A Divided FERC Approves ISO-NE’s Capacity Market Changes to Accommodate State Subsidized Resources

On March 9, 2018, a divided FERC approved the Competitive Auctions with Sponsored Policy Resources (“CASPR”) proposal submitted by the ISO New England Inc. (“ISO-NE”). Developed through an extensive stakeholder process that began in 2016, CASPR was promoted by ISO-NE as a mechanism to integrate out-of-market state resource policies that might otherwise suppress capacity market prices in ISO-NE’s capacity market. A divided FERC approved the proposal as a just and reasonable accommodation of state policies, with Commissioner Powelson dissenting, arguing that the proposal dilutes market signals and “threatens the viability” of ISO-NE’s capacity market. Commissioners LaFleur and Glick concurred with the outcome, but criticized the order’s guidance on adapting markets to state energy policies, and reliance on minimum offer pricing rules (“MOPRs”) as the “standard solution” to achieve that end.

The primary mechanism for ensuring resource adequacy in the New England region is the ISO-NE’s forward capacity market (“FCM”). As part of the FCM, ISO-NE holds an annual Forward Capacity Auction (“FCA”) in which capacity suppliers compete to provide capacity to the region for the relevant delivery year, three years in the future. Suppliers of capacity that receive a capacity supply obligation in an FCA commit to, and receive payment for, providing capacity for that one-year period associated with that FCA.

Prompted by increased state efforts to develop specific state-supported resources in New England, ISO-NE engaged in a stakeholder process in 2016 to determine how to integrate these state policies into its FCM (see April 25, 2017 edition of the WER). The resulting proposal, CASPR, seeks to achieve this goal by holding the annual FCA in two stages. In the first stage, generators bid into the capacity auction, ISO-NE’s existing MOPR is imposed to limit bids from subsidized generators, and a clearing price is established and awarded to the resources that cleared the auction. The second stage involves a new “substitution auction” through which resources that cleared the first auction can transfer their capacity obligations to new, state-subsidized resources. Because the substitution auction will not impose market mitigation restrictions, the new subsidized resources can offer lower bids than in the first-stage auction, which would allow retiring resources to essentially “buy-out” their obligations at a lower rate to the new generators—what the proposal likens to a “severance payment.” Critically, new subsidized resources that clear the second auction will be treated as existing resources and not be subject to the MOPR in future auctions. On January 8, 2018, ISO-NE submitted its CASPR proposal to FERC under Federal Power Act (“FPA”) section 205.

In the March 9, 2018 order, FERC approved the CASPR proposal as just and reasonable. The majority agreed that by coordinating the entrance of state subsidized resources with the exit of an equal quantity of retiring capacity, the CASPR will allow the FCM to continue providing resource adequacy at just and reasonable rates. Beyond accepting CASPR as just and reasonable, however, the majority splintered on how to guide future efforts to accommodate state policies. In particular, the order stated that going forward, “[a]bsent a showing that a different method would appropriately address particular state policies, we intend to use the MOPR to address the impacts of state policies on the wholesale capacity markets.”

In a concurring statement, however, Commissioner LaFleur argued that resorting to the MOPR as the “standard solution” against the impacts of all state policies was an unnecessary “blunt instrument,” and that the Commission should be open to considering other proposals, such as carbon pricing, as they emerge. In his partial concurrence, Commissioner Glick agreed with the outcome but similarly criticized the MOPR, arguing that, because it prevents state-sponsored resources from clearing capacity auctions, its broad application “usurps the authority over generation resource decisions that Congress left to the states,” under the FPA.

For his part, Commissioner Powelson dissented entirely, arguing that the two-part auction will only “delay” price suppression caused by state-subsidized resources, and in the process “dilute” market signals as more state-subsidized resources enter the FCA. If states wish to choose their own resource mix, Commissioner Powelson noted, they should “also assume the responsibility for resource adequacy and reliability.”

A copy of the order, along with the separate concurring and dissenting statements, can be found here.

This article first appeared on the Washington Energy Report, hosted by Troutman Sanders, LLP.

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