Washington — The chairman of the US Federal Energy Regulatory Commission warned about the broader consequences of an ISO New England proposal to revise the delist provisions of its capacity market rules, while two of his colleagues signed off on the order.
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"In addition to my concern that implementing this kind of rule change after the relevant deadlines have passed is not an equitable way of conducting business, the legal basis of the order is questionable at best," FERC Chairman Neil Chatterjee said in a dissent. "This case raises very serious questions about when and how the rule against retroactive ratemaking applies in the context of an auction driven by inputs that are established according to deadlines in a filed tariff."
Currently, the ISO-NE's tariff requires existing capacity resources that wish to retire or permanently leave the grid operator's forward capacity market to submit certain financial information and a delist bid, which is a price at or below which it would retire a facility or no longer accept a capacity commitment. The ISO-NE's internal market monitor then uses a two-step process to review the delist bid to ensure that it was submitted for economic reasons, including by looking at the expected remaining economic life of the resource.
The ISO-NE's market monitor has determined that the economic life calculation overstates the true economic life of a resource. The current calculation assumes that a resource that earned positive cash flows in its earlier years would continue to operate in later years at a loss as long as its overall cumulative cash flows remain positive. But the monitor said a resource justifiably would want to retire as soon as the resource becomes unprofitable in order to avoid losing some of the profits already gained instead of continuing to operate at a loss.
The grid operator, joined by the New England Power Pool, therefore proposed to modify the economic life calculation to reflect that reality -- i.e., to assume that the expected economic life of an existing capacity resource "is the period that maximizes the net present value of the resource's expected cumulative future profits."
In asking FERC to approve the tariff revisions, the ISO-NE requested that the changes be allowed to take effect retroactive to August 10 so the revised calculation would apply to the region's 13th forward capacity auction, or FCA 13, to be held in February 2019. The grid operator explained that a large supplier has sought to delist four existing capacity resources totaling about 2,000 MW from FCA 13, which could impact the competitiveness of that auction.
In a November 9 order granting the ISO-NE's request, Commissioners Cheryl LaFleur and Richard Glick said the proposed revisions would help ensure that the outcomes of FCA 13 and future auctions are competitive and avoid the potential that capacity resources will receive inflated FCA clearing prices.
The New England Power Generators Association had argued that approving the requested effective date for the changes would violate the filed rate doctrine or constitute retroactive ratemaking. But the majority disagreed, noting that the delist bids are "merely inputs to the wholesale rate" and not the "ultimate rate," which will be filed with the commission after the auction has cleared.
The majority further reasoned that the ISO-NE's tariff put market participants on notice that delist bids are subject to change. Moreover, the revisions in fact are being implemented prospectively and not retroactively because FCA 13 has not yet occurred, the order said.
In his dissent, Chatterjee said the proposed tariff revisions should take effect after FCA 13 is held to avoid disrupting "settled market expectations mid-course" and harming market participants who relied on the existing tariff in calculating prices and entering into contracts.
"Allowing the proposed rule change to take effect for FCA 13 will alter the consequences of economic decisions that certain market participants have already made about the conditions under which their units will retire," Chatterjee said. "These market participants reviewed their economic position in light of the existing rules and chose to submit de-list bids in reliance on these existing rules. Today's action denies market participants the opportunity to make a fully informed decision about whether to submit a de-list bid."
Chatterjee said he also was troubled that the ISO-NE submitted its proposal "to modify the economic consequences of those de-list bid decisions" after it calculated those consequences under the existing rules. "This change would achieve a specific price-oriented outcome based on information ISO-NE possesses due to its unique role as both system operator and auction administrator," he concluded.
The fourth sitting FERC commissioner, Kevin McIntyre, who has been ill, did not vote on the order (ER18-1770).
-- Glen Boshart, S&P Global Market Intelligence, firstname.lastname@example.org
-- Edited by Annie Siebert, email@example.com