[Federal Register Volume 80, Number 39 (Friday, February 27, 2015)]
[Notices]
[Pages 10676-10681]
[FR Doc No: 2015-04119]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL15-37-000]

Order Instituting Section 206 Proceeding and Directing Filing To
Establish Reliability Must Run Tariff Provisions: New York Independent
System Operator, Inc

    Before Commissioners: Cheryl A. LaFleur, Chairman; Philip D.
Moeller, Tony Clark, Norman C. Bay, and Colette D. Honorable.

    1. The Commission, pursuant to section 206 of the Federal Power Act
(FPA),\1\ takes action through this order to address a recurring issue
in the wholesale markets administered by the New York Independent
System Operator, Inc. (NYISO). NYISO, as the

independent system operator, is responsible for efficiently and
reliably administering the resources and transmission facilities under
its control. As with certain other regions of the country, NYISO is
facing challenges with temporarily retaining certain generation
resources needed to ensure reliable transmission service until more
permanent reliability solutions are in place. This has manifested
itself in proceedings before this Commission initiated by generation
resources that had sought to deactivate \2\ but were determined to be
needed for reliability by the New York Public Service Commission (New
York Commission). These generation resources sought this Commission's
approval of agreements under which the generation resources would
continue to operate and recover costs that would not otherwise be
recovered through generator sales of energy, capacity and ancillary
services in NYISO's markets. The services provided under these
agreements, commonly referred to as ``must run'' or ``reliability must
run'' (RMR) services,\3\ provide for the retention of generation units
wishing to deactivate, often because they have become uneconomic, but
which are needed for transmission system reliability. NYISO was not a
party to any of the agreements or applications filed for approval.
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    \1\ 16 U.S.C. 824e (2012).
    \2\ For purposes of this order, references to generator
``deactivation'' encompass generator retirements, mothballing, or
any other long-term outages or suspension of service.
    \3\ The services are designated as RMR or ``Reliability Support
Services'' (RSS) in the various agreements. We will generally refer
to such services as RMR services here.
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    2. Given the foregoing, the Commission is concerned that NYISO's
Market Administration and Control Area Services Tariff (NYISO Tariff)
is unjust and unreasonable. Although NYISO is the entity responsible
for providing open access transmission service on the New York
transmission system and ensuring the reliability and efficiency of that
transmission service,\4\ the NYISO Tariff lacks provisions governing
the rates, terms and conditions for RMR service. While the Commission
has repeatedly stated that our jurisdictional markets should utilize
market mechanisms to ensure that the resulting rates are just and
reasonable,\5\ the Commission has also recognized that short-term
remedies, such as RMR agreements, may be appropriate in certain
circumstances to address an immediate problem at hand. Indeed, pursuant
to our authority under the FPA, the Commission has accepted tariff
provisions filed by other independent system operators (ISOs) and
regional transmission organizations (RTOs) to implement and govern RMR
service.\6\ In doing so, the Commission has emphasized that RMR
agreements should be of a limited duration so as to not perpetuate out-
of-market solutions that have the potential, if not undertaken in an
open and transparent manner, to undermine price formation.\7\
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    \4\ Article 2.01 of the ISO/TO Agreement, which governs the
relationship between NYISO and its transmission owners, explains
that NYISO has operational control over certain transmission
facilities, while Transmission Owners have responsibility for the
operation of Local Area Transmission System Facilities. It further
explains that such operation by each Transmission Owner shall not
compromise the reliable and secure operation of the New York State
Transmission System, and that each Transmission Owner shall promptly
comply to the extent practicable with a request from the NYISO to
take action with respect to coordination of the operation of its
Local Area Transmission System Facilities.
    \5\ PJM Interconnection, LLC, 110 FERC ] 61,053, at P 31 (2005)
(``market clearing prices that reflect [reliability] costs better
support efficient consumption and investment decisions''). See also,
ISO New England, Inc., 148 FERC ] 61,179 (2014), order on
clarification, 150 FERC ] 61,029, at P 10 (2015) (if future winter
reliability program is found to be necessary, it must be a market-
based, rather than out-of-market, solution); ISO New England, Inc.,
144 FERC ] 61,204, at P 42 (2013), reh'g denied, 147 FERC ] 61,026
(2014) (market-based solutions preferable to out-of-market solutions
to address winter reliability issues); See Midwest Indep.
Transmission Sys. Operator, Inc., 108 FERC ] 61,163 at n. 226 (``The
Commission favors market design remedies, where possible, to provide
needed revenues to support reliability-based generators and other
needed investments''), reh'g denied, 109 FERC ] 61,157 (2004); see
also Midwest Indep. Transmission Sys. Operator, Inc., 140 FERC ]
61,237, at P 63 (2012), order on compliance, 148 FERC ] 61,056, at P
42 (2014).
    \6\ See, e.g., PJM Interconnection, L.L.C., 107 FERC ] 61,112,
at P 8 (2004); Calif. Indep. Sys. Operator Corp., 138 FERC ] 61,112
(2012); Calif. Indep. Sys. Operator Corp., 134 FERC ] 61,211 (2011);
ISO New England, Inc. 125 FERC 61,102, order on clarification, 125
FERC ] 61,234 (2008), order denying reh'g, 130 FERC ] 61,089 (2010);
Midwest Indep. Transmission Sys. Operator, Inc., 140 FERC ] 61,237
(2012).
    \7\ See, e.g., PJM Interconnection, L.L.C., 107 FERC ] 61,112,
at PP 20-21 (2004); Midwest Indep. Transmission Sys. Operator, Inc.,
108 FERC ] 61,163, at P 368, reh'g denied, 109 FERC ] 61,157 (2004)
(RMR program is backstop measure designed to meet short-term
reliability need).
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    3. As further discussed below, the provision of RMR services has
been an ongoing concern in NYISO's markets. Accordingly, to ensure the
proper and efficient operation of NYISO's markets, we find that NYISO
should have on file the rates, terms, and conditions for RMR service.
Without such provisions, there is no assurance that generation
resources will be treated on a not unduly discriminatory basis and have
the opportunity to collect compensatory rates without a protracted
proceeding. The uncertainty created for resources by the lack of clear
tariff provisions has the potential to exacerbate the very concerns an
RMR service is meant to address--ensuring the continued reliable and
efficient operation of the grid, and of NYISO's markets.\8\ NYISO is
uniquely positioned to assess the need for RMR service and the
appropriate entity to assess the potential impacts RMR agreements may
have on its markets in New York. Thus, NYISO should be the entity that
administers RMR service in New York, and should do so pursuant to the
provisions of its Commission-jurisdictional Tariff required by this
order to be filed with the Commission.
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    \8\ See 16 U.S.C. 824(b)(1) (2012) (the FPA gives the Commission
jurisdiction over ``the transmission of electric energy in
interstate commerce and . . . the sale of electric energy at
wholesale in interstate commerce'').
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    4. As discussed below, NYISO's Tariff is unjust and unreasonable
because it does not contain provisions governing the retention of and
compensation to generating units needed for reliability. The
Commission, pursuant to section 206 of the FPA, will require NYISO to
submit to the Commission within 120 days of the date of this order
fully supported proposed tariff provisions governing the retention of
and compensation to generating units required for reliability,
including procedures for designating such resources, the rates, terms
and conditions for RMR service, provisions for the allocation of costs
of RMR service, and a pro forma service agreement for RMR service.\9\
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    \9\ The Commission is acting on two filings concerning
agreements for RMR service in NYISO concurrently with this order in
Docket Nos. ER12-2237-002 and ER13-405-000.
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I. Background

    5. Multiple filings have been made by generators that had applied
to the New York Commission to mothball certain facilities but which
were determined to be needed for transmission system reliability. These
generators then pursued agreements to provide RMR-type service for a
limited term until permanent solutions to transmission system
reliability issues are addressed by transmission upgrades. The range of
RMR-type services to be provided by these units were substantially
similar, but involved a number of different agreements some of which
were filed at the Commission and others at the New York Commission.
    6. Specifically, on July 12, 2012, pursuant to FPA section 205,\10\
Dunkirk Power LLC (Dunkirk) filed in Docket No. ER12-2237-000, an
unexecuted RMR agreement with cost-of-service pricing net of revenues,
under which Dunkirk would provide RMR service to

Niagara Mohawk Power Corporation d/b/a National Grid (National Grid)
from two of Dunkirk's generation units.\11\ Concurrently, however,
Dunkirk had been engaged in negotiations with National Grid for the
same type of services for the same units but with different
compensation provisions. Dunkirk filed a ``Term Sheet'' summarizing the
RSS agreement (RSSA) with the New York Commission on July 20, 2012.
Accordingly, Dunkirk submitted a request on August 1, 2012, for the
Commission to hold the RMR proceeding in abeyance to provide the New
York Commission time to review the Term Sheet for the RSSA. On August
16, 2012, the New York Commission approved the Dunkirk/National Grid
RSSA Term Sheet. On August 22, 2012, Dunkirk filed a further request
that the Commission hold the RMR proceeding in abeyance indefinitely to
provide time for the parties to execute a final contract and for any
subsequent New York Commission order to issue.\12\
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    \10\ 16 U.S.C. 824d (2012).
    \11\ Dunkirk Filing, Docket No. ER12-2237-000, at 1 (filed July
12, 2012).
    \12\ On March 4, 2013, National Grid and Dunkirk entered into a
second RSSA (2013 Dunkirk RSSA) to cover the period following
termination of the August 2012 RSSA. On May 20, 2013, the New York
Commission approved the 2013 Dunkirk RSSA. Petition of Dunkirk Power
LLC and NRG Energy, Inc. for Waiver of Generator Retirement
Requirements--Order Deciding Reliability Need Issues and Addressing
Cost Allocation and Recovery, Case 12-E-0136 (New York Public
Service Commission, May 20, 2013.
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    7. On March 29, 2013, National Grid proposed in Docket No. ER13-
1182-000 to amend certain components of its Wholesale Transmission
Service Charge formula under Attachment H of the NYISO Tariff to
incorporate the costs it incurs pursuant to the above-described RSSAs
covering the Dunkirk services as approved by the New York Commission.
National Grid proposed to add a new item, ``Reliability Support
Services Expense,'' that would have included expenses incurred pursuant
to agreements entered into with generators or other similar resources
for the purpose of supporting transmission reliability. On August 30,
2013, noting protestors' arguments about the unique rate and
reliability implications inherent in National Grid's proposed
revisions, the Commission rejected National Grid's filing, without
prejudice to National Grid making a new filing under FPA section 205
providing additional support for recovery of RSS costs. The Commission
found that the proposed formula rate revisions would essentially
establish a placeholder that would allow the future pass-through of RSS
costs. In order for the Commission to approve such a pass-through, the
Commission explained that National Grid would, at a minimum, need to
file any underlying RSSAs for Commission review, and support the
proposed rates.\13\ On December 6, 2013, in Docket No. ER14-543-000,
National Grid filed different revised provisions to its Wholesale
Transmission Service Charge formula to pass through RSS costs and
included the two RSSAs pursuant to the Commission's directive. On
February 4, 2014, the Commission accepted and suspended National Grid's
revisions, and made them effective subject to refund and further
order.\14\
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    \13\ New York Independent System Operator, Inc., 144 FERC ]
61,172, at P 39 (2013).
    \14\ New York Independent System Operator, Inc., 146 FERC ]
61,065 (2014).
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    8. Similar to Dunkirk, Cayuga Operating Company, LLC (Cayuga)
sought approval from the New York Commission to mothball its generation
units, but it was determined that its units are needed for transmission
system reliability. On November 16, 2012, pursuant to FPA section 205,
Cayuga filed an unexecuted RMR agreement with the Commission under
which Cayuga would provide RMR service to New York State Electric & Gas
Corporation (NYSEG). This agreement was based on cost-of-service rates
less the revenues earned by Cayuga from the sale of energy, capacity
and ancillary services in the NYISO markets. In the meantime, similar
to Dunkirk, Cayuga was in negotiations with NYSEG for an RSSA and filed
a ``Term Sheet'' with the New York Commission summarizing the proposed
RSSA, which differed from its FPA section 205 RMR agreement only as to
the rate. Cayuga also requested that the Commission hold Cayuga's RMR
filing in abeyance until Cayuga notified it to do otherwise.\15\
Following the New York Commission's December 17, 2012 order approving
the RSSA Term Sheet and directing the parties to execute and
subsequently file the RSSA with the New York Commission,\16\ Cayuga
submitted an expedited motion for the Commission to hold the RMR
proceeding in abeyance until further notice.\17\ On February 28, 2013,
Cayuga filed a motion to withdraw its FPA section 205 RMR filing as
moot on the grounds that it would never make sales to NYSEG under the
RMR agreement it had filed with the Commission, but, rather, any sales
would be pursuant to the RSSA that NYSEG filed with the New York
Commission.\18\
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    \15\ Cayuga Transmittal, Docket No. ER13-405-000, at 4 (filed
Nov. 16, 2012).
    \16\ Petition of Cayuga Operating Company, LLC to Mothball
Generating Units 1 and 2, Case 12-E-0400, New York Public Service
Commission, (issued and effective December 17, 2012).
    \17\ Cayuga Expedited Motion to Hold Proceeding in Abeyance,
Docket No. ER13-405-000, at 2 (filed Dec. 31, 2012).
    \18\ Cayuga Expedited Motion to Withdraw Filing, Docket No.
ER13-405-000, at 3 (filed Feb. 28, 2013).
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II. Discussion

    9. As noted above,\19\ NYISO's having on file rates, terms and
conditions for RMR service is fundamental to the proper and efficient
operation of NYISO's markets. Without such provisions, there is no
assurance that generation resources will be treated on a not unduly
discriminatory basis and have the opportunity to collect compensatory
rates without a protracted proceeding. Thus, pursuant to FPA section
206, the Commission finds that the omission of procedures in the NYISO
Tariff governing the rates, terms, and conditions of FERC-
jurisdictional RMR service needed to ensure reliable transmission
service renders the NYISO Tariff unjust and unreasonable and inadequate
to prevent undue discrimination among similarly-situated resources. The
uncertainty created for resources by the lack of clear tariff
provisions has the potential to exacerbate the very concerns an RMR
service is meant to address--ensuring the continued reliable and
efficient operation of the grid, and of NYISO's markets. NYISO, as the
independent system operator in New York, is uniquely positioned to
assess the need for RMR service. Moreover, given its role, NYISO is the
appropriate entity to assess the potential impacts RMR agreements may
have on its markets in New York. Therefore, NYISO should be the entity
that administers RMR service in New York, pursuant to the provisions of
its Commission-jurisdictional Tariff required by this order to be filed
with the Commission.
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    \19\ See supra note 8 and accompanying text.
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    10. NYISO has filed status reports on matters concerning RMR
service and compensation for nearly four years now and there has been
no consensus regarding tariff provisions governing compensation for
generators needed for reliability.\20\ The Commission thus has no
expectation of NYISO and its stakeholders addressing the matter on
their own. Yet, the need for RMR service remains as evidenced by the
aforementioned cases, and NYISO, as the independent system operator is
responsible for efficiently and reliably administering the resources
under its

control, particularly including the generation resources needed to
ensure reliable transmission service.
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    \20\ NYISO Eighth Informational Report on Efforts to Develop
Rules Addressing Compensation to Generators that Are Determined to
be Needed for Reliability, Docket No. ER10-2220-000, at 2 (filed
Sep. 23, 2014).
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    11. If left unresolved, uncertainty regarding NYISO's RMR
procedures and compensation policies could undermine NYISO's access to
generation units needed for reliability. That is, in the absence of
tariff provisions that would allow NYISO to secure RMR services, NYISO
may not be able to ensure both that there is indeed adequate
generation, and at the appropriate locations, to ensure reliable and
efficient operations, and that such generation is adequately
compensated so that it will be available when needed. NYISO's inability
to secure adequate RMR services could impede its ability to ensure the
reliable and efficient operation of the electric grid and its markets.
Therefore, pursuant to FPA section 206, we direct NYISO to submit
proposed tariff provisions setting forth its proposals to establish an
appropriate RMR process in the NYISO tariff. The filing should consist
of fully supported proposed tariff provisions governing the retention
of and compensation to generating units required for reliability,
including procedures for designating such resources, the rates, terms
and conditions for RMR service, provisions for the allocation of costs
of RMR service, and a pro forma service agreement for RMR service.\21\
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    \21\ However, the Commission clarifies that NYISO's RMR proposal
will not require Dunkirk to enter into new pro forma agreements for
the 2012 and 2013 RSS agreements or for Cayuga to enter into new pro
forma agreements for the Cayuga RSSA-1 and RSSA-2 agreements
referenced above. The Commission also notes that the costs at issue
in the Niagara Mohawk Power Corp. filing in Docket No. ER14-543-000,
related to the 2012 and 2013 Dunkirk RSSAs, remain pending before
the Commission in Docket No. ER14-543-000.
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    12. In order to assist NYISO in the development of a compliance
proposal, the Commission provides general guidance on the elements that
should be addressed by NYISO.\22\ NYISO's proposal should be consistent
with this general guidance.\23\
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    \22\ In its evaluation of what to include in its submission, we
encourage NYISO to consider the RMR tariff provisions of other RTOs/
ISOs. However, we recognize that there may be reasons to allow
variation among RTOs/ISOs, so we will not at this time direct NYISO
to adopt any particular mechanism. See PJM Interconnection, LLC, 112
FERC ] 61,031, at P 21 (2005) (PJM's procedures need not precisely
match procedures of another ISO).
    \23\ NYISO, however, is not limited to filing proposed tariff
provisions that meet the general guidance provided in this order.
NYISO's compliance filing may contain additional provisions as long
as they are fully supported and are shown to be just and reasonable
and not unduly discriminatory.
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A. RMR Process

    13. As an initial matter, as part of its RMR mechanism, NYISO
should include Tariff provisions governing the schedule by which a
generation owner must notify NYISO that it intends to deactivate.\24\
These provisions should also include a clear timeline by which NYISO
will notify the generation owner that its unit is required for
reliability, or, alternatively, determine that the deactivation will
not impact reliability and the unit can be deactivated as planned.\25\
Provisions establishing a schedule by which a generator must notify
NYISO of deactivation and clear timelines for action will ensure that
NYISO, generation owners, all relevant transmission owners, and other
concerned parties have sufficient time to plan and implement the
reliability solutions necessary to address any identified reliability
issue, which may ultimately mitigate the need for an RMR designation.
In this regard, NYISO should describe the process for conducting the
reliability analyses necessary to determine that there is a reliability
need for the unit. NYISO may elect to address these requirements by
expanding upon its OATT Attachment Y planning process, or developing
another process as it deems appropriate for inclusion in the NYISO
Tariff. We believe it is appropriate to require the NYISO Tariff to
provide transparency with respect to such timelines, processes, and
schedules, not just for the practical administration of the NYISO
Tariff, but also to help ensure that there is no undue discrimination
or preference in the handling of RMR service and agreements pursuant to
the NYISO Tariff.
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    \24\ See, e.g., Midcontinent Independent System Operator, Inc.
(MISO), FERC Electric Tariff 38.2.7 (requiring 26 weeks' notice);
PJM Interconnection, LLC (PJM), FERC Electric Tariff Part V Section
113.1 (requiring 90 days' notice); California Independent System
Operator Corp. (CAISO) FERC Electric Tariff, Section 43 (requiring
180 days' notice). See generally, Calif. Indep. Sys. Operator Corp.,
138 FERC ] 61,112 (2012); Calif. Indep. Sys. Operator Corp., 134
FERC ] 61,211 (2011); ISO New England, Inc. 125 FERC 61,102, order
on clarification, 125 FERC ] 61,234 (2008), order denying reh'g, 130
FERC ] 61,089 (2010); Midwest Indep. Transmission Sys. Operator,
Inc., 140 FERC ] 61,237, at P 18 (2012).
    \25\ See, e.g., Calif. Indep. Sys. Operator Corp., 134 FERC ]
61,211 (2011); Midwest Indep. Transmission Sys. Operator, Inc., 140
FERC ] 61,237, at P 18 (2010); PJM Interconnection, L.L.C., 112 FERC
] 61,031, at P 31 (2005).
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    14. After considering the necessary reliability studies, NYISO must
be the entity that makes the determination whether a specific generator
is needed to ensure reliable transmission service and thus whether the
facility is designated an RMR unit. As indicated earlier, NYISO is
uniquely positioned to assess the need for RMR service. Further, given
that it is not only the independent system operator in New York but
also is responsible for administering the markets in New York, NYISO is
the appropriate entity to assess the potential impacts RMR agreements
may have on its markets. To avoid requiring NYISO to study steps
necessary to ensure reliable operation of transmission facilities over
which NYISO does not have direct operational control, we require that
the NYISO Tariff indicate the entity that will conduct the study in
such cases. In order to avoid any potential for bias among
stakeholders, NYISO may elect to conduct the necessary reliability
studies itself, including any studies necessitated by local reliability
standards, such as those developed by the New York State Reliability
Council (NYSRC). Under that approach, NYISO would need to identify in
the NYISO Tariff how it will coordinate the necessary reliability
studies with the affected transmission owners. Alternatively, NYISO may
elect to allow the relevant transmission owner to conduct the necessary
reliability studies. If an entity other than NYISO is to conduct the
initial reliability study, NYISO must review and verify any local or
regional reliability studies conducted, and notify stakeholders as to
whether or not it agrees with the outcome of those studies, independent
of any other relevant authority's determination that a particular unit
is needed for reliability. NYISO's proposal may also include a process
for it to take into consideration the relevant reliability studies and
evaluations made by the New York Commission and/or NYSRC.
    15. In addition, regardless of the approach chosen by NYISO for
conducting the necessary reliability studies, NYISO's proposal must
include the requirement that any future generation resource-specific
RMR filing made with the Commission fully describe, at a minimum, the
methodologies and findings in the underlying reliability studies and
clearly state all potential reliability criteria violations. NYISO's
including such a requirement is important to ensuring that, when a
resource-specific RMR filing is made with the Commission, the
Commission will be able to evaluate NYISO's assessment of the need for
operation of the resource in judging the reasonableness of the
agreement including whether there has been any undue discrimination or

preference.\26\ Where an RMR determination is based on local planning
criteria, any filing also must similarly provide, and for the same
reasons, a full discussion of those local criteria, including, for
example, documentation as to when the criteria became effective, how
the criteria were applied, which regulatory body approved the standard,
and any other supporting information.\27\
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    \26\ See, e.g., Calif. Indep. Sys. Operator Corp., 134 FERC ]
61,211, at P 130 (2011) (directing tariff provisions providing that
risk of retirement designation may be exercised ``only if all other
available procurement measures fail to procure the resources needed
for reliable operation''); ISO New England, Inc. 125 FERC 61,102, at
P 110, order on clarification, 125 FERC ] 61,234 (2008), order
denying reh'g, 130 FERC ] 61,089 (2010), Midwest Indep. Transmission
Sys. Operator, Inc., 140 FERC ] 61,337, at PP 10, 36 (2012).
    \27\ See, e.g., MISO, FERC Electric FPA Tariff, MISO Rate
Schedules, MISO Transmission Owner Agreement, C., Planning
Activities., 1.0.0 (``planning shall conform to applicable
reliability requirements of NERC, applicable Regional Entities, or
any successor organizations, each Owner's specific reliability
requirements and operating guidelines, and all applicable
requirements of federal or state laws or regulatory authorities'');
PJM Operating Agreement 462 (Jan. 6, 2014), available at: http://
www.pjm.com/~/media/documents/agreements/oa.ashx (addressing
Regional Transmission Expansion Plan criteria).
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    16. Finally, NYISO's proposal must describe the process NYISO will
use to evaluate alternatives for addressing the identified reliability
need. The evaluation of alternatives to an RMR designation is an
important step that deserves the full consideration of NYISO and its
stakeholders to ensure that RMR agreements are used only as a limited,
last-resort measure. To this end, NYISO, in its proposed tariff
language, should explain its process for identifying RMR alternatives
in detail, including how the process will ensure a thorough
consideration of all types of RMR alternatives in an open and
transparent manner.\28\ For example, MISO applies an open and
transparent process to consider with its stakeholders feasible
alternatives to an RMR designation, including (depending on the type of
reliability concern identified) transmission upgrades, demand-side
resources, and generator alternatives, as well as alternative operating
procedures (e.g., re-dispatch, temporary rating increases, special
protection systems).\29\ Our requiring that NYISO describe this process
promotes the transparency needed to ensure that the process has indeed
not been unduly discriminatory or preferential. Furthermore, NYISO's
proposal must include the requirement that any future generation
resource-specific RMR filing made with the Commission should detail the
alternative solutions evaluated and justify the term of the proposed
RMR agreement vis-[agrave]-vis the timing of alternative solutions to
the identified reliability need.\30\ This last requirement reflects our
belief that RMR filings should be made only to temporarily address the
need to retain certain generation until more permanent solutions are in
place and that all alternatives should be considered to ensure that
designating a generator for RMR service is a last resort option for
meeting immediate reliability needs.
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    \28\ See, e.g., Midwest Indep. Transmission Sys. Operator, Inc.,
140 FERC ] 61,237, at P 36 (2012).
    \29\ See, e.g., Midcontinent Independent System Operator, Inc.,
FERC Electric Tariff, Sec.  38.2.7.
    \30\ See, e.g., Midwest Independent Transmission System
Operator, Inc., 140 FERC ] 61,237, at PP 10, 106 (2012).
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B. RMR Compensation

    17. As RMR agreements are for Commission jurisdictional services,
we require NYISO's RMR proposal to include provisions dealing with
compensation for RMR services. The Commission believes that NYISO's RMR
compensation provisions should reflect the nature of NYISO's RMR
proposal. That is, should NYISO choose an exclusively voluntary RMR
regime, under which a generator wishing to deactivate could reject the
reliability needs determination and continue to deactivate absent the
establishment of acceptable compensation, the tariff should provide for
the parties to agree to an appropriate cost-based rate. Compensation to
an RMR generator must at a minimum allow for the recovery of the
generator's going-forward costs,\31\ with parties having the
flexibility to negotiate a cost-based rate up to the generator's full
cost of service.\32\ This ensures that generators are appropriately
compensated for agreeing to provide RMR service. Thus, if NYISO chooses
an exclusively voluntary RMR regime, the tariff must include a process
by which NYISO and the RMR unit may negotiate an appropriate cost-based
rate, to minimize the potential for protracted disputes concerning that
unit's compensation. The participation of the NYISO Independent Market
Monitor in negotiations with the generator regarding the appropriate
level of charges to include in the negotiated RMR rate should also be
considered. Alternatively, should NYISO choose an exclusively mandatory
RMR regime, under which a generator wishing to deactivate but
determined by NYISO to be needed for reliability is required to remain
in operation, NYISO's proposal should provide for compensation at a
full cost-of-service rate.\33\
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    \31\ With respect to the going-forward costs rate, the
Commission recognizes that the NYISO Services Tariff already defines
Going Forward Costs. NYISO Services Tariff, Attachment H, 23.2.1.
However, for purposes of its RMR proposal, NYISO may wish to define
going-forward costs differently in the context of RMR unit
compensation.
    \32\ PJM Interconnection, LLC, 107 FERC ] 61,112, at P 40
(2004).
    \33\ Midcontinent Indep. Sys. Operator, Inc., 148 FERC ] 61,057,
at P 84 (2014) (``While the Commission has accepted a range of
reasonable compensation methodologies for RMR units in RTOs/ISOs, we
find that it is unjust and unreasonable to not allow SSRs to receive
compensation for the fixed costs of existing plant given MISO's
authority under its Tariff to unilaterally require a generator that
seeks to retire or suspend operations to remain online in order to
address reliability concerns'').
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    18. NYISO's proposal should also contain procedures requiring the
filing of RMR agreements for review and approval by the Commission,
including, among other provisions, a pro forma RMR Agreement; \34\ a
filing requirement for RMR agreements will ensure Commission review of
the agreements and thus ensure that they are just and reasonable and
not unduly discriminatory or preferential.\35\ Specifically, regardless
of whether NYISO adopts a voluntary approach or an involuntary
approach, NYISO's proposal should provide authorization for a generator
to file, for Commission review, an RMR agreement under FPA section 205
in the form of the Tariff's pro forma RMR Agreement containing cost-
based rates (and provisions for filings to change such rates) \36\ for
the provision of RMR service in accordance with the NYISO Tariff.\37\
Providing for such FPA section 205 filings will ensure that generators
delaying deactivation for transmission system reliability reasons will
have the authority to seek just and reasonable rates when they delay
deactivation. In the case where a generator seeks to file such rates
under FPA section 205, NYISO should provide

the generator the reliability study report and NYISO's RMR proposal
should address which entity will file the reliability report(s) with
the Commission.
---------------------------------------------------------------------------

    \34\ The filing of RMR agreements should be done consistent with
the requirements of the Commission's eTariff system.
    \35\ Midwest Indep. Sys. Operator, Inc., 140 FERC ] 61,237, at P
10 (2012).
    \36\ For example, a generator should have the ability to file to
change that rate under section 205 in the event, among other things,
that materially adverse unforeseen circumstances affecting the unit
increase its costs, or, alternatively, if circumstances result in a
decrease in costs.
    \37\ See, e.g., PJM Interconnection, L.L.C., 112 FERC ] 61,031,
at PP 18-20 (2005); see also PJM OATT 119. (``A generator seeking to
provide RMR services under a non-conforming RMR Agreement must file
that agreement for Commission review and approval, and demonstrate
that it is consistent with or superior to the pro forma
agreement''); see also Midcontinent Indep. Sys. Operator, Inc., 148
FERC ] 61,057, at P 92 (2014) (``the MISO Tariff should allow
generation or SCU owners designated as SSRs to file their own
revenue requirement in order to protect that generation or SCU
owner's rights under FPA section 205'').
---------------------------------------------------------------------------

    19. NYISO's RMR proposal should address the circumstance of
accelerated cost recovery for generators that require upgrades,
retrofitting, repowering, or some other form of additional investment
required to continue operating during the term of the RMR agreement, to
ensure that in such circumstances generators are appropriately
compensated.\38\ In addition, the proposal should likewise address
recovery of such investments from RMR generators should the RMR unit
receive compensation for the investment during the term of the RMR
agreement but then continue to operate as a merchant unit after the
term of the RMR agreement.\39\ Such provisions should ensure that
generators under RMR agreements will not recover more than an allocable
portion of the cost of such investments from providing RMR service.
---------------------------------------------------------------------------

    \38\ See, e.g., ISO New England, Inc. 125 FERC 61,102, at PP 82-
84, order on clarification, 125 FERC ] 61,234 (2008), order denying
reh'g, 130 FERC ] 61,089 (2010).
    \39\ Midwest Indep. Transmission Sys. Operator, Inc., 140 FERC ]
61,237, at P 138 (2012), order on compliance, 148 FERC ] 61,056, at
P 44 (2014).
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C. RMR Cost Allocation

    20. NYISO's RMR compliance filing should include tariff provisions
specifying a methodology for allocating the costs of RMR agreements, as
appropriate cost allocation is essential to ensuring that the rates
charged are just and reasonable and not unduly discriminatory or
preferential.\40\ Moreover, disclosing the allocation of RMR costs in
this manner will enable the entities to whom the costs may be allocated
to better understand their potential responsibility for the RMR
costs.\41\ Other RTOs and ISOs have adopted different approaches to
address the recovery of the costs associated with agreements like the
RMR agreements discussed in this order. For example, in PJM
Interconnection, L.L.C. (PJM), RMR costs are allocated to the load in
the zone(s) of the transmission owners that will be assigned financial
responsibility for the reliability upgrades necessary to alleviate the
reliability impact that would result from the unit's deactivation.\42\
NYISO should ensure that any cost allocation regime is consistent with
the Commission's cost allocation principles and precedents.
---------------------------------------------------------------------------

    \40\ PJM Interconnection, L.L.C., 107 FERC ] 61,112, at P 22
(2004).
    \41\ Midwest Indep. Transmission Sys. Operator, Inc., 140 FERC ]
61,237, at P 154 (2012).
    \42\ See, e.g., PJM OATT 120.
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D. Toggling Provisions

    21. NYISO's proposal should also include rules to eliminate, or at
least minimize, incentives for a generator needed for reliability to
toggle between receiving RMR compensation and market-based compensation
for the same units.\43\ The Commission appreciates that uneconomic
units could become economic for a number of reasons, including changing
market conditions and the need for and timing of capital investments.
However, the Commission is concerned that any proposed provisions not
provide an incentive for a generation resource to propose to deactivate
earlier than it otherwise would have in expectation of being needed for
reliability and, therefore, be able to receive more revenues under an
RMR service agreement than by remaining in the market. As noted above,
the tariff provisions should not provide an incentive for a generation
resource to re-enter the market after having received accelerated
recovery of the cost of additional investments made under its RMR
agreement.\44\ Accordingly, to address the Commission's concerns
related to toggling, NYISO should craft tariff provisions that provide
clear guidance to generators regarding the implications of a
deactivation notice.
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    \43\ See, e.g., PJM OATT 118; ISO-NE, Transmission Markets and
Services Tariff, III.<IP_ADDRESS>.5 (18.0.0); MISO, FERC Electric
Tariff, 38.2.7 (4.0.0); CAISO, eTariff, 43.2.6 (1.0.0).
    \44\ See, ISO New England Inc., 125 FERC ] 61,102, at PP 45-48
(2008).
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The Commission Orders
    (A) Pursuant to the authority contained in and subject to the
jurisdiction conferred upon the Federal Energy Regulatory Commission by
section 402(a) of the Department of Energy Organization Act and by the
Federal Power Act, particularly section 206 thereof, and pursuant to
the Commission's Rules of Practice and Procedure and the regulations
under the Federal Power Act (18 CFR Chapter I), the Commission hereby
institutes a proceeding in Docket No. EL15-37-000 concerning the
justness and reasonableness of NYISO's Tariff with regard to RMR
issues, as discussed in the body of this order.
    (B) Within 120 days of the date of issuance of this order, NYISO
shall submit a compliance filing containing a proposed RMR Rate
Schedule and pro forma RMR agreement, as discussed in the body of this
order.
    (C) Any interested person desiring to be heard in this proceeding
must file a notice of intervention or motion to intervene, as
appropriate, with the Federal Energy Regulatory Commission, 888 First
Street NE., Washington, DC 20426, in accordance with Rule 214 of the
Commission's Rules of Practice and Procedure (18 CFR 385.214 (2014))
within 21 days of the date of this order.
    (D) The Secretary is hereby directed to promptly publish this order
in the Federal Register.

    By the Commission.

    Issued: February 19, 2015.
Kimberly D. Bose,
Secretary.
[FR Doc. 2015-04119 Filed 2-26-15; 8:45 am]
BILLING CODE 6717-01-P


[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61256-61258]
[FR Doc No: 2015-25702]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76077; File No. SR-NSCC-2015-003]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change to Enhance NSCC's
Margining Methodology as Applied to Family-Issued Securities of Certain
NSCC Members

October 5, 2015.
    On August 14, 2015, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2015-003 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ to change its margin charge with respect
to a member's positions in securities that are issued by such member or
its affiliate (i.e., ``family-issued securities'') by excluding
positions in these securities, when the member is on NSCC's Watch
List,\3\ from its volatility margining model. The proposed rule change
was published for comment in the Federal Register on September 2,
2015.\4\ The Commission did not receive comment letters regarding the
proposed change. For the reasons discussed below, the Commission is
granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As part of its ongoing monitoring of its membership, NSCC
utilizes an internal credit risk rating matrix to rate its risk
exposures to its members based on a scale from 1 (the strongest) to
7 (the weakest). Members that fall within the weakest three rating
categories (i.e., 5, 6, and 7) are placed on NSCC's ``Watch List''
and, as provided under NSCC's Rules and Procedures (``Rules''), may
be subject to enhanced surveillance or additional margin charges.
See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV of
NSCC's Rules, available at http://dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \4\ See Securities Exchange Act Release No. 75768 (August 27,
2015), 80 FR 53219 (September 2, 2015) (SR-NSCC-2015-003). NSCC also
filed an advance notice with the Commission seeking approval of
changes to its Rules necessary to implement the proposed rule
change. This advance notice was published in the Federal Register on
September 17, 2015. Securities Exchange Act Release No. 75899
(September 11, 2015), 80 FR 55883 (September 17, 2015) (File No. SR-
NSCC-2015-803).
---------------------------------------------------------------------------

I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as
provided by NSCC:
    The proposed rule change consists of amendments to NSCC's Rules in
order to enhance NSCC's margining methodology as applied to family-
issued securities of NSCC Members \5\ that are placed on NSCC's ``Watch
List'', i.e., those Members who present a heightened credit risk to
NSCC or have demonstrated higher risk related to their ability to meet
settlement, as more fully described below.
---------------------------------------------------------------------------

    \5\ Terms not defined herein are defined in the Rules, available
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
---------------------------------------------------------------------------

Background

    As a central counterparty, NSCC occupies an important role in the
securities settlement system by interposing itself between
counterparties to financial transactions and thereby reducing the risk
faced by participants and contributing to global

financial stability. The effectiveness of a central counterparty's risk
controls and the adequacy of its financial resources are critical to
achieving these risk-reducing goals. In that context, NSCC continuously
reviews its margining methodology in order to ensure the reliability of
its margining in achieving the desired coverage. In order to be most
effective, NSCC must take into consideration the risk characteristics
specific to certain securities when margining those securities.
    Among the various risks that NSCC considers when evaluating the
effectiveness of its margining methodology are its counterparty risks
and identification and mitigation of ``wrong-way'' risk, particularly
specific wrong-way risk, defined as the risk that an exposure to a
counterparty is highly likely to increase when the creditworthiness of
that counterparty deteriorates.\6\ NSCC has identified an exposure to
wrong-way risk when it acts as central counterparty to a Member with
respect to positions in securities that are issued by that Member or
that Member's affiliate. These positions are referred to as ``family-
issued securities.'' In the event that a Member with unsettled long
positions in family-issued securities defaults, NSCC would close out
those positions following a likely drop in the credit-worthiness of the
issuer, possibly resulting in a loss to NSCC.
---------------------------------------------------------------------------

    \6\ See Principles for financial market infrastructures, issued
by the Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities
Commissions 47 n.65 (April 2012), available at http://www.bis.org/publ/cpss101a.pdf.
---------------------------------------------------------------------------

    NSCC has proposed to address its exposure to this type of wrong-way
risk in two steps. First, NSCC has proposed in this filing to enhance
its margin methodology as applied to the family-issued securities of
its Members that are on its Watch List by excluding these securities
from the volatility component, or ``VaR'' charge, and then charging an
amount calculated by multiplying the absolute value of the long net
unsettled positions in that Member's family-issued securities by a
percentage that is no less than 40%. The haircut rate to be charged
will be determined based on the Member's rating on the credit risk
rating matrix and the type of family-issued security submitted to NSCC.
Fixed income securities that are family-issued securities will be
charged a haircut rate of no less than 80% for firms that are rated 6
or 7 on the credit risk rating matrix, and no less than 40% for firms
that are rated 5 on the credit risk rating matrix; and equity
securities that are family-issued securities will be charged a haircut
rate of 100% for firms that are rated 6 or 7 on the credit risk rating
matrix, and no less than 50% for firms that are rated 5 on the credit
risk rating matrix. NSCC will have the authority to adjust these
haircut rates from time to time within these parameters as described in
Procedure XV of NSCC's Rules without filing a proposed rule change with
the Commission pursuant to Section 19(b)(1) of the Act,\7\ and the
rules thereunder, or an advance notice with the Commission pursuant to
Section 806(e)(1) of the Clearing Supervision Act,\8\ and the rules
thereunder.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(1).
    \8\ 12 U.S.C. 5465(e)(1).
---------------------------------------------------------------------------

    Because NSCC Members that are on its Watch List present a
heightened credit risk to the clearing agency or have demonstrated
higher risk related to their ability to meet settlement, NSCC believes
that this charge will more effectively capture the risk characteristics
of these positions and can help mitigate NSCC's exposure to wrong-way
risk.
    Second, NSCC will continue to evaluate its exposures to wrong-way
risk, specifically wrong-way risk presented by family-issued
securities, including by reviewing the impact of expanding the
application of the proposed margining methodology to the family-issued
securities of those Members that are not on the Watch List. NSCC has
proposed to apply the enhanced margining methodology to the family-
issued securities of Members that are on the Watch List at this time
because, as stated above, these Members present a heightened credit
risk to the clearing agency or have demonstrated higher risk related to
their ability to meet settlement. As such, there is a clear and more
urgent need to address NSCC's exposure to wrong-way risk presented by
these firms' family-issued securities.
    However, any future change to the margining methodology as applied
to the family-issued securities of Members that are not on the Watch
List would be subject to a separate proposed rule change pursuant to
Section 19(b)(1) of the Act,\9\ and the rules thereunder, and an
advance notice pursuant to Section 806(e)(1) of the Clearing
Supervision Act,\10\ and the rules thereunder.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 12 U.S.C. 5465(e)(1).
---------------------------------------------------------------------------

Implementation

    The effective date of the proposed rule change will be announced
via a NSCC Important Notice. NSCC expects to run these changes in a
test environment for a three month parallel period prior to
implementation. Details and dates regarding this test will be
communicated to Members through an NSCC Important Notice. As stated
above, NSCC will conduct additional analysis of its exposure to wrong-
way risk, and, following implementation of this proposed rule change,
will engage in outreach to its membership when evaluating whether to
expand the application of the proposed enhanced margining methodology
to Members not on its Watch List.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \11\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. The Commission believes the proposal is
consistent with Section 17A(b)(3)(F) of the Act,\12\ and Rule 17Ad-
22(b)(1) \13\ and Rule 17Ad-22(b)(2) \14\ under the Act, as described
in detail below.
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    \11\ 15 U.S.C. 78s(b)(2)(C).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(b)(1).
    \14\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    Consistency with Section 17A(b)(3)(F) of the Act. Section
17A(b)(3)(F) of the Act requires, among other things, that the rules of
a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, as well as, in
general, protect investors and the public interest.\15\ By enhancing
the margin methodology applied to family-issued securities of members
that are on NSCC's Watch List, the proposal will assist NSCC in
collecting margin that more accurately reflects NSCC's exposure to a
clearing member that clears family-issued securities and will assist
NSCC in its continuous efforts to improve the reliability and
effectiveness of its risk-based margining methodology by taking into
account specific wrong-way risk. As such, the proposal will help NSCC,
as a central counterparty, promote robust risk management, and thus
promoting the prompt and accurate clearance and settlement of
securities transactions, as well as, in general, protecting investors
and the public interest.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Consistency with Rule 17Ad-22(b)(1). Rule 17Ad-22(b)(1) \16\ under
the Act requires a CCP, such as NSCC, to

``establish, implement, maintain and enforce written policies and
procedures reasonably designed to . . . limit its exposures to
potential losses from defaults by its participants under normal market
conditions . . . .'' NSCC faces specific wrong-way risk in all
circumstances where a member submits family-issued securities to NSCC
for clearance, including under normal market conditions. By enhancing
the margin methodology applied to family-issued securities of NSCC's
members that are on its Watch List, the proposal will limit NSCC's
exposure to potential losses from the default of a member on NSCC's
Watch List with family-issued securities under normal market
conditions. As such, the Commission believes that the proposal is
consistent with Rule 17Ad-22(b)(1).
---------------------------------------------------------------------------

    \16\ 17 CFR 240.17Ad-22(b)(1).
---------------------------------------------------------------------------

    Consistency with Rule 17Ad-22(b)(2). Rule 17Ad-22(b)(2) \17\ under
the Act requires a CCP, such as NSCC, to ``establish, implement,
maintain and enforce written policies and procedures reasonably
designed to . . . [u]se margin requirements to limit its credit
exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements . . . '' By
enhancing the margin methodology applied to family-issued securities of
NSCC's members that are on its Watch List, the proposal will better
account for and cover NSCC's credit exposure to less creditworthy
members. In addition, by taking into account specific wrong-way risk
arising from family-issued securities submitted to NSCC, the proposal
is consistent with using risk based models and parameters to set margin
requirements. As such, the Commission believes that the proposal is
consistent with Rule 17Ad-22(b)(2).
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \18\ and the
rules and regulations thereunder.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-NSCC-2015-003 be, and hereby is,
APPROVED.\19\
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    \19\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25702 Filed 10-8-15; 8:45 a.m.]
BILLING CODE 8011-01-P