analysis 

suggesting that without certain exemptions most resource types will suffer financially,

60

claiming that its own analysis reveals that, most resources, including those with 

performance as low as 40 percent, will earn greater net capacity revenue than under the 

existing rules.

61

59. ISO-NE also argues that using a different reliability standard to calculate the 

Capacity Performance Payment Rate, such as value of lost load as the External Market 

Monitor suggests, would result in a different estimate of expected annual scarcity hours.

62 

ISO-NE explains that it is not free to unilaterally change its reliability standards, and the 

appropriateness of the applicable and longstanding reliability standard is not a question 

before the Commission in this proceeding.63 Additionally, ISO-NE argues that the 

External Market Monitor’s recommended stepped Capacity Performance Payment Rate is 

unnecessary and disagrees that this change would provide a material benefit. ISO-NE 

explains that by measuring scarcity conditions in five-minute increments, its proposal

accomplishes much of the goal the External Market Monitor seeks, but in a much simpler 

manner. Specifically, less severe Capacity Scarcity Conditions tend to be shorter in 

duration and have less of a financial impact, while more severe events tend to last longer 

and have a larger financial impact.64

60. Some protesters assert that, due to the risk inherent in ISO-NE’s proposal, hedging 

with financial intermediaries will be expensive and will force suppliers to incorporate this 

hedging cost into their supply offers.65 Maine PUC and Maine Public Advocate question 

59 ISO-NE February 12 Answer at 22. 

60 ISO-NE March 3 Answer at 9-11. 

61 ISO-NE February 12 Answer at 24-25. 

62 ISO-NE March 3 Answer at 16-17.

63 ISO-NE March 3 Answer at 17-18.

64 ISO-NE March 3 Answer at 19-21.

65 Maine PUC and Maine Public Advocate Answer at 4, Indicated Generators 

Answer at 4-6.

 
Docket No. ER14-1050-000, et al. - 24 -

ISO-NE’s conclusion that only 1,034 MW would incorporate risk premiums up to a 

maximum of $3.30 per kW-month and that, given the tight capacity supply evident in the 

eighth FCA, these high prices could very well set the clearing price for all of the capacity 

supply units if they are needed to meet the Installed Capacity Requirement.66 Indicated 

Generators argue that capacity suppliers are unlikely to find adequate hedging options 

because constrained zones will have little or no excess supply capable of providing a 

physical hedge and because suppliers will be inclined to reserve any surplus capacity to 

hedge their own portfolio of resources.67 Indicated Generators assert that if suppliers 

cannot adequately hedge their risk, they may elect to self-schedule, which will not only 

allow ISO-NE to pick winners and losers by accepting or rejecting self-schedule requests

but will also disrupt price formation in the energy market.68

61. Connecticut, Rhode Island PUC, and United Illuminating state that ISO-NE’s

proposal does not implement a traditional two-settlement forward contract structure 

because the quantity to be supplied is uncertain and ISO-NE has exclusive rights to set 

the timing and quantity of delivery required. However, if the Commission chooses 

ISO-NE’s proposal, Connecticut, Rhode Island PUC, and United Illuminating urge the 

Commission to reject the Capacity Performance Payment Rate of $5,455/kW-month as 

excessively high.69 Challenging ISO-NE’s assessment of the likely impacts of its 

proposal, NRG contends that the assessment fails to consider how the phase-in will affect 

retirements during the six years before the full Capacity Performance Payment Rate is

implemented and whether any new entry will take place in response under the lower 

Capacity Performance Payment Rates.70

iv. Commission Determination

62. While we generally agree with ISO-NE that as part of its proposed two-settlement 

capacity market design, exemptions for non-performance should be minimal, we find that 

an exemption is appropriate in instances where an intra-zonal transmission constraint 

may lead to improper price signals to capacity resources. Therefore, we will direct 

66 Maine PUC and Maine Public Advocate Answer at 5. 

67 Indicated Generators Answer at 4-5.

68 Indicated Generators Answer at 9.

69 Connecticut, Rhode Island PUC, and United Illuminating February 27 Answer 

at 20-23.

70 NRG Answer at 10. 

 
Docket No. ER14-1050-000, et al. - 25 -

ISO-NE to submit a compliance filing with Tariff revisions reflecting such an exemption, 

as described below. We further find that ISO-NE’s proposed Tariff revisions reflecting 

multiple mechanisms to help mitigate the risk to suppliers are just and reasonable, 

including: (1) a monthly and annual stop-loss mechanism, (2) Capacity Performance 

Bilaterals, and (3) the phase-in of the Capacity Performance Payment Rate. Accordingly 

we will require ISO-NE to submit Tariff revisions reflecting those mechanisms as part 

of the compliance filing directed here. These Tariff revisions must be submitted within 

45 days of the date of this order.

63. As an initial matter, we agree with ISO-NE that in a fully-functioning and 

uncapped energy market, resources only earn scarcity revenue if they can actually deliver 

energy during periods of scarcity. In such a market, if a resource fails to perform it is not 

compensated, regardless of fault. ISO-NE’s two-settlement capacity market design 

replicates the performance incentives that would exist in an uncapped energy market by 

linking payments to performance during scarcity conditions. It follows that a resource 

that acquires a Capacity Supply Obligation through the two-settlement capacity market 

design adopted here does not merit compensation when it fails to perform in accordance 

with that obligation, regardless of fault.

64. While a resource faces uncertainty about whether it will actually be able to 

provide energy or reserves during a given scarcity period, ISO-NE’s proposed twosettlement capacity market design relies on placing some measure of risk on capacity 

suppliers to incent them to develop and maintain their resources such that they can 

reliably perform and ensure that consumers receive benefits commensurate with the costs 

they incur in the capacity market. We generally agree with ISO-NE that under this 

market design suppliers, not consumers, are in the best position to assess and price the 

performance risk associated with their resources. This includes risks beyond a resource’s 

control, including weather-related outages. Because suppliers are expected to price this 

risk into their offers, it is fair to assume that those resources with better performance 

characteristics will include a lower risk premium than other resources and be more likely 

to clear, thereby improving overall fleet performance. 

65. However, in certain limited circumstances, the Capacity Performance Payment

may lead to improper price signals that could prevent ISO-NE from efficiently 

dispatching resources. The intent of the Capacity Performance Payment is to signal, 

through scarcity pricing, an area where more energy and reserves are needed to resolve a 

Capacity Scarcity Condition. Depending on market conditions during the Capacity 

Scarcity Condition, the area could include one or more Capacity Zones or the entire ISONE footprint. When a Capacity Scarcity Condition exists only in one (or more) Capacity 

Zone(s) but not in the rest of the ISO-NE footprint, the Capacity Performance Payment 

would apply only to resources in the zone(s) experiencing the Capacity Scarcity 

Condition. In these circumstances, capacity outside the affected zone(s) would be 

capable of producing additional energy, but inter-zonal transmission constraints would 
Docket No. ER14-1050-000, et al. - 26 -

prevent ISO-NE from delivering the energy from the rest of the footprint to the affected 

zone(s). In essence, a shortage would be occurring in the import-constrained zone(s) but 

not in the rest of ISO-NE’s footprint. It would be inefficient to signal through Capacity 

Performance Payments the need for additional energy in the rest of the footprint, because 

additional energy from that area would not help alleviate the shortage in the importconstrained zone(s).

66. While ISO-NE’s proposal avoids this inefficiency in instances of inter-zonal 

transmission constraints, it fails to do so for intra-zonal transmission constraints. As with 

inter-zonal transmission constraints, a planned or unplanned transmission outage can 

create a binding transmission constraint within a zone that is experiencing a Capacity 

Scarcity Condition, which could prevent ISO-NE from delivering all of the producible 

energy on the export side of the constraint within the zone to loads on the import side of 

the constraint. However, unlike with inter-zonal transmission constraints, ISO-NE’s 

proposal would apply Capacity Performance Payments to resources on the export side of 

an intra-zonal transmission constraint. This would send the wrong price signal, as 

resources on the export side would be incented to maximize their provision of energy or 

reserves in order to maximize their Capacity Performance Payments for the duration of 

the Capacity Scarcity Condition, even though that additional energy production would 

not be useful or efficient because it cannot reach the import-side of the constraint. 

67. This improper price signal is problematic because it incents a generating resource 

on the export side of the constraint to submit energy market offer prices that are below its 

actual marginal operating costs in order to be dispatched at the greatest quantity possible 

and thereby maximize its Capacity Performance Payment.71 ISO-NE’s proposal does not 

71 While this improper price signal could also incent a generating resource on the 

export side of the constraint to provide energy above the level at which ISO-NE 

dispatches it, ISO-NE’s proposal adequately addresses this problem with the following 

proposed Tariff language: 

A Generating Capacity Resource’s Actual Capacity Provided during a 

Capacity Scarcity Condition shall be the sum of the resource’s output 

during the interval plus the resource’s Real-Time Reserve Designation 

(including any regulation capability available but not used for energy) 

during the interval; provided, however, that if the resource’s output was 

limited during the Capacity Scarcity Condition as a result of a transmission 

system limitation, then the resource’s Actual Capacity Provided may not be 

greater than the resource’s Desired Dispatch Point during the interval. 

Tariff, § III.13.7, Performance, Payments and Charges in the FCM, 31.0.0 (2014) 

(emphasis added).

 
Docket No. ER14-1050-000, et al. - 27 -

address this inefficient incentive. A comprehensive solution is to avoid creating the 

inefficient incentive in the first place by exempting all resources within a zone 

experiencing a Capacity Scarcity Condition and which are located on the export side of a 

binding transmission constraint. With such an exemption, when a binding intra-zonal 

transmission constraint arises, the price signal on the export side would properly be lower 

than the price signal on the import side. We will therefore direct ISO-NE to submit 

Tariff revisions to address the improper price signals in this scenario or further explain 

why the exemption is not necessary. ISO-NE must submit these Tariff revisions as part 

of the compliance filing required within 45 days of the date of this order.

68. Some protesters also assert that an exemption is warranted for resources that

under-perform as a result of following ISO-NE’s dispatch instructions.72 We disagree. 

This assertion is merely a variant of the argument that exemptions should be given for 

circumstances beyond their control, an idea we also reject. During scarcity conditions, 

ISO-NE seeks to dispatch for energy or put on reserve all resources that are capable of 

providing energy or reserves. Protesters argue that after following ISO-NE’s dispatch 

instructions resources may be unable to provide energy or reserves during a Capacity 

Scarcity Condition, due to start time or ramp rate constraints. However, in this situation 

these resources are not providing equivalent reliability contributions as compared to other 

higher performing resources and thus should not be compensated equally.

69. We further find that other aspects of ISO-NE’s proposal appropriately help 

balance or limit capacity suppliers’ risk exposure, and we adopt them as part of the 

two-part settlement design implemented here. Specifically, ISO-NE must submit in its 

compliance filing due within 45 days of the date of this order the Tariff provisions as 

submitted here reflecting the monthly and annual stop-loss mechanisms, Capacity 

Performance Bilaterals, and the phase-in of the Capacity Performance Payment Rate. 

70. Regarding the stop-loss mechanisms, while some protesters argue that the annual 

stop-loss limit is too high and could result in a resource losing more than its Capacity 

72 We also disagree with protesters’ assertions that not allowing such an exemption 

will create a perverse incentive to ignore dispatch instructions. Not allowing an 

exemption for following dispatch instructions does not create an incentive to ignore 

dispatch instructions because during scarcity conditions, the dispatch software directs 

resources to produce at a level that maximizes the sum of the energy and reserves they 

can provide during each interval, subject to the resource’s offered capabilities and the 

transmission network’s capabilities. Thus, we agree with ISO-NE that a supplier’s 

financial incentives to maximize its resource’s capabilities to provide energy and reserves 

are fully aligned with the system’s dispatch objectives to make maximum use of those 

capabilities during scarcity conditions. 

 
Docket No. ER14-1050-000, et al. - 28 -

Base Payment, we agree with ISO-NE that the ability for a market participant’s capacity 

revenues to become negative is an important aspect of its proposed market design 

because it provides an incentive for resource owners to make investments and maintain 

their resources to help mitigate the risk of non-performance and helps ensure paying 

consumers receive commensurate reliability benefits. Further, we note that for a resource 

to reach the annual stop-loss limit, the number of hours of Capacity Scarcity Conditions 

would have to significantly exceed the amount of such scarcity conditions the region has 

experienced in recent years.

71. We acknowledge protesters’73 concerns that the stop-loss limits could produce a 

skewed risk profile because the limits are calculated using the FCA starting price, 

whereas the Capacity Base Payment from which a resource’s negative performance 

payments are deducted is calculated using the FCA clearing price. However, we find 

that establishing the stop-loss limit based on the auction starting price is appropriate 

because the auction starting price is known in advance, and therefore allows a resource to 

calculate its maximum risk exposure for a Capacity Commitment Period based on its 

offer price. To the extent the auction clearing price is higher than the resource’s offer 

price, its risk exposure for that Capacity Commitment Period will be reduced.74

72. Regarding Capacity Performance Bilaterals, while we acknowledge protesters’ 

concerns that there is uncertainty about whether a market for the bilaterals will develop, 

we are not persuaded that such uncertainty renders this aspect of ISO-NE’s proposal 

unjust and unreasonable. Protesters’ arguments on this point are concerned with the 

liquidity of the Capacity Performance Bilaterals, not the Tariff rules governing the 

agreements. Although uncertainty is unavoidable when predicting the liquidity of any 

new bilateral market, that uncertainty alone does not persuade us to conclude that the 

market will not materialize and, therefore, will not allow resources to hedge against their 

performance risk.

73. Regarding the phase-in of the Capacity Performance Payment Rate, we disagree 

with protesters’ assertion that the phase-in should be eliminated and that ISO-NE should 

instead implement the full $5,455/MWh rate from the outset. We agree with ISO-NE and 

others that the phase-in will allow suppliers to gain experience with the new market

design at reduced risk exposure before the full Capacity Performance Payment Rate goes 

into effect. Further, as ISO-NE explains, the phase-in will allow ISO-NE to evaluate 

market participants’ behavior under the new market design and assess whether the 

phase-in levels and the ultimate Capacity Performance Payment Rate need to be adjusted 

73 NRG Protest at 11, Indicated Generators Protest at 28-30.

74 See ISO-NE Tariff Filing, at Att. I-1c, 206.

 
Docket No. ER14-1050-000, et al. - 29 -

in response. This type of reevaluation is particularly important in light of our directive

below that ISO-NE increase the Reserve Constraint Penalty Factors and submit a 

compliance filing to explain any necessary adjustments to accommodate that increase. 

74. We also disagree with the External Market Monitor and other protesters who 

assert that the Capacity Performance Payment Rate should be set based on the value of 

lost load, rather than the cost of new entry. The Capacity Performance Payment Rate is 

designed to achieve the “one day in 10 years” reliability standard established by the 

Northeast Power Coordinating Council,75 and the appropriateness of that longstanding 

reliability standard is not in question in this proceeding. We are not persuaded that 

setting the Capacity Performance Payment Rate at the value of lost load would provide 

adequate incentive for new entry, when required, and would therefore meet this reliability 

standard.

75. Lastly, we note that, in addition to the stop-loss mechanism, bilaterals, and phasein discussed above, ISO-NE’s two-settlement capacity market design, as implemented 

here, allows resources to mitigate their risk by offering their capacity in blocks. We 

expect this feature of ISO-NE’s market design to provide resources some flexibility to 

manage their risk exposure through bidding strategies designed to reflect the varying 

levels of performance risk associated with different levels of output for a particular 

resource. We find that, taken together, the above aspects of ISO-NE’s proposal properly 

balance the region’s need for more reliable resources with suppliers’ need to have a 

quantifiable risk profile in order to secure financing for new resources and calculate the 

appropriate level of investment to maintain existing resources. While the risk premiums 

reflected in ISO-NE’s two-settlement capacity market design may increase costs to 

consumers, we find that, given the nature of the fleet-wide resource performance 

problems facing the New England region, the market design appropriately balances the 

increased costs to consumers against the added reliability benefits consumers will receive

from a resource fleet with more appropriate incentives and capability to reliably perform 

when needed.

c. Treatment of Certain Classes of Resources

i. ISO-NE’s Proposal

76. ISO-NE states that its proposal is resource neutral and will pay suppliers providing 

the same service the same compensation, regardless of what technology they use.76 ISO75 ISO-NE March 3 Answer at 17-18; ISO-NE Tariff Filing, at Att. I-1c, 107-108.

76 ISO-NE Transmittal at 6.

 
Docket No. ER14-1050-000, et al. - 30 -

NE asserts that this is not unfair to older or less flexible resources because resources 

should be compensated based on what they contribute to maintaining system reliability. 

ISO-NE states that resources are not compensated this way under the current FCM and 

that this has created a disincentive for investors to develop units with greater capabilities 

because resources that are not capable of contributing significantly to reliability get paid 

the same as units that are highly capable.

77. ISO-NE states that it will continue to assess the performance of demand response 

resources based on the load reductions they achieve, and that those resources will 

therefore be eligible for Capacity Performance Payments in the same way as all other 

resources. ISO-NE also notes that prior to the first Capacity Commitment Period under 

ISO-NE’s proposal, ISO-NE plans to implement its Commission-approved design to fully 

integrate demand response resources into the energy markets. ISO-NE states that after 

that integration, demand response resources may participate in the real-time energy and 

ancillary services markets without a Capacity Supply Obligation and that such resources 

will be compensated for their performance – in the form of load reductions and, if 

applicable, reserves provided – during Capacity Scarcity Conditions at the Capacity 

Performance Payment Rate, consistent with the treatment of all resources under ISONE’s proposal.77

78. ISO-NE states that energy efficiency resources are included in the On Peak 

Demand Resource and Seasonal Peak Demand Resource categories and that, under 

current Tariff rules, they demonstrate performance by submitting data to ISO-NE 

substantiating their energy load reduction during certain peak hours, as defined in the 

Tariff for each resource type. ISO-NE explains that, therefore, energy efficiency 

resources’ performance is the amount of energy load reduction they provide during 

defined on-peak hours, and is zero in all other hours. ISO-NE states that an energy 

efficiency resource’s performance during a Capacity Scarcity Condition will be 

determined based on its average load reduction in the applicable hour.78 

ii. Comments and Protests

79. Renewable Energy New England and First Wind state that renewable resources 

can meet their performance obligations under ISO-NE’s proposal because wind and solar 

resources are predictably variable, which gives resource owners and ISO-NE the ability 

to forecast and rely on the performance of these resources. Further, Renewable Energy 

New England and First Wind explain that, unlike fossil resources, wind and solar 

77 ISO-NE Testimony of Matthew White at 151-152.

78 ISO-NE Testimony of Matthew White at 152-153.

 
Docket No. ER14-1050-000, et al. - 31 -

resources are only eligible to provide a fraction of their nameplate capacity into the FCM

and therefore can over-perform relative to their Capacity Supply Obligations.

80. Public Systems, PSEG, and Connecticut, Rhode Island PUC, and United 

Illuminating argue that ISO-NE’s proposal will create a bias in the FCM toward

resources with high availability factors, quick-start resources, and some types of demand

response resources, while creating a bias against intermittent resources and mid-range 

resources without quick-start capabilities.

79

81. EnerNOC asserts that ISO-NE’s proposed treatment of resources unduly 

discriminates against demand response resources. EnerNOC explains that because ISONE’s proposal would tie a resource’s capacity revenue payment to its provision of energy 

or reserves during scarcity conditions, a resource would need access to both the energy 

and reserves markets in order to avoid significant payment reductions. EnerNOC states 

that if demand response resources are not allowed to participate in ISO-NE’s reserve 

markets, then during a scarcity event where locational marginal prices fail to reach the 

level that a demand response resource offered in the energy market, that demand response 

resource would not be dispatched by ISO-NE to provide energy and would incur 

substantial capacity penalties.

80 EnerNOC states that because demand response resources 

are not yet allowed to participate in ISO-NE’s reserves market, they will have their 

capacity revenues decreased for not providing a service that they are not yet allowed to 

provide. EnerNOC requests that the applicability of ISO-NE’s proposal to demand 

response resources be deferred until the reserves market Tariff rules are effective in 

advance of the applicable FCA. EnerNOC states that ISO-NE has authorized EnerNOC

to state that ISO-NE would not object to a compliance filing directing such a deferral.

81 

EnerNOC further states that ISO-NE has indicated that it intends to file reserves market

rules for demand response resources pursuant to FPA section 205 in the fourth 

quarter of 2014 with an effective date in January 2015, in time for the ninth FCA.

82

82. Energy Efficiency Stakeholders, Connecticut, Rhode Island PUC, and United 

Illuminating argue that ISO-NE’s proposed treatment of resources discriminates against 

energy efficiency resources and may dissuade them from participating in the FCM. 

79 Public Systems Comments at 13, PSEG Protest at 12, Connecticut, Rhode Island 

PUC, and United Illuminating Comments at 41-43.

80 EnerNOC Comments at 9.

81 EnerNOC Comments at 1-4, 11.

82 EnerNOC Comments at n 12.

 
Docket No. ER14-1050-000, et al. - 32 -

Energy Efficiency Stakeholders assert that the performance requirements in ISO-NE’s

proposal are not aligned with energy efficiency resources’ passive, non-dispatchable 

nature because such resources cannot respond to operational contingencies in real time. 

Energy Efficiency Stakeholders state that under ISO-NE’s proposal energy efficiency 

resources may not receive full payment for their verified performance of the obligation 

they assumed and may be forced to incur additional measurement and verification costs 

to avoid further penalties, even though these resources’ contribution to resource adequacy

would be the same as it is under the existing Tariff.

83

83. Brookfield states that import capacity resources should not face a reduced 

payment for non-performance if an external transaction is not dispatched by ISO-NE due 

to an inaccurate locational marginal price forecast or latency in scheduling protocols. 

Brookfield further states that an import capacity resource does not have the flexibility to 

react to intra-hour scarcity events because of scheduling practices among neighboring 

jurisdictions. Additionally, Brookfield notes that if ISO-NE’s locational marginal price

forecast is inaccurate, it may not clear the appropriate amount of external transactions 

to meet load. In these cases, an import capacity resource would be penalized due to 

ISO-NE error or scheduling delays beyond its control. While ISO-NE’s proposal would 

permit resources to submit a Capacity Performance Bilateral to assign a portion of its 

score for that interval to another resource, Brookfield argues that this provision does not 

explicitly apply to external transactions that are not associated with import capacity 

resources.84

iii. Answers

84. Connecticut, Rhode Island PUC, and United Illuminating state that the Peak 

Energy Rent deduction exemption should continue to apply to passive demand response 

resources, such as energy efficiency resources, that do not participate in the energy 

markets and therefore have no opportunity to earn back energy revenues that the Peak 

Energy Rent mechanism deducts.85

83 Energy Efficiency Stakeholders Comments at 6-7.

84 Brookfield Comments at 11-14.

85 Connecticut, Rhode Island PUC, United Illuminating Answer at 3 and n.5

 
Docket No. ER14-1050-000, et al. - 33 -

iv. Commission Determination

85. We find that ISO-NE’s proposed treatment of resources unduly discriminates 

against energy efficiency resources. We will therefore direct ISO-NE to submit Tariff 

revisions to address this issue as discussed below.

86. As an initial matter, we reject protesters’ contentions that ISO-NE’s proposal 

unduly discriminates against intermittent resources and mid-range resources without 

quick-start capabilities. Under ISO-NE’s proposal, resources are compensated without 

regard to technology type. To the extent resources have different capabilities to provide 

energy and reserves during a Capacity Scarcity Condition, those resources are not 

similarly situated, and therefore it is not unduly discriminatory to compensate those 

resources differently based on their respective capabilities. We also note that ISO-NE 

estimates resources with performance rates as low as 40 percent will be better off 

financially under its proposal than under the existing FCM rules.86 Further, as

Renewable Energy New England and First Wind explain, wind and solar resources

should benefit from ISO-NE’s proposal because they are predictably variable and

necessarily have nameplate capacity exceeding their Capacity Supply Obligations.

87 

87. We also reject the arguments that the two-settlement capacity market design 

unduly discriminates against import resources. In terms of resource scheduling and offer 

flexibility, import resources are not similarly situated to resources that are within ISONE’s footprint. As a general principle, it would be preferable for resources in any market 

to have the ability to adjust their offers in a way that maximizes their ability to respond to 

price signals in real-time. However, there are technical limitations to offer flexibility.

88 

For import resources, offer flexibility is particularly complicated because intertie 

transactions between neighboring systems—e.g., between ISO-NE and the New York 

Independent System Operator (NYISO)—require coordination between independent 

system operators to economically optimize the interchange schedule. This coordination 

requires communication and complex calculations, both of which take time.89 Further, 

86 ISO-NE February 12 Answer at 25 (citing Test. of Paul Hibbard and Todd 

Schatzki at 23).

87 Renewable Energy New England and First Wind Comments at 5. 

88 Even resources within New England cannot update their offers less than 

30 minutes prior to a given operating hour. See ISO New England Inc. & New England 

Power Pool, 145 FERC ¶ 61,014 (2013).

89 See, e.g., ISO New England Inc., 139 FERC ¶ 61,047 (2012) (accepting tariff 

revisions to implement Coordinated Transaction Scheduling between ISO-NE and 

 

(continued..)
Docket No. ER14-1050-000, et al. - 34 -

each independent system operator schedules its fleet in a way that it deems necessary to 

maintain reliability in its own region. To the extent an import resource is disadvantaged 

under the two-settlement capacity market design as a result of the scheduling practices in 

the resource’s home region, that disadvantage is the direct result of the resource not being 

similarly situated to the resources within New England.

88. While EnerNOC argues that ISO-NE’s two-part settlement design unduly 

discriminates against demand response resources, we expect that its concerns will be 

addressed by our requirement, discussed infra at section IV.2.iii, that ISO-NE increase 

the Reserve Constraint Penalty Factors for 30-Minute Operating Reserves, from 

$500/MWh to $1,000/MWh, and 10-Minute Non-Spinning Reserves, from $850/MWh to 

$1,500/MWh.

90 EnerNOC expresses concern that demand response resources could 

incur substantial penalties if energy prices failed to reach the level at which a demand 

response resource offered in the energy market during a Capacity Scarcity Condition. 

However, once ISO-NE increases its Reserve Constraint Penalty Factor for 30-Minute 

Operating Reserves to $1,000/MWh, as directed here, then when ISO-NE experiences a 

Capacity Scarcity Condition,91 energy prices should equal or exceed $1,000/MWh and 

demand response resources offered into the energy market during that Capacity Scarcity 

Condition should be dispatched, thus addressing EnerNOC’s concerns regarding penalties 

NYISO, subject to a compliance filing); see also ISO New England Inc. & New England 

Power Pool Participants Committee, 146 FERC ¶ 61,190, at P 15 (2014) (summarizing 

ISO-NE’s explanation that economic optimization of interchange schedules under 

Coordinated Transaction Scheduling requires evaluation by both ISO-NE’s and NYISO’s 

dispatch systems, which occurs sequentially and takes approximately 30 minutes). 

90 The Commission takes note of the May 23, 2014 decision of the U.S. Court of 

Appeals for the District of Columbia Circuit in Elec. Power Supply Ass’n v. FERC, 

No. 11-1486. The Commission is still considering both the scope of and possible next 

steps with respect to that court decision.

91 This does not address the possibility that demand response resources would not 

be dispatched during a zonal Capacity Scarcity Condition, since the zonal Reserve 

Constraint Penalty Factor is only $250/MWh. However, we note that ISO-NE has 

experienced only 105 minutes of zonal operating reserve shortages since April 23, 2008. 

See ISO-NE, RCPF Events through 4_2014 5.19.2014.xlsx, at sheets 

‘Summary_local_oct06_dec09’ and ‘Summary_local_jan10_apr14’, available at

http://www.isone.com/markets/othrmkts_data/fcm/doc/opr_reserve_deficiency_info_hist_data_updated_

5_21_2014.zip. 

 
Docket No. ER14-1050-000, et al. - 35 -

associated with Capacity Scarcity Conditions.92 This is because energy offers, including 

those from demand response resources, cannot exceed the $1,000/MWh offer cap.93 

89. However, we find that ISO-NE’s proposal is unduly discriminatory with respect to 

the treatment of energy efficiency resources. As protesters explain, ISO-NE’s proposal 

assumes that energy efficiency resources provide zero performance in off-peak hours, 

which means those resources must either incur significant costs to measure and verify 

their load reductions around-the-clock, rather than only in certain peak hours of the year, 

or face guaranteed negative Capacity Performance Payments during any Capacity 

Scarcity Condition during off-peak hours. While it is necessary to track the performance 

of other types of resources around-the-clock under ISO-NE’s proposed market design, 

this is not the case for energy efficiency resources. Energy efficiency resources are not 

similarly situated to other capacity resources because they do not actively perform in 

real-time—they represent a pre-determined level of load reduction that is constant as a 

percentage of that resource’s load—and therefore are not able to respond to the ISO-NE 

proposal’s performance incentive. Therefore, we direct ISO-NE to submit as part of the 

compliance filing required within 45 days of the date of this order, Tariff revisions 

ensuring that energy efficiency resources’ Capacity Performance Payments are calculated 

only for Capacity Scarcity Conditions during hours in which demand reduction values are 

calculated under the Tariff for that particular type of resource.

d. Bidding Rules/Market Monitoring

i. ISO-NE’s Proposal

90. ISO-NE states that under its proposed bidding rules, a de-list bid will include four 

separate components: (1) net going-forward costs, (2) expectations about the resource’s 

Capacity Performance Payments, (3) risk premium assumptions, and (4) opportunity 

costs. ISO-NE asserts that the risk premium that a resource includes in its bid is separate 

from the resource’s net going-forward cost in order to allow the Internal Market Monitor 

to analyze the two components separately. ISO-NE states that “[a]ny risk that can be 

quantified and analytically supported and that is not already reflected in the formula for 

net going-forward costs may be included in the risk premium component.”94 ISO-NE 

92 NEPOOL states that its proposed Reserve Constraint Penalty Factor levels, 

which we adopt in this order at section IV.B.2.a.iii, will ensure that all demand response 

resources would be fully available to ISO-NE for real-time dispatch in order to maintain 

operating reserve levels. NEPOOL Transmittal at 10.

93 See Tariff § III.1.10.1A(d)(ix).

94 ISO-NE Tariff Filing at Att. I-1a, 60.

 
Docket No. ER14-1050-000, et al. - 36 -

explains that the Internal Market Monitor may only mitigate the de-list bids of those

resources associated with a Lead Market Participant that is found to be pivotal,

95 and will 

evaluate those de-list bids in two ways. First, for units that are part of a multi-unit 

portfolio, the Internal Market Monitor will examine whether the risk premium for each 

unit in the portfolio reflects consistent assumptions. Second, the Internal Market Monitor

will compare risk premiums across all market participants to determine whether a 

particular resource’s risk premium is consistent with competitive market behavior. 

91. ISO-NE’s proposal also raises the trigger for the Internal Market Monitor’s review 

of a de-list bid, from $1.00/kW-month to $3.94/kW-month. This trigger is known as the 

Dynamic De-List Bid Threshold. ISO-NE argues that, ideally, the Dynamic De-List Bid 

Threshold should be set at the competitive bid of the marginal unit. ISO-NE’s proposed 

$3.94/kW-month level for the Dynamic De-List Bid is based on the recent historical 

going forward costs of representative fossil steam units, adjusted for expected net 

performance penalties. In ISO-NE’s view, these are the types of existing resources most 

likely to seek to leave the auction, and therefore, could be the marginal unit when ISONE does not need new capacity.96 ISO-NE states that the Internal Market Monitor will

mitigate bids above the $3.94/kW-month threshold only if the bid is from a resource 

associated with a Lead Market Participant that is determined to be a pivotal supplier.97 

ISO-NE explains that a Lead Market Participant will be considered pivotal if any of the 

capacity from the existing resources controlled by that Lead Market Participant is needed 

to satisfy the capacity requirements either system-wide or in an import-constrained 

Capacity Zone.

95 ISO-NE states that since the FCM can clear without accepting the capacity 

supply offers of a non-pivotal supplier, the non-pivotal supplier cannot exercise unilateral 

market power and cannot profitably raise price to a non-competitive level. In addition, 

ISO-NE states that the pivotal supplier test detects and screens for whether an individual 

resource could raise clearing prices due to its market power. ISO-NE, Tariff Filing, at 

Att. I-1E, 20-21 (Joint Testimony of David LaPlante and Seyed Parviz Gheblealivand).

96 See ISO-NE Tariff Filing at Att. I-1e, 53-61 (Aff. of David LaPlante and Seyed 

Parviz Gheblealivand on behalf of ISO New England).

97 A Lead Market Participant, for purposes of the FCM, is the entity designated to 

participate in that market on behalf of an Existing Capacity Resource or a New Capacity 

Resource. ISO-NE Tariff § I.2.2. 

 
Docket No. ER14-1050-000, et al. - 37 -

ii. Comments and Protests

92. Public Systems argue that ISO-NE’s proposal to treat risk premiums as a distinct 

component of de-list bids eliminates the Internal Market Monitor’s previous, welldefined formula for assessing risk, and replaces it with a vague and standard-less review 

of a resource’s risk documentation.98 They contend that ISO-NE’s proposal does not 

specify how the Internal Market Monitor will verify whether a resource’s risk premium is 

legitimate and will allow market participants to submit data that is not only “subject to 

bias” but also largely subjective and speculative. Connecticut, Rhode Island PUC, and 

United Illuminating argue that ISO-NE’s proposal creates challenges to effective 

detection and mitigation of market power necessary to protect consumers and, as a result, 

consumers will likely see increased costs.

99 They assert that the proposal limits the 

Internal Market Monitor’s pre-auction review of de-list bids100 and quadruples the 

dynamic bid threshold to $3.94, obligating customers to pay $1.527 billion in capacity 

charges. Therefore, Connecticut, Rhode Island PUC, and United Illuminating state that 

maintaining current review practices is essential to protect the market and capacity 

customers from attempts to exercise market power. They note that even the Internal 

Market Monitor has expressed concerns that a threshold higher than $1.00/kW-month 

could provide an opportunity to exercise market power.101

93. Entergy Nuclear states that if the Commission accepts ISO-NE’s proposal, it is

essential that generators can factor risk premiums into their capacity offers and that those 

risk premiums are not inappropriately mitigated by the Internal Market Monitor.

102

94. NextEra argues that if the Commission accepts ISO-NE’s proposal, it should 

require ISO-NE to modify the Internal Market Monitor’s proposed pivotal supplier test to 

98 Public Systems Comments at 26.

99 Connecticut, Rhode Island PUC, and United Illuminating Comments at 47.

100 Connecticut, Rhode Island PUC, and United Illuminating contend that, in prior 

proceedings, the market monitor assured the Commission that it had no expectation that it 

would be “overburdened in meeting its obligations” in conducting its pre-auction review. 

Connecticut, Rhode Island PUC, and United Illuminating Comments at 52-53 (citing ISO 

New England Inc., 135 FERC ¶ 61,029, at P 321 (2011)). 

101 Connecticut, Rhode Island PUC, and United Illuminating Comments at 50-51 

(citing ISO New England Inc., 135 FERC ¶ 61,029 at P 313).

102 Entergy Nuclear Comments at 9-10. 

 
Docket No. ER14-1050-000, et al. - 38 -

evaluate portfolios based on ownership and control, rather than the Lead Market 

Participant, because some Lead Market Participants submit supply offers that they do not 

control. NextEra asserts that the proposed pivotal supplier test could lead to over 

mitigation based on an errant finding that the Lead Market Participant is a pivotal 

supplier.

103 NextEra argues that under ISO-NE’s proposal, a capacity supplier may offer 

a resource’s capacity in blocks with different offer prices, but that this action could be 

perceived as physical or economic withholding, constituting a violation of the 

Commission’s anti-manipulation regulations in 18 C.F.R. Part 1c. NextEra thus seeks

confirmation that a capacity resource abiding by the rules of ISO-NE’s proposal will not 

be deemed in violation of the anti -manipulation regulations.104

iii. Answers

95. ISO-NE argues that NextEra’s protest regarding the pivotal supplier test should be 

rejected. ISO-NE explains that it has no access to underlying contractual relationships 

between Lead Market Participants and other entities with an interest in particular 

resources, and thus has no way to ascertain with certainty which entity has authority to 

determine the capacity supply offer price associated with a specific resource. 

Accordingly, ISO-NE explains, the only feasible approach to avoid the potential for 

masked market power is to consider all resources offered by the same Lead Market 

Participant as a portfolio in which the Lead Market Participant plays a potential role in 

the capacity supply offer pricing.105 

iv. Commission Determination

96. We find the bidding rules and market monitoring provisions in ISO-NE’s proposal 

to be a just and reasonable component of the two-settlement capacity market design 

adopted here. Therefore, we direct ISO-NE to submit those Tariff provisions as part of 

the compliance filing required within 45 days of the date of this order. ISO-NE’s 

proposal allows suppliers to include in their bids “[a]ny risk that can be quantified and 

analytically supported and that is not already reflected in the formula for net going 

forward costs.”106 As ISO-NE explains, ISO-NE’s proposal allows each company to 

103 NextEra Protest at 6-8.

104 NextEra Protest at 29-30.

105 ISO-NE March 3 Answer at 26-27.

106 Tariff, § III.13.1 Forward Capacity Auction Qualification (22.0.0), 

§ III.13.1.2.3.2.1.4.

 
Docket No. ER14-1050-000, et al. - 39 -

evaluate its risks using its own methodology, rather than following a single methodology 

dictated by the Internal Market Monitor, because calculating risk is more complex under 

ISO-NE’s proposal than under the existing FCM rules. We agree that this is appropriate 

given the complexity and company-specific nature of valuing performance risk.

97. We are not persuaded that this approach creates an overly vague standard of 

review or hinders the detection and mitigation of market power, as various protesters 

argue. Under ISO-NE’s proposal, market participants must provide “documentation 

separately detailing any risk premium included in the bid” and the documentation “should 

address all components of physical and financial risk reflected in the bid, including, for 

example, catastrophic events, a higher than expected amount of reserve deficiencies, and 

performing scheduled maintenance during reserve deficiencies.”107 As ISO-NE explains, 

the Internal Market Monitor will analyze a risk premium to determine whether it is 

(1) consistent with assumptions across the market participant’s portfolio and (2)

consistent with competitive market behavior, based on all market participants’ risk 

premiums. If the Internal Market Monitor is concerned about a particular risk premium, 

it may ask the market participant for additional information.

108

98. Because these types of risk premiums have not yet been analyzed by the Internal 

Market Monitor, there is necessarily uncertainty both in how suppliers will value the risks 

specific to this market design and how the Internal Market Monitor will assess those 

calculations. However, this uncertainty does not supplant or undermine ISO-NE’s stated 

standard of review, i.e., whether a market participant’s risk premiums reflect consistent 

assumptions and are consistent with competitive market behavior; rather it emphasizes 

the importance of assessing risk premiums across all market participants and 

communicating with those market participants about their risks. While risk valuation can 

be complex, it is by no means a new discipline, and we are persuaded that the types of 

performance risks under ISO-NE’s proposal can be adequately quantified and shown to 

be reasonable. We agree with ISO-NE that the risks associated with ISO-NE’s proposal 

appear to be “within the bounds of other risks routinely absorbed and priced by the 

financial community.”109 We further note that, as a competitive market design, ISO-NE’s 

proposal creates an incentive for resources to submit offers that accurately reflect their 

risks, rather than inflating them, in order to increase the likelihood that they will clear in 

107 Tariff, § III.13.1 Forward Capacity Auction Qualification (22.0.0), 

§ III.13.1.2.3.2.1.4. 

108 Tariff, § III.13.1 Forward Capacity Auction Qualification (22.0.0), 

§ III.13.1.2.3.2.1.1.

109 ISO-NE March 3, 2014 Answer at 14, Att. A at 5-23 (Mudge Testimony).

 
Docket No. ER14-1050-000, et al. - 40 -

the FCA. We expect that, as market participants and the Internal Market Monitor gain 

familiarity with the new market design and the number of competitive bids and risk 

premiums submitted and reviewed increases over time, the uncertainty concerning risk 

premiums that exist at the outset will diminish. 

99. We further disagree with NextEra that the Internal Market Monitor is likely to 

over-mitigate offers based on a Lead Market Participant’s submission of a supply offer 

for resources that it does not control. ISO-NE’s proposed tariff language states that Lead 

Market Participants will be evaluated for pivotal supplier status based on “the amount of 

capacity from all of the Existing Capacity Resources controlled by the Lead Market

Participant for the resource submitting the bid....”110 Based upon this Tariff language, a 

Lead Market Participant may seek to justify to the Internal Market Monitor that a 

resource for which it has submitted a supply offer is not under its control and may seek to 

have the capacity from such resource removed from the pivotal supplier test calculation. 

We agree with ISO-NE that because ISO-NE is not privy to a Lead Market Participant’s 

contractual arrangements with resource owners, it is impractical to expect the Internal 

Market Monitor to determine which entity other than the Lead Market Participant

exercises control over the resource. 

100. As to NextEra’s concern that a capacity supplier that offers its capacity in blocks 

with different offer prices due to different risk premiums may be found to be withholding 

capacity from the FCM, we cannot definitively conclude that such an action will never

constitute withholding. As noted above, we expect that a resource’s ability to offer its 

capacity in blocks provides an important opportunity for resources to manage their 

resources’ performance risk. However, as with any offer under ISO-NE’s proposal, the 

risk premium associated with a resource’s offer-blocks must be consistent with 

competitive market behavior and will accordingly be subject to review by the Internal 

Market Monitor as necessary. 

2. NEPOOL’s Reserve Constraint Penalty Factor Changes

a. NEPOOL’s Proposal

101. NEPOOL proposes to increase the current, system-wide Reserve Constraint 

Penalty Factor values for Thirty-Minute Operating Reserves from $500/MWh to 

$1,000/MWh and for Ten-Minute Non-Spinning Reserves from $850/MWh to 

$1,500/MWh.

111 NEPOOL states that the Reserve Constraint Penalty Factor serves as a 

110 Tariff, § III.13.1 Forward Capacity Auction Qualification (22.0.0), 

§ III.13.1.2.3.2

111 NEPOOL Transmittal at 9.

 
Docket No. ER14-1050-000, et al. - 41 -

price cap for the real-time price of each reserve product, and thus, its proposal to raise 

Reserve Constraint Penalty Factor levels would establish more efficient price signals to 

the marketplace during reserve shortages.112 NEPOOL further states that higher Reserve 

Constraint Penalty Factor levels will: (1) ensure that all Demand Response resources will 

be fully available to ISO-NE for real-time dispatch in order to maintain operating reserve 

levels; (2) attract more reserve resources to the market; (3) better encourage market 

participants to schedule in the Day-Ahead Energy Market and pursue other hedging 

activities to limit and manage their exposure to real-time prices; and (4) decrease the 

amount of total Net Commitment Period Compensation incurred.113 NEPOOL asserts 

that the use of Reserve Constraint Penalty Factors to set efficient prices during operating 

reserve shortages has been endorsed by the Commission.114

i. Comments and Protests

102. Maine PUC and Consumer Advocates state that they support an increase to the 

Reserve Constraint Penalty Factors because it appropriately encourages price-responsive 

demand and will avoid the high risk premiums of ISO-NE’s proposal.115 NEPOOL 

counters ISO-NE’s criticisms that the proposed Reserve Constraint Penalty Factors

increase is an order of magnitude too small by stating that its proposal is not designed to 

mimic the effect of the ISO-NE proposal but is adequate to enhance economic incentives 

in the real-time markets.116

103. GDF SUEZ argues that increasing Reserve Constraint Penalty Factors will only 

exaggerate the inefficiency of the existing Peak Energy Rent deduction. GDF SUEZ 

contends that even under existing scarcity pricing provisions, real-time energy prices 

generally exceed the Peak Energy Rent proxy rate and result in the Peak Energy Rent 

112 NEPOOL Transmittal at 9-10.

113 NEPOOL Transmittal at 10-11.

114 NEPOOL Transmittal at 10 (citing Wholesale Competition in Regions with 

Organized Elec. Markets, Order No. 719, 73 Fed. Reg. 64,100 (2008), FERC Stats. & 

Regs. ¶ 31,281 (2008)).

115 Maine PUC Protest at 18-19 and Consumer Advocates Comments at 4-5, 12. 

116 NEPOOL Comments at 28.

 
Docket No. ER14-1050-000, et al. - 42 -

deduction from capacity revenues equivalent to a significant portion of the real-time 

energy price.117 

104. Massachusetts DPU and New Hampshire PUC oppose NEPOOL’s proposed

increases to the Reserve Constraint Penalty Factors because they believe it would result 

in higher prices and increased volatility in the hourly energy prices and volatility in the 

total procurement costs from year to year without providing a way for customers to 

appropriately respond to those price signals, and because it would likely make financing

new generation more difficult.118 In addition, Indicated Generators state that the Reserve 

Constraint Penalty Factor changes will not address load under-scheduling in the dayahead market.119

ii. Answers

105. Dominion contends that with the offer flexibility changes,

120 as well as the 

Reserve Constraint Penalty Factor changes proposed by NEPOOL, significantly higher 

real-time locational marginal prices during constrained or reserve shortage conditions 

will provide very strong incentives for gas-fired resources to make sure they have backup fuel provisions in place.121

106. ISO-NE argues that NEPOOL has provided no explanation or justification for the 

proposed Reserve Constraint Penalty Factor increases and no analysis attempting to 

demonstrate that these proposed adders will have any useful effect on investment in 

reliability.122 ISO-NE states that higher energy prices during scarcity conditions due to 

increases in the Reserve Constraint Penalty Factor values could have similar effects on 

suppliers’ incentives, but only if the higher energy market prices are of a comparable 

magnitude to the Pay for Performance incentives. ISO-NE asserts that the Reserve 

117 GDF SUEZ Comments at 18-19.

118 Massachusetts DPU and New Hampshire PUC Comments at 17. 

119 Indicated Generators Comments at 34-35.

120 Dominion explains that the offer flexibility changes include the opportunity to 

make intra-day hourly re-offers, and notes that these measures are designed to ensure that 

offers are not “stale.” Dominion Answer at 4.

121 Dominion Answer at 5. 

122 ISO-NE February 12 Answer at 6-7.

 
Docket No. ER14-1050-000, et al. - 43 -

Constraint Penalty Factor increases are insufficient to cover the costs needed to retrofit 

any existing gas-fired resources in ISO-NE’s fleet with dual-fuel capability.

123

iii. Commission Determination

107. We find that NEPOOL’s proposed Reserve Constraint Penalty Factors in 

combination with ISO-NE’s proposal, as modified, represent a just and reasonable 

solution to the region’s resource performance problems. Accordingly, we will direct 

ISO-NE to submit as part of the compliance due within 45 days of the date of this order

Tariff revisions increasing the Reserve Constraint Penalty Factors for 30-Minute 

Operating Reserves, from $500/MWh to $1,000/MWh, and 10-Minute Non-Spinning 

Reserves, from $850/MWh to $1,500/MWh.

108. ISO-NE acknowledges that increasing the Reserve Constraint Penalty Factors 

could help incent performance but argues that NEPOOL’s proposed increases are

insufficient to address the region’s resource performance problems. However, the 

Reserve Constraint Penalty Factor changes are not intended to be a complete panacea to 

the region’s resource performance problems, but rather part of a comprehensive solution

that will enhance performance incentives in the near-term until ISO-NE’s proposal, as 

adopted here, begins impacting real-time performance. While Massachusetts DPU and 

New Hampshire PUC argue that the Reserve Constraint Penalty Factor changes could 

increase price volatility through a price signal to which consumers have no way to 

respond, we find it to be part of a just and reasonable solution, given the urgency of the 

reliability concerns facing the New England region and the incremental nature of the 

increases to the Reserve Constraint Penalty Factors. Further, we direct ISO-NE to 

implement both the Reserve Constraint Penalty Factors and the two-settlement FCM 

design because we find that there is value to providing incentives in both the FCM and 

the energy and ancillary services markets. This is because different combinations of 

revenue streams make sense for different resources. 

109. Additionally, because the immediacy of energy market price signals provides 

strong incentives to gas-fired generators to bolster fuel availability, the Reserve 

Constraint Penalty Factor changes should help address in the near-term the gas-electric 

coordination issues that have contributed to resource non-performance.

124 In other 

words, resources will be incentivized to ensure they are deliverable during a Capacity 

123 ISO-NE February 12 Answer at 33, Test. of Paul Hibbard and Todd Schatzki 

at 10. 

124 ISO New England Inc. and New England Power Pool, 145 FERC ¶ 61,014 

(2013).

 
Docket No. ER14-1050-000, et al. - 44 -

Scarcity Condition due to the Reserve Constraint Penalty Factor changes going into effect 

immediately.

110. As discussed above, because the increased Reserve Constraint Penalty Factors 

may impact specific elements of ISO-NE’s proposal, we will also direct ISO-NE to 

submit as part of its compliance filing due within 45 days of the date of this order either 

Tariff revisions reflecting any adjustments that it believes are necessary in light of the 

Commission’s decision to implement Reserve Constraint Penalty Factor changes, or an 

explanation as to why no such adjustments are necessary. With respect to GDF SUEZ’s 

concern regarding the interaction of the increased Reserve Constraint Penalty Factors and 

the Peak Energy Rent mechanism, we dismiss its comments as beyond the scope of this 

proceeding. The potential inefficiency that GDF SUEZ protests exists independent of, 

and is not impacted by, the increase to the Reserve Constraint Penalty Factors. The 

purpose of increasing the Reserve Constraint Penalty Factors is to increase performance 

incentives, which can be provided in the form of either rewards or penalties, depending 

on whether the resource has been scheduled in the day-ahead market. However, the Peak 

Energy Rent deduction does not affect the incremental incentives to produce energy, 

because a resource’s Peak Energy Rent deduction will be the same whether or not it 

produces energy.

111. In cases where, as here, the Commission institutes a proceeding under section 206, 

section 206(b) of the FPA requires that the Commission establish a refund effective date 

that is no earlier than publication of notice of the Commission’s initiation of its 

proceeding in the Federal Register, and no later than five months subsequent to that date. 

We establish a refund date to be the earliest date possible in order to provide maximum 

protection to customers, i.e., the date that notice of initiation of the section 206 

proceeding in Docket No. EL14-52-000 is published in the Federal Register. 

The Commission orders:

(A) ISO-NE’s proposal and NEPOOL’s proposal are hereby rejected, as discussed in 

the body of this order.

(B) Pursuant to the authority contained in and subject to the jurisdiction conferred 

upon the Commission by section 402(a) of the Department of Energy Organization Act 

and by the FPA, particularly section 206 thereof, and pursuant to the Commission’s Rules 

of Practice and Procedure and the regulations under the FPA (18 C.F.R., Chapter 1), the 

Commission hereby institutes a proceeding in Docket No. EL14-52-000, as discussed in 

the body of this order.

(C) ISO-NE is hereby directed to submit a compliance filing within 45 days of the date 

of this order, as discussed in the body of this order.
Docket No. ER14-1050-000, et al. - 45 -

(D) The Secretary shall promptly publish in the Federal Register a notice of the 

Commission’s initiation of the proceeding ordered in Ordering Paragraph (B) above, 

under section 206 of the FPA. 

(E) The refund effective date established pursuant to section 206 (b) of the FPA will 

be the date of publication in the Federal Register of the notice discussed in Ordering 

Paragraph (E) above. 

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.
Docket No. ER14-1050-000, et al. - 46 -

Appendix A – Interventions, Comments, and Protests

# - Denotes Notice of Intervention rather than Motion to Intervene.

* - Denotes filing made out-of-time.

^ - Denotes filing of a subsequent errata or supplemental pleading.

Interventions

Algonquin Gas Transmission, LLC Consolidated Edison Energy, Inc. and 

Consolidated Edison Solutions, Inc.

America’s Natural Gas Alliance

Dept. of Public Utilities of the 

Commonwealth of Massachusetts and the 

State of New Hampshire Public Utilities 

Commission #

American Wind Energy Association *

Dominion Resources Services, Inc., on 

behalf of Dominion Energy Marketing, 

Inc., Dominion Energy Manchester Street, 

Inc., and Dominion Nuclear Connecticut, 

Inc.

Attorney General for the State of 

Connecticut *

Dynegy Marketing and Trade, LLC, and 

Casco Bay Energy Company, LLC

Bay State Gas Company, The Berkshire 

Gas Co., EnergyNorth Natural Gas, Inc., 

City of Holyoke, Massachusetts Gas and 

Electric Department, Northern Utilities, 

The Southern Conn. Gas Company, 

Westfield Gas & Electric Dept., and 

Fitchburg Gas and Electric Light Company 

Eastern Massachusetts Consumer-Owned 

Systems

Brookfield Energy Marketing LP Energy Management Inc.

Calpine Corporation EnerNOC, Inc.

Connecticut Municipal Electric Energy 

Cooperative, Massachusetts Municipal 

Wholesale Electric Company, New 

Hampshire Electric Cooperative, Inc., 

Vermont Public Power Supply Authority, 

and Vermont Electric Cooperative

Entergy Nuclear Power Marketing, LLC

Connecticut Public Utilities Regulatory 

Authority and motion to intervene by the 

Commissioner of the Connecticut 

Department of Energy and Environmental 

Protection #

EquiPower Resource Management, LLC
Docket No. ER14-1050-000, et al. - 47 -

Interventions, cont.

Essential Power, LLC, Essential power 

Newington, LLC, and Essential Power 

Massachusetts, LLC

New England Power Generators 

Association, Inc. and the Electric Power 

Supply Association

Exelon Corporation New England States Committee on 

Electricity

First Wind Energy, LLC New Hampshire Office of Consumer 

Advocate

GDF SUEZ Energy Marketing NA, Inc. NextEra Energy Resources, LLC ^

H.Q. Energy Services (U.S.) Inc. Northeast Energy Efficiency Partnerships, 

Inc.

Industrial Energy Consumer Group Northeast Utilities Service Company

Iroquois Gas Transmission System, L.P.

NRG Power Marketing LLC, GenOn 

Energy Management, LLC, Connecticut Jet 

Power LLC, Devon Power LLC, 

Middletown Power LLC, Montville Power 

LLC, Norwalk Power LLC, NRG Canal 

LLC, NRG Kendall LLC and Energy 

Curtailment Specialists Inc.

Long Island Power Authority Potomac Economics *

Maine Public Advocate Office

PSEG Power LLC, PSEG Power 

Connecticut LLC and PSEG Energy 

Resources & Trade LLC.

Maine Public Utilities Commission # Renewable Energy New England, Inc.

Maritimes & Northeast Pipeline, L.L.C. Repsol Energy North America Corporation

Massachusetts Attorney General Rhode island Public Utilities Commission #

Massachusetts Electric Company, 

Nantucket Electric Company and 

Narragansett Electric Company d/b/a 

National Grid

Tennessee Gas Pipeline Company, L.L.C.

Millennium Power Partners, L.P. TransCanada Power Marketing Ltd.*

Natural Gas Supply Association United Illuminating Company

NEPOOL Industrial Customer Coalition Vermont Department of Public Service
Docket No. ER14-1050-000, et al. - 48 -

Interventions, cont.

Vermont Public Service Board #

Verso Paper Corp.

Vitol Inc.

Comments and Protests

America’s Natural Gas Alliance (ANGA)

Connecticut Public Utilities Regulatory 

Authority, Connecticut Office of Consumer 

Counsel, Attorney General for the State of 

Connecticut, Connecticut Department of 

Energy and Environmental Protection, the 

United Illuminating Company and the 

Rhode Island Public Utilities Commission

(Connecticut, Rhode Island PUC, and 

United Illuminating)

American Wind Energy Association 

(AWEA) *

Department of Public Utilities of the 

Commonwealth of Massachusetts and the 

State of New Hampshire Public Utilities 

Commission (Massachusetts DPU and New 

Hampshire PUC)

Brookfield Energy Marketing LP 

(Brookfield)

Dominion Resources Services, Inc., on 

behalf of Dominion Energy Marketing, 

Inc., Dominion Energy Manchester Street, 

Inc., and Dominion Nuclear Connecticut, 

Inc. (Dominion)

Connecticut Municipal Electric Energy 

Cooperative, Massachusetts Municipal 

Wholesale Electric Company, New 

Hampshire Electric Cooperative, Inc., 

Vermont Public Power Supply Authority, 

and Vermont Electric Cooperative (Public 

Systems)

Eastern Massachusetts Consumer-Owned 

Systems (EMCOS)

Conn. Office of Consumer Counsel, Maine 

Office of the Public Advocate, Mass.

Office of the Attorney General, and the 

New Hampshire Office of Consumer 

Advocate (Consumer Advocates)

Energy Management, Inc. (Energy 

Management)
Docket No. ER14-1050-000, et al. - 49 -

EnerNOC, Inc. (EnerNOC)

Massachusetts Electric Company, 

Nantucket Electric Company and 

Narragansett Electric Company d/b/a 

National Grid (National Grid)

Entergy Nuclear Power Marketing, LLC

(Entergy Nuclear) Natural Gas Supply Association (NGSA)

Exelon Corporation, EquiPower Resources 

Management, LLC, Essential Power, LLC, 

Dynegy Marketing and Trade, LLC and 

Casco Bay Energy Company, LLC

(Indicated Generators)

New England Power Generators 

Association, Inc. and the Electric Power 

Supply Association (NEPGA and EPSA)

GDF SUEZ Energy Marketing NA, Inc.

(GDF SUEZ)

New England States Committee on 

Electricity (NESCOE)

H.Q. Energy Services (U.S.) Inc. (HQUS) NEPOOL Participants Committee

(NEPOOL)

Industrial Energy Consumer Group

(Industrial Energy Consumers)

Algonquin Gas Transmission, LLC, 

Iroquois Gas Transmission System, L.P., 

Maritimes & Northeast Pipeline, L.L.C., 

Portland Natural Gas Transmission System, 

and Tennessee Gas Pipeline Company, 

L.L.C.; National Grid; Northeast Gas 

Association; New England Local 

Distribution Companies (Bay State Gas 

Company, d/b/a Columbia Gas of 

Massachusetts; The Berkshire Gas 

Company; EnergyNorth Natural Gas, Inc., 

d/b/a Liberty Utilities; Connecticut Natural 

Gas Corporation; Fitchburg Gas and 

Electric Light Company; City of Holyoke, 

Massachusetts Gas and Electric 

Department; Northern Utilities, Inc.; The 

Southern Connecticut Gas Company; and 

Westfield Gas & Electric Department); 

Repsol Energy North America, and GDF 

Suez Gas North America (New England 

Natural Gas Industry)

Maine Public Utilities Commission (Maine 

PUC)

NextEra Energy Resources, LLC 

(NextEra) ^

Northeast Energy Efficiency Partnerships, 

Northeast Utilities Companies, Vermont 

Energy Investment Corporation, and 

Environment Northeast (Energy Efficiency 

Stakeholders)
Docket No. ER14

-1050-000, et al.- 50 -

Northeast Utilities Service Company, on 

behalf of the Northeast Utilities Companies 

The Northeast Utilities Companies are The 

Connecticut Light and Power Company, 

Western Massachusetts Electric Company, 

Public Service Company of New 

Hampshire, and NSTAR Electric Company

(Northeast Utilities)

NRG Power Marketing LLC, GenOn

Energy Management, LLC, Connecticut Jet 

Power LLC, Devon Power LLC, 

Middletown Power LLC, Montville Power 

LLC, Norwalk Power LLC, NRG Canal 

LLC, and Energy Curtailment Specialists 

Inc. (NRG) ^

Potomac Economics (External Market 

Monitor)

PSEG Power LLC, PSEG Power 

Connecticut LLC and PSEG Energy 

Resources & Trade LLC. (PSEG)

Renewable Energy New England, Inc. and 

First Wind Energy, LLC(Renewable 

Energy New England and First Wind)

The United Illuminating Company (United 

Illuminating)

United States Senate 

Vermont Department of Public Service and 

Vermont Public Service Board (Vermont 

Agencies)