The Commission recently issued two orders addressing controversial capacity market issues. On April 12, 2011, the Commission approved a rate filing by PJM Interconnection, LLC (“PJM”) that will modify the minimum offer price rule (“MOPR”) to prevent what PJM called the threat of uneconomic entry of new generation (the “PJM Order”). On April 13, 2011, the Commission addressed issues in connection with ISO-New England’s (“ISO-NE”) Forward Capacity Market (“FCM”) and ordered ISO-NE to develop an offer-floor mitigation “construct” similar to that of PJM and the New York Independent System Operator (“NYISO”) in order to deal with Out of Market (“OOM”) resources suppressing clearing prices below competitive levels (“ISO-NE Order”).
On February 11, 2011, PJM submitted proposed changes to its tariff in response to a complaint filed by a group of stakeholders, “P3,” (see February 4, 2011 edition of the WER) and plans by New Jersey to provide funding to allow new natural gas to bid in the capacity market at low prices. The PJM MOPR currently has screens to protect against buyer market power: (i) a conduct screen; (ii) an impact screen; and (iii) an incentive test, or net-short requirement. In its rate filing, PJM proposed, among other items, to change the percentage factor used in its conduct screen for net Cost of New Entry (“CONE”) for combined cycle and combustion turbine plants from eighty percent to ninety percent. PJM would then re-price any resource that failed the MOPR screen at ninety percent of the asset class CONE (and to seventy percent for other, unspecified plant types). In the PJM Order, the Commission accepted this proposal as balancing the need to prevent uneconomic entry, while recognizing the “vagaries” of cost estimation and administrative burdens. PJM also proposed to eliminate its own authority to grant exceptions to the MOPR on state policy grounds, and instead require a seller to receive such an exemption from FERC pursuant to Section 206 of the Federal Power Act. The Commission accepted PJM’s proposal to eliminate the state exemption, but rejected the replacement mechanism where PJM would restate a party’s right to change a filed rate schedule. In accepting PJM’s proposed tariff changes (subject to conditions and a compliance filing) FERC granted the P3 supplier group’s complaint in part, and denied it in part without prejudice.
On April 13, 2011, the Commission ruled on ISO-NE’s July 1, 2010 proposal to address similar buyer-side mitigation measures in the FCM. ISO-NE and New England Power Pool (“NEPOOL”) (together, “Joint Parties”) had previously submitted revisions to the FCM over concerns that new capacity resources with OOM revenue sources were distorting FCM price signals. The Commission rejected ISO-NE’s proposed “two-tiered” pricing model, which provided for two clearing prices when OOM resources would clear the forward capacity auction (“FCA”), one based on actual offers (Capacity Clearing Price) and a higher, “Alternative Capacity Price” which would assume all OOM resources offered competitively by using benchmark pricing. ISO-NE would procure all capacity that bid at or below the Capacity Clearing Price and additional existing capacity that bids below the Alternative Clearing Price; however, this process would not be triggered unless OOM capacity cleared the auction. FERC rejected this approach and instead ordered ISO-NE to develop a minimum offer price rule like that in PJM and NYISO. The Commission also accepted the proposal not to apply mitigation to resources that had cleared in the first three FCAs, because the resources are already in the market.
Notably, Chairman Jon Wellinghoff and Commission Cheryl LaFleur issued a joint concurrence in the ISO-NE order, to highlight the ability for exemptions from mitigation as a part of entities’ abilities to satisfy renewable portfolio standards. Commissioner Mark Spitzer dissented from the majority in the ISO-NE Order in part, finding that the Commission should not require ISO-NE to institute a MOPR. Commissioner Spitzer found no basis for this proposal and would have accepted ISO-NE’s two-tiered proposal. No party advocated for a MOPR, Spitzer argued, and this will require more stakeholder processes, in a process that has been ongoing since 2008.
A copy of the PJM Order is available here.
A copy of the ISO-NE Order is available here.
A copy of Commissioner Spitzer’s dissent is available here.