On January 29, FERC issued an order accepting revisions to ISO New England Inc.’s (“ISO-NE”) Competitive Auctions with Sponsored Policy Resources (“CASPR”) program, the ISO-NE’s mechanism to integrate state-sponsored generation resources (“Sponsored Policy Resources”) that might otherwise suppress prices in its Forward Capacity Market. The order addressed the contested test price mechanism in detail, ultimately accepting it as a just and reasonable modification to ISO-NE’s Forward Capacity Auction (“FCA”) design. In so doing, FERC’s order permits ISO-NE to bar capacity resources from participating in the FCA secondary auction if those resources bid capacity into the FCA primary action at a price below the ISO-NE’s assessment of their going-forward costs. FERC’s order drew a dissent from Commissioner Glick, who argued that the test price mechanism had not been shown to be just and reasonable.
ISO-NE and the New England Power Pool Participants Committee proposed the test price mechanism in order to address the concern that a capacity resource could contribute to inefficiencies in the primary FCA auction by engaging in “bid shading.” As background, the ISO-NE holds its annual FCA in two stages: a primary auction in which bidding generators are subject to a Minimum Offer Price Rule (“MOPR”), and a secondary auction in which resources that have cleared the primary auction can transfer their capacity obligations to new Sponsored Policy Resources before retiring from the market. Because the secondary auction is not subject to the MOPR, Sponsored Policy Resources can offer lower bids than in the primary auction. CASPR thus coordinates the entry of Sponsored Policy Resources with the exit of an equivalent amount of Existing Capacity Resources (resources participating in the FCA that have previously offered capacity into and cleared the auction) (see March 20, 2018 edition of the WER for more detail on CASPR.) “Bid shading” occurs when an Existing Capacity Resource nearing retirement reduces its primary auction offer below its true cost in order to increase the likelihood that the resource clears the auction and acquires the necessary Capacity Supply Obligation (“CSO”) to then shed in the secondary auction.
FERC’s order accepted the test price mechanism as a just and reasonable means to address “bid shading,” and offered some clarifications to the process for setting the test price. Market participants will submit a test price for Existing Capacity Resources—i.e., the competitive price below which a market participant would retire the resource rather than acquire a CSO. The Internal Market Monitor (“IMM”) will then evaluate the market participant-submitted test price and may propose an adjustment if the IMM believes that the market participant has failed to support its proposal. ISO-NE will then file both the test price as proposed by the market participant and the IMM’s proposed adjustment. FERC will evaluate both test price submissions and “accept the market participant’s test price so long as the market participant persuades the Commission that its test price is just and reasonable, despite contrary assertions by the [IMM].” The test price values as accepted or modified by the Commission will apply in the associated FCA.
In dissent, Commissioner Glick argued that the test price mechanism worked against the CASPR program’s purpose to facilitate the entry of state-sponsored resources into ISO-NE’s capacity market. Because the test price mechanism prevents resources from offering their capacity into the secondary market at a price below ISO-NE’s assessment of their going-forward costs, Commissioner Glick concluded that the mechanism would result in Existing Capacity Resources remaining in the market that would otherwise have retired through the secondary auction. This, in turn, will result in an insufficient number of buyers in the secondary auction and force consumers to pay twice for capacity. Commissioner Glick further concluded that neither ISO-NE’s filing nor the Commission’s order provided adequate support for why a proposal that “tilt[s] the scales in favor of retaining traditional resources and against the incorporation of state-sponsored resources” is just and reasonable.
The Commission’s January 29 order is available here.