On September 16, 2014, ISO New England Inc.’s (“ISO-NE”) eighth annual Forward Capacity Auction (“FCA 8”) results took effect by operation of law due to a deadlocked FERC that could not agree to approve or reject the results amid allegations that market power within the auction was not properly mitigated. As a result, FERC on the same day issued a Show Cause Order requiring ISO-NE to either revise its tariff to allow for independent oversight of import offers prior to each FCA or show cause why it is not required to do so.
ISO-NE conducted FCA 8 to procure capacity for the year of June 1, 2017 – May 31, 2018 and submitted the results to FERC on February 28, 2014. In response to a FERC deficiency letter regarding the results, ISO-NE stated in a July 17, 2014 amendment to its initial filing that just prior to FCA 8, an abrupt change in the supply and demand balance in New England due to generation retirements resulted in a capacity shortage. Pursuant to ISO-NE’s tariff, the capacity shortage resulted in FCA 8 prices being set by administrative pricing rules in the tariff, specifically ISO-NE’s Insufficient Competition and Capacity Carry Forward (“ICCCF”) rules. Under the ICCCF auction rules, ISO-NE explained that when there is limited excess supply available in an auction, participants with a large amount of supply may recognize that they could be pivotal in setting a higher auction price. Upon the conclusion of FCA 8, ISO-NE submitted higher than usual prices to FERC for acceptance, and allegations of market manipulation arose.
Due to disagreement among the Commissioners over whether to accept the results of FCA 8, on September 16, 2014 – 61 days after ISO NE’s amendment was filed – the results of FCA 8 became effective by operation of law pursuant to section 205 of the Federal Power Act. While the FCA 8 results became effective without specific FERC approval and discussion of the results, all Commissioners issued statements regarding the unusual circumstances regarding ISO-NE’s FCA 8 results. Chairman Cheryl LaFleur and Commissioner Phillip Moeller, in separate statements, both stated that they would have voted to approve the auction results as just and reasonable.
Chairman LaFleur noted that when an auction occurs, FERC determines if the results are just and reasonable based on whether the auction was conducted in accordance with the controlling tariff, not a two-step process of determining whether the auction was conducted in accordance with the tariff and whether the resulting auction rates were just and reasonable. Chairman LaFleur stated that she believed this two-step approach is flawed and would result in retroactive ratemaking, in violation of the filed rate doctrine, create disincentives for auction participation, and raise additional issues regarding how to set new auction rates.
Commissioner Moeller noted that, even though the auction contained insufficient competition, the auction was conducted in accordance with the ISO-NE tariff and all steps were taken to prevent the large capacity suppliers from exercising market power. However, Commissioner Moeller also stated that, while auctions conducted in accordance with tariff procedures can sometimes lead to unjust and unreasonable rates, he did not believe that was the case here. Commissioner Moeller stated his view that the higher rates were not a result of market power, but the result of limited supply and demand.
Commissioners Tony Clark and Norman Bay, in a joint statement, disagreed that the ISO-NE auction results were just and reasonable and noted that they would have set the matter for a fast-track hearing and settlement procedures. Commissioners Clark and Bay stated that FERC is responsible for ensuring that both the auction results and auction processes were just and reasonable, and that any other approach requires FERC to treat any FCA results filing as merely an informational filing. Furthermore, the Commissioners noted that because the auction results are not final until after FERC approves the FCA results, the filed rate doctrine does not bar FERC from determining whether the results are just and reasonable.
As a result of the deadlocked decision, as well as a still-ongoing non-public investigation by the Office of Enforcement into FCA 8 bidding behavior, FERC directed ISO-NE in the Show Cause Order to submit tariff revisions that provide for additional mitigation procedures for FCAs, or show cause why it is not required to do so.