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Court remands FERC decision allowing new ISO-NE suppliers to lock in prices

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Court remands FERC decision allowing new ISO-NE suppliers to lock in prices

Existing generators were handed a victory when a federal appeals court ordered the Federal Energy Regulatory Commission to reconsider its approval of new rules for the ISO New England's capacity market that the generators claimed would drive down capacity prices.

The U.S. Court of Appeals for the District of Columbia Circuit on Feb. 2 found that FERC, in a series of orders, failed to adequately explain its rationale for approving the ISO-NE's price "lock-in" and "capacity-carry-forward" rules, the aim of which was to encourage new generating resources to enter the grid operator's capacity market.

"FERC did not engage in ... reasoned decisionmaking," wrote Judge Robert Wilkins, who penned the court's opinion. "FERC failed to respond to the substantial arguments put forward by petitioners and failed to square its decision with its past precedent."

The ISO-NE's rules allow new suppliers to lock in their first-year clearing prices for up to seven years and require that the capacity of the price-locked resources be offered into the future capacity auctions during the lock-in period, potentially at very low prices or even a price of zero. Doing so could drive down capacity prices for generators other than those with locked-in prices.

Crying foul, the New England Power Generators Association and Exelon Corp. filed separate complaints (FERC dockets EL14-7, EL15-23) with FERC. They argued that the lock-in and capacity carry-forward rules are discriminatory because they give new suppliers a windfall while lowering clearing prices paid to existing suppliers.

FERC denied both complaints, but the court said the agency's reasoning "morphed" over the course of the nearly two years between the commission's denial of the association's complaint and its denial of Exelon's rehearing request.

Essentially, FERC said allowing capacity to get carried forward into future auctions does not necessarily mean prices will be driven down below competitive levels due to excess capacity, the court recounted. The agency also claimed the rules will help ensure the ISO-NE has enough capacity to meet future power needs.

FERC further maintained that its denial of a somewhat similar pricing construct for the PJM Interconnection does not mean it must reject the ISO-NE's pricing rules, asserting that the conditions in the two markets were different. The commission also contended before the court that it has changed its view about the lock-in and capacity carry-forward rules since its PJM decision and even suggested that it would be more receptive to the tariff changes at issue in PJM if they were proposed today.

Stressing that while the court must grant wide deference to FERC in rate-setting, Wilkins said the agency also must engage in reasoned decisionmaking, which the court found was not the case here.

In particular, the D.C. Circuit found that FERC failed to reconcile its decision allowing the ISO-NE rules to go into effect with its rejection of the PJM tariff provisions.

"FERC failed to adequately explain why its rationale in PJM — which seems to foreclose signing off on a tariff scheme like ISO-NE's — does not apply even more forcefully to the scheme it accepted" for New England, the judge wrote. "As petitioners argued, the structural mechanisms of the ISO-NE market appear to exacerbate all of the problems FERC cited for rejecting the similar rule in PJM."

"Although FERC may be sincere in its change of heart and ... correct that its new rationale is just and reasonable, the commission must provide some analysis and explanation in its orders regarding why it changed course," the judge concluded.

The court therefore remanded the matter to FERC "for further proceedings consistent with this opinion."

Joining Wilkens in the decision New England Power Generators Association v. FERC (15-1071; 16-1042) were Judges David Sentelle and Sri Srinivasan.

Ethan Howland is a contributing reporter to S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.