On January 19, 2012, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued its latest order in a now long-running debate over so-called “buyer side” market power mitigation measures in RTO capacity markets.  The January 19 Order addressed pending rehearing and clarification requests regarding ISO-New England’s Forward Capacity Market (“FCM”) design.  In the January 19 Order, consistent with recent orders in other markets, FERC affirmed its prior decision that the FCM must have an offer-floor mechanism to keep “out of market” capacity from bidding as a price-taker and depressing market-clearing prices.

At issue in the January 19 Order was FERC’s prior rejection of ISO-New England’s 2010 proposal to address buyer-side market power through a two-tiered pricing system called the “Alternative Price Rule” or “APR” mechanism.  The APR proposal would have addressed new entry pricing by paying one market price to new capacity and a separate clearing price to existing capacity.  FERC rejected that approach in 2010, and defended that decision in this most recent January 19 Order, calling instead for an across- the- board offer floor proposal akin to what PJM Interconnection LLC uses in its capacity market.

Instead, in the January 19 Order, the Commission renewed its prior support for offer floor mitigation in the FCM, which prevents new capacity from bidding into the FCM as price takers if, for example, the new resource is backed by a power purchase agreement or some other price support.  The Commission again rejected pleas by load-serving entities for the ability to self-supply new capacity without the threat of offer floor mitigation, finding that an “across-the-board offer floor mitigation exemption for new resources designated as self-supply would allow for an unacceptable opportunity to exercise buyer market power and thus could inhibit competitive investment.”  Similarly, the Commission refused requests by several state commissions for an exemption to offer floor mitigation for state-sponsored power projects, finding that the mitigation rules treat all “out of market” capacity on equal footing. 

The Commission also affirmed that parties must file a complaint under Section 206 of the Federal Power Act to seek an exemption from the offer floor rules. 

A copy of FERC’s rehearing and clarification can be found here.