On July 27, 2016, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) accepted a compliance filing from ISO New England (“ISO-NE”) that establishes a ten-percent materiality threshold before ISO-NE will mitigate a retirement bid in its annual Forward Capacity Auction (“FCA”). In an April 2016 order, FERC previously accepted a set of proposed revisions to ISO-NE’s Transmission, Markets, and Services Tariff (“Tariff”) regarding capacity market power and FCA prices on the condition that the ISO include a price mitigation threshold for retirement bids (see April 18, 2016, edition of the WER).

The Forward Capacity Auction is administered yearly by ISO-NE to ensure sufficient wholesale electricity capacity three years in the future from the actual auction date. By bidding into the auction, sellers commit to provide a certain amount of generation capacity for the relevant auction period. Sellers may also submit “de-list” bids, which set a price below which the seller will not provide capacity from an existing resource.

In December 2015, ISO-NE submitted several Tariff revisions, which, among other changes, established market rules for how ISO-NE would manage attempts by sellers to exert capacity market power and influence FCA prices. As FERC summarized in its April order, because FCA prices are set according to the level of supply, when capacity supply conditions are tight, a seller could benefit its larger resource portfolio by submitting a “de-list” bid for one generator, thereby increasing resource scarcity and driving up FCA auction prices as a result.

In an effort to ensure that de-list bids would be truly economical and not an unfair exercise of market power to increase auction prices, ISO-NE’s December 2015 proposal allowed its Internal Market Monitor (“IMM”) to determine the appropriateness of de-list bids, the reasonableness of the sellers’ cost assumptions, and whether price mitigation would be necessary. In its April order, FERC determined that the proposal gave the IMM unreasonably broad discretion in analyzing a de-listing bid and in deciding whether to institute price mitigation. Although FERC generally accepted ISO-NE’s Tariff revisions, it instructed the ISO to submit a compliance filing instituting a “mitigation materiality threshold” for the IMM de-list analysis process.

As directed, ISO-NE submitted a compliance filing, setting out the methodology and assumptions for IMM’s de-list bid analysis. ISO-NE’s compliance filing also established a ten-percent materiality threshold for when IMM would institute price mitigation. Under this new proposal, if the seller’s de-list bid exceeds the IMM’s own bid calculation by more than ten percent, ISO-NE will file the IMM bid with the Commission and will use that bid as the mitigated bid in the next Forward Capacity Auction. Where the seller’s bid does not exceed that ten-percent threshold, however, the seller’s bid will be entered into the auction.

FERC approved ISO-NE’s updated mitigation process proposal and ten-percent materiality threshold. In doing so, the Commission noted that there were different, often subjective, assessments and methodologies used to decide whether to retire a resource. However, FERC concluded that the proposed ISO-NE mitigation process accommodated these variables. In response to some parties’ arguments that the proposal allows IMM to unnecessarily insert its own calculations whenever a seller’s calculations exceeded the ten-percent threshold, FERC noted that IMM would only be allowed to substitute its own judgment if the seller fails to demonstrate the reasonableness of its own calculations. Thus, by ensuring flexibility in analyzing a seller’s resource de-list bid and allowing for bid deviations up to ten percent before price mitigation, FERC determined that ISO-NE’s mitigation proposal sufficiently protected de-list bidders from unwarranted mitigation while also preventing unfair exercises of market power though uneconomic resource retirements. FERC approved ISO-NE’s compliance filing and instituted the same March 1, 2016 effective date as the ISO’s previously approved Tariff revisions.

A copy of the Commission’s Order can be found here.