If an order issued late March 9 is any indication, the newly constituted Federal Energy Regulatory Commission is not going to have an easy time tackling the pressing issue of addressing the impact of state policies and generation choices on competitive wholesale markets.
Of the five FERC commissioners, one dissented, another dissented and concurred in part, and a third concurred in part with respect to the order, which approved the ISO New England's plan to create a two-part power capacity auction aimed at accommodating states' energy policies. That would be accomplished by allowing newer generation to replace aging assets that are willing to retire in exchange for something akin to a severance payment.
The only commissioner dissenting from the entire order, Robert Powelson, said while the ISO-NE proposal may be well intentioned, the two goals it tries to achieve "are fundamentally in conflict and cannot coexist in one market." By attempting to accommodate state policies, Powelson said, the proposal will threaten the viability of the capacity market.
Powelson blamed the states for creating that conundrum by agreeing to join an organized market and charge the ISO-NE with ensuring resource adequacy and grid reliability but then seeking to procure resources of their choosing. He said the states also are responsible for possibly forcing customers to pay twice for the same capacity.
ISO-NE's proposal
Certain New England states have established renewable energy targets and programs aimed at procuring thousands of megawatts from renewable resources. Since much of the renewable capacity being built to meet those objectives is state subsidized and being procured outside the ISO-NE's capacity market, the grid operator became concerned that
In addition, the grid operator has been worried that states procuring certain resources outside the ISO-NE's markets will drive down capacity market prices to levels that deprive resources not supported by the state of the opportunity to recover their investment costs through the capacity market. The ISO-NE expressed concern about the impacts of its minimum offer price rule, or MOPR, which does not allow resources receiving out-of-market revenue to reflect that support in their offer prices. The MOPR may cause consumers to "pay twice" for the same capacity — once for the capacity acquired in the capacity market and again for resources that could serve as capacity but were procured outside the market through out-of-market contracts with state-supported resources.
Accordingly, the ISO-NE in January proposed to immediately follow its forward capacity auction with a so-called "substitution" auction, which would allow existing resources that cleared the first auction but are willing to retire, to offer to transfer those capacity supply obligations to a new resource through a sealed-bid auction at the lowest price at which the plant is willing to leave the market. That two-stage process has been dubbed "Competitive Auctions with Sponsored Policy Resources," or CASPR.
The ISO-NE maintained that allowing newer generation and resources to displace older generation that elects to retire accommodates the new resources "at a pace that should not adversely impact capacity prices." While the proposed new process will not change the total quantity of resources that are committed as capacity resources, the ISO-NE said it could lead to older coal- and oil-fired units deciding to retire.
FERC's order
In approving the ISO-NE proposal, FERC said it generally intends to use a MOPR to address the impacts of state policies on wholesale capacity markets, absent a showing that a different method "would appropriately address particular state policies." Here, the agency determined that the ISO-NE’s proposal is just such an alternative.
FERC previously found that the ISO-NE's MOPR construct, including a limited exemption for a set quantity of renewable resources each year, would adequately limit the impact of out-of-market state actions on capacity market prices. The problem is that the New England states have significantly ramped up their renewable generation targets and their efforts to promote the development of specific state-supported resources, the order explained.
In particular, the commission acknowledged that the substitution auction price during certain years may drive decisions about entering or exiting the capacity market while also noting that the price paid to all other capacity resources will be set by the primary auction where the MOPR is applied to all new resource offers.
"This design thereby reasonably mitigates" the impacts of state-sponsored resources entering the capacity market through the substitution auction, the agency reasoned. "And to the extent CASPR allows state-supported resources to obtain capacity supply obligations without clearing the primary auction, it does so by carefully coordinating the entry of those resources into the [forward capacity market] with the exit of an equal quantity of retiring capacity."
FERC said it expects that such coordination will avoid sudden and dramatic shifts in supply amounts that can undermine investor confidence that the capacity market will allow them to recoup the costs of their investments in new capacity over the long term.
Finally, the agency said its acceptance of the ISO-NE proposal should not be read as a departure from its fuel-neutral policies, stressing that its decision was based on the record before it in this particular case.
Dissents and concurrences
"Unless the states are willing to reassume complete responsibility for resource adequacy, they must accept that the commission is required to take action to ensure the viability of the capacity markets," Powelson maintained in his dissent. In this case, he said, FERC should not have approved a proposal that will not allow the capacity market clearing price to provide a meaningful signal to the marketplace.
"Price signals are skewed when resources receiving out-of-market revenue participate in the market alongside resources that do not receive similar support because they are able to offer into the market at a lower price that is reflective of the out-of-market revenues they are receiving rather than a price that is reflective of their total costs," Powelson maintained. "This is precisely what CASPR permits."
Powelson said he also is concerned that by approving the proposal, FERC is sending the signal that the best way to ensure the future viability of a particular resource is to seek state support. He said the order also dissuades states from pursuing long-term market solutions, such as putting a price on carbon or valuing other desired resource attributes within wholesale energy and capacity markets. In addition, Powelson questioned CASPR's ability to accommodate state-supported resources.
In a forceful partial dissent, Commissioner Richard Glick took aim at the order's suggestion that state-sponsored resources must be subject to either a MOPR or an alternative mechanism for "accommodating" the effects of state public policies.
That rationale "is ill-conceived, misguided, and a serious threat to consumers, the environment and, in fact, the long-term viability of the commission's capacity market construct," Glick wrote. He said the order also interferes with the states' responsibility to shape the generation mix in their own regions and forces consumers "to prop up generators" with attributes that may be inconsistent with the policies adopted by state officials.
Since Congress gave states the authority to make generation resource decisions, Glick said the MOPR should only be applied in the limited circumstance for which it was originally intended: to prevent the exercise of buyer-side market power. "I believe that a commission policy of 'mitigating,' rather than facilitating, state public policy preferences places the commission in a role that Congress never intended it to play," Glick wrote.
Glick also maintained that by effectively making a state pay twice for capacity that is subject to the MOPR, the commission "is greatly increasing the cost that a state must bear in order to exercise the authority that Congress reserved to the state under the [Federal Power Act]."
In addition, Glick assailed the order's suggestion that FERC must ensure that a capacity market construct assures investors they will recover their costs. "This pursuit of investor confidence will cause the over-procurement of capacity, the imposition of unnecessary costs on consumers, and the outright frustration of state public policies," he predicted.
In a partial concurrence, Commissioner Cheryl LaFleur also took issue with the notion that FERC should use a MOPR as a "standard solution" for the impacts of all state policies, calling it "too blunt of an instrument."
Instead, LaFleur said FERC should allow certain variations of a MOPR, including providing MOPR exemptions or, like CASPR, allowing resources subject to the MOPR "to obtain a capacity award while not impacting or necessarily receiving the market clearing price." She said other market design constructs, such as carbon pricing, also could achieve state objectives within the market.
LaFleur said instead of requiring a cookie-cutter solution to be broadly applied across all regions, FERC should be open to region-specific solutions of different types. But she also cautioned stakeholders about the potential harm of inaction, including "gradual, unplanned reregulation, making the transition to clean energy in those regions more expensive than necessary and less reliable for customers."
"The value of markets to customers makes it well worth the effort to adapt them to accommodate or achieve state policy objectives, and today's order approving CASPR is an important milestone in that ongoing effort," she concluded. (FERC docket ER18-619)
