On December 2, 2020, FERC ordered ISO New England, Inc. (“ISO-NE”) to remove the price-lock mechanism and zero-price offer rule (together, the “New Entrant Rules”) from Tariff provisions relating to its Forward Capacity Market (“FCM”), finding that the price certainty benefit afforded by these rules no longer outweighs their price suppressive effects. FERC also clarified that its termination of these rules would not impact price-lock agreements in effect prior to the issuance of its order. FERC thus ordered ISO-NE to eliminate the New Entrant rules starting in its sixteenth Forward Capacity Auction (“FCA”).

ISO-NE holds an FCA each year to procure capacity for its FCM. At the inception of the FCM, ISO-NE adopted a price “lock-in” rule to encourage new suppliers to enter the market, to mitigate price risk and provide predictable revenues, and to facilitate financing for new capacity. The lock-in rule allowed new entrants to “lock in” the market clearing price observed in their first year participating in the FCM for up to an additional six years. Under the zero-price offer rule, new entrants would be required to offer their capacity into those subsequent auctions as a price-taker, i.e., at a zero-price offer, to ensure that the offer clears. Despite these lower bids, the new suppliers would still be guaranteed their locked-in, first-year market clearing price.

Complaints challenging the New Entrant Rules were filed by the New England Power Generators Association, Inc. (“NEPGA”), Exelon Corporation, and Calpine Corporation, respectively. FERC dismissed the complaints, but the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) issued a decision remanding the orders without vacatur for further proceedings (see February 13, 2018 edition of the WER). The D.C. Circuit found that FERC had not adequately explained why it allowed ISO-NE to institute the New Entrant Rules without an offer floor, when it had previously rejected similar rules in PJM Interconnection, L.L.C.’s capacity market on the basis that the rules would result in price suppression and discriminatory rates. On remand, FERC established paper hearing procedures in order to evaluate, among other questions: the need for the price lock; whether the price-lock or zero-price offer rule lead to unreasonable price suppression; whether to retain the price-lock rule but add an offer floor; and any alternative approaches to the price lock rules that would incent new entry.

FERC’s December 2 order concluded that the New Entrant Rules are unjust and unreasonable and directed ISO-NE to submit a filing on compliance to eliminate the price-lock and zero-price offer provisions from its Tariff on a prospective basis. FERC explained that, since the New Entrant Rules were instituted, ISO-NE has made several changes to energy and ancillary services markets that have provided new resources in ISO-NE greater certainty about their ability to earn revenues in these markets and reduced their reliance on price certainty in the capacity markets. These changes included: implementing a system-wide and zonal downward sloping demand curve to reduce annual price volatility; implementing scarcity pricing enhancements to increase the price that resources are paid for energy and reserves during scarcity conditions; and removing a downward adjustment to monthly capacity payments in order to prevent suppliers from withholding energy to increase prices.

FERC further concluded that the price suppression caused by the New Entrant Rules can no longer be justified as necessary to facilitate new entry into the FCM. FERC pointed out that there are several alternatives outside of ISO-NE’s markets that can provide price assurance to resources seeking to enter its capacity market, including resources’ ability to purchase contracts in capital markets and then incorporate the cost of that hedge into their FCA offers. However, FERC directed ISO-NE to retain the zero-price offer requirement for existing price-locked resources for the remaining duration of their price-lock, reasoning that recently-cleared resources are unlikely to have high going-forward costs and that requiring price-locked resources to offer at zero will yield an FCA clearing price reflective of a competitive market. In so doing, FERC rejected NEPGA’s argument that unreasonable price suppression would occur unless ISO-NE implements a soft offer floor for the remaining resources that elected the price lock, finding that an offer floor would unnecessarily complicate the FCM and have detrimental consequences.

FERC’s December 2 order is available here.