On October 25, 2017, FERC issued an order explaining the market consequences when a resource loses certain participation rights in the New York Intendent System Operator, Inc. (“NYISO”) Installed Capacity (“ICAP”) market.  The order on clarification, which was requested by NRG Power Marketing LLC and GenON Energy Management, LLC (collectively, “NRG”), followed a January 27, 2017 decision in which FERC largely accepted NYISO’s proposed revisions to its Market Administration and Control Area Services Tariff (“Tariff”) to correct a pricing inefficiency in its ICAP market design.  As FERC clarified in this most recent order, when a capacity resource loses its ability to participate in NYISO’s ICAP market, certain benefits or discounts tied to that participation ability—here, a so-called “Locality Exchange Factor”—fall away.

NYISO originally submitted its Tariff revisions in November 2016 to address pricing inefficiencies for energy exports from certain NYISO zones, known as Localities, that are “import constrained” due to transmission constraints limiting the amount of power that can be delivered.  As explained by FERC in its January 27 order, each NYISO Locality has a “Locational Minimum Installed Capacity Requirement,” representing the amount of capacity that load-serving entities must obtain from capacity resources located within the Locality in which they serve customers.  At the time of its November 2016 filing, NYISO’s ICAP market rules considered generators that exported power from import constrained Localities to no longer be in service.  As a result, the relevant resource’s exported capacity was required to be replaced with other capacity located exclusively within the import-constrained Locality, resulting in increased capacity prices, as well as increased revenue for generators participating in capacity auctions.

In its November 2016 filing, NYISO proposed to change its market rules to, among other things, recognize that whenever a generator exports power from an import-constrained Locality, counter-flows can ease import constraints and make it possible to replace a portion of the exported capacity with capacity located outside that Locality.  Specifically, NYISO proposed a mechanism known as the “Locality Exchange Factor” to determine the amount of capacity from outside an import constrained Locality that could replace exported capacity from that Locality.

NRG protested NYISO’s filing, arguing essentially that any capacity market discounts (such as the Locality Exchange Factor) should cease if a resource loses its Capacity Resource Interconnection Service (“CRIS”) rights and therefore, its ability to participate in NYISO’s ICAP Market.  In the event that an exporting resource loses its CRIS rights, NRG argued, the import-constrained Locality’s Locational Minimum Installed Capacity Requirement should again have to be met by resources within that Locality—which would result, as noted above, in increased ICAP market prices.

In its January 27 order, FERC responded to NRG’s concern that the Locality Exchange Factor conflicted with NYISO’s other rules on CRIS rights forfeiture.  FERC confirmed that if a generator fails to maintain its CRIS rights, it may not participate in NYISO’s ICAP markets.  However, FERC determined that the “situation does not call for an end to NYISO’s Locality Exchange Factor methodology.  The same conditions still exist in terms of the generator’s exporting capacity’s effects on counter-flows into the Locality.”

NRG filed its request for rehearing and clarification in February 2017, arguing that FERC’s holding confused the consequences of losing CRIS rights on resources exporting from import constrained Localities.  As NRG argued, FERC’s statement that “[t]he same conditions still exist” could mean that the Locality Exchange Factor should still be applied to exported capacity associated with a resource that has lost its CRIS rights because the exporting generator is still creating counter-flows that enable capacity to be replaced from outside of the Locality in which it is located.

In its October 25 order, FERC explained that the Locality Exchange Factor was a component of NYISO’s capacity market.  FERC clarified that if a resource loses its CRIS rights, and corresponding ability to participate in the ICAP market, “the Locality Exchange Factor would not apply to reduce the amount of capacity that must be procured from within an import constrained Locality based on the exports of [that] resource.”  In other words, if the exporting generator is unable to participate in the ICAP market, its exported capacity must once again be replaced by capacity resources located exclusively within the import constrained Locality.