FERC Continues Assault on Retail Customers with Offer Floor Directive for FCA

April 14, 2011
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Essentially providing a bailout to generators due to low capacity prices in ISO New England, FERC directed ISO-NE to develop a mitigation regime that relies on benchmark pricing for so-called out-of-market (OOM) capacity, but which does not procure more capacity than the Installed Capacity Requirement (ICR).

Although generators have claimed various states have engaged in uneconomic entry and buyer-side market manipulation, generators have tellingly not brought any complaint before FERC alleging a violation of any market rules or tariffs. Indeed, FERC even concedes in its order that any such potential complaint would have failed.

Nonetheless, FERC still found that minimum offers shall be imposed on all capacity offering into the Forward Capacity Auction. Essentially, FERC will require ISO-NE to implement an offer-floor mitigation construct akin to those in PJM and the New York ISO. The Commission ordered ISO-NE to convene a stakeholder process to develop tariff revisions to implement buyer-side mitigation in the Forward Capacity Market (FCM) that would impose offer floors on new resources offering into the FCM auctions.

The offer floors would utilize benchmark prices, which would "represent competitive offers," developed by the Independent Market Monitor and which would be specific to each resource type. The offer floor is to be set at a level that "approximates" the net cost of entry of a new resource.

FERC directed ISO-NE to file a set of proposed "estimates" of the applicable costs of new entry for various categories of new resources; a process for revising these estimates over time; and a proposal establishing offer floors for various categories of resources based on these cost estimates (e.g., whether the offer floor threshold should equal 80 percent of the applicable cost of entry versus some other level). ISO-NE shall also file a proposal for how long a resource should be subject to an offer floor and/or what conditions should be met before removing the offer floor for the resource.

FERC stressed that resources initially subject to the offer floor would not necessarily be precluded from clearing, because a resource seeking to offer below its benchmark will have the opportunity to justify its costs to the IMM. If the IMM, or FERC under a complaint, deems the original offer "justified," such a resource will be permitted to bid its actual costs.

FERC rejected ISO-NE's more complex, two-tiered buyer-side mitigation proposal (which would have resulted in two separate clearing prices and a potential for the procurement of capacity above the Installed Capacity Requirement).

FERC will also require offer floors on long-lead time resources, though the exact mechanism shall be developed by ISO-NE. Despite the fact that such resources, by the time they bid into their first FCA, will have minimal construction costs (and only minimal going forward costs), FERC feared that rational bidding reflecting such minimal costs would depress capacity prices, and suggested that offers from these resources should be raised to reflect already-sunk costs.

FERC dismissed states' right to order the construction of new generation for various policy goals, and will by default subject such generation to the minimum offer prices, though states may file a complaint at FERC seeking an exemption.

Throwing a bone to load, FERC ruled that out-of-market- resources that have already cleared in the FCA shall not be subject to the new offer floors.

Further increasing capacity prices, FERC accepted ISO-NE's proposal to model all zones all the time, which will increase the likelihood for price separation in zones. FERC accepted this form of zonal modeling despite its concession that such modeling will increase opportunities for seller market power. FERC said that it has addressed these concerns through new mitigation measures.

FERC accepted ISO-NE's proposal to use the eight energy load zones as initial capacity zones.

The new zonal requirements will require a radical change in how ISO-NE procures and clears the FCM; however, only a skeletal description of the new clearing process was provided. Load interests protested the acceptance of the modified zonal requirements, which necessitate fundamental changes in the clearing of the auction, without assurances of what the new clearing mechanism will look like.

Load interests noted the inherent subjectivity in determining how each zone will clear, and that an untested and unproven clearing design increases the, "risk of unintended, unexpected, and inefficient outcomes," that will produce, "incorrect and inefficient prices and capacity supply obligation awards."

FERC dismissed these concerns, finding that parties will have an opportunity to address such issues as market rules are developed.

As if imposing an offer floor on resources was not enough of a bailout, generators during the case had argued for the abandonment of the original FCM vertical demand curve in favor of the downward sloping demand curves used at PJM and NYISO. This essentially would have instituted the originally proposed LICAP market through a backdoor means. FERC rejected this maneuver, finding that purchasing only the capacity required under the Installed Capacity Requirement -- which is only possible through the current vertical demand curve and not generators' proposal -- is a "bedrock" principle of the FCM.

The case was Docket ER10-787 et. al.

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