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October 16, 2016 VIA ELECTRONIC FILING Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First

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October 16, 2016 VIA ELECTRONIC FILING Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First October 16, 2016 VIA ELECTRONIC FILING Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First Street, NE Washington, D.C. 20426 Re: ISO New England Inc., Filing of 2016 Capital Budget and Revised Tariff Sheets for Recovery of 2016 Administrative Costs; Docket No. ER16-_______________________ Dear Secretary Bose: Pursuant to Section 205 of the Federal Power Act, Part 35 of the Rules and Regulations of the Federal Energy Regulatory Commission (the “Commission”), Section 12 of the Participants Agreement among ISO New England Inc., the New England Power Pool and any Individual Participants,1 and Section IV.B.6.1 of the ISO New England Inc. Transmission, Markets and Services Tariff (the “Tariff”),2 ISO New England Inc. (the “ISO” or “ISO-NE”) hereby submits its capital budget for calendar year 2016 (the “2016 Capital Budget”) and a revised Section IV.A of the Tariff to reflect the collection of its administrative costs for calendar year 2016 (the “2016 Administrative Expenses Tariff”). The ISO requests that the Commission accept the 2016 Capital Budget and the 2016 Administrative Expenses Tariff as filed, effective January 1, 2016. Because the ISO is a non-profit entity without equity, it relies totally on collections under its Tariff to fund its operational expenses, including through depreciation. For this reason, the ISO is not in a position to make refunds should the Commission accept the 2016 Capital Budget or the 2016 Administrative Expenses Tariff for filing but set them for hearing subject to refund. That is, the only “refunds” that can be paid to ISO Customers during 2016 would have to be funded by additional charges to other Customers. For this reason, the ISO respectfully requests 1 The Participants Agreement is available at http://www.iso-ne.com/static-assets/documents/regulatory/part_agree/ part_agree_1_15_11.pdf. 2 Capitalized terms used but not otherwise defined in this filing have the meanings given them in the Tariff. October 16, 2015 Page 2 of 33 that the Commission accept the 2016 Capital Budget and the 2016 Administrative Expenses Tariff without suspension and not subject to refund.3 Should the Commission have any questions regarding the 2016 Capital Budget or the 2016 Administrative Expenses Tariff, the ISO respectfully requests that such concerns be resolved in an accelerated fashion and addressed in the Commission’s Order issued prior to January 1, 2016. If the Commission decides to set any issues for hearing, the ISO requests that the Commission set the scope of any such hearing as specifically and narrowly as is feasible, and require a paper hearing process, to ensure conservation of ISO, stakeholder, and Commission staff resources. I. ISO-NE’S 2016 REVENUE REQUIREMENT AND REVISED SHEETS A. Overview This filing presents the 2016 Revenue Requirement4 for operating the ISO. Before incorporating the true-up for 2014’s actual expenses and collections, the 2016 Revenue Requirement is $185.2 million, which is $6.8 million more than in 2015. After the over- collection for 2014 is subtracted, the total 2016 Revenue Requirement decreases to $184.5 million. In comparison, the 2015 total – which was reduced by a much larger over-collection of nearly $10 million – was $168.5 million. In sum, the 2016 Revenue Requirement is 3.8% higher than in 2015 before the prior years’ true-ups. When the two years’ operating budgets are compared with inclusion of the true- ups (including the nearly $10 million true-up for 2013), the 2016 Revenue Requirement is 9.6% higher than the 2015 Revenue Requirement. For 2016, more than half of the increase in the Core Operating Budget is necessary to maintain the ISO’s current operations, by funding competitive compensation, software licenses and maintenance, and retirement and medical benefits. Most of the remaining increased costs are attributable to: cyber security enhancements, including the establishment of a 24/7 cyber security operations center, as directed by the ISO’s Board of Directors; meeting the Internal Market Monitor’s resource needs; and implementing Commission-approved changes to the Forward Capacity Market (“FCM”). Each of these initiatives is discussed in more detail in Section I.C, below. 3 This approach is consistent with NEPOOL’s recommendation to the Commission that “contested budget increases should not be implemented subject to ‘refunds’” because of the ISO’s non-profit status, which means that any money already spent “can only be reallocated among the stakeholders, negating any true refund.” Comments of the New England Power Pool Participants Committee at 3, Docket No. RM04-12-000 (Nov. 9, 2004) (“NEPOOL RTO Cost Comments”). 4 As used in this filing, “Revenue Requirement” refers to the combination of: the administrative costs of running the ISO (the “Core Operating Budget”); depreciation and amortization; and the true-up for past over-collection or under- collection in revenues versus expenses. Generally, numbers used herein are rounded for ease of reference and, accordingly, may not sum. October 16, 2015 Page 3 of 33 The ISO seeks to add 8.5 full-time employees in 2016, largely to staff the cyber security operations center and to meet the Internal Market Monitor’s personnel requirements. The ISO is meeting other staffing needs by reassigning existing employees. Barring unforeseen circumstances, the ISO intends to fulfill all of its obligations with existing employees in the next budget cycle. The remainder of this Section I describes: • the 2016 budget development process (Section B); • components of the 2016 Revenue Requirement (Section C); • the three services provided by the ISO and funded by the 2016 Revenue Requirement (Section D); and • the allocation of costs among the three primary schedules and the development of the rates reflected in the 2016 Administrative Expenses Tariff (Section E). B. 2016 Budget Development Process The ISO has always operated in a climate of cost accountability and transparency.5 The ISO annually files with the Commission updated specific dollar-value, non-formula rates to collect the ISO’s Revenue Requirement for each upcoming calendar year. Instead of using a formula rate allowing the automatic collection of every expense as incurred, the ISO revises its specific rates each year from a proposed annual Revenue Requirement that has been reviewed through a multi-stage stakeholder process, voted on by participants, approved by the ISO’s independent Board of Directors, and ultimately filed with the Commission for approval in an open process in which any interested party may participate. As in past years, the ISO’s budgeting process was driven by the business planning process led by the ISO’s Board of Directors. The business plan’s timeline is five years and, for that period, contains the following overarching objectives: New England’s bulk power system is reliable in both the short- and long-term and the wholesale electricity markets are competitive and efficient; and business operations are well-managed, cost effective, and responsive to New England’s Market Participants, state officials, and other electricity stakeholders. These objectives formed the foundation for development of the ISO’s 2016 Core Operating Budget. The full seven-step process, throughout which stakeholder input was sought, requires the ISO to: • define objectives, activities, and goals; • identify efficiencies for each department; 5 The NEPOOL Participants Committee, the ISO’s primary stakeholder body, has lauded the ISO’s budget process, stating that it “works, not only because NEPOOL provides input, but also because ISO-NE is responsive to that input.” NEPOOL RTO Cost Comments at 6. October 16, 2015 Page 4 of 33 • determine resource requirements; • develop budget estimates for each department; • adjust budgets to ensure that staff resources and activities are aligned with the business plan; • conduct senior staff review to ensure alignment of the budget with the business plan and overall fiscal constraint; and • develop priorities. ISO-NE reviews the budgets with both the New England Power Pool (“NEPOOL”) and the states. To kick off this year’s process, the ISO presented proposed budgets at the June 7, 2015 meeting with the New England Conference of Public Utilities Commissioners and the June 22, 2015 meeting of the NEPOOL Participants Committee. The ISO then developed its 2016 Revenue Requirement proposal and posted a detailed budget presentation, which includes more than 120 slides regarding the 2016 Capital Budget and the 2016 Revenue Requirement (the “Budget Presentation”).6 The ISO reviewed the Budget Presentation at the NEPOOL Budget and Finance Subcommittee’s August 26, 2015 meeting and at a meeting for state agencies on August 27, 2015. Following the August 27 meeting, a number of the state agencies submitted written questions regarding the budgets. ISO-NE provided answers, following which the state agencies submitted written comments regarding the budget review process and the ISO’s headcount. Those comments and the ISO’s response are located at Exhibits 10 and 11 to this filing letter.7 The ISO reviewed the 2016 Capital Budget and the 2016 Revenue Requirement at the NEPOOL Participants Committee’s meetings on September 11 and October 2, 2015. At the October 2 meeting, the two budgets were supported unanimously by the Participants Committee (with abstentions). Contemporaneously with the stakeholder processes, the Board of Directors undertakes its review of the budget. The Board process includes review of particular elements
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