Despite its internal market monitor's findings that the region's 2013-2014 winter reliability program auction "was not structurally competitive," the ISO New England Inc. told FERC that the bid results were reasonable and should be approved as filed.
The market monitor said a small portion of the program's total costs may be the product of the exercise of market power but asserted it cannot reach a "direct conclusion" that bids with medium or high markups were the result of such exercise, the ISO-NE recounted in its Jan. 23 filing.
Under the program, which was aimed at curbing reliability concerns that had plagued the New England region in previous winters when the availability of natural gas became limited, certain resources selected through a bidding process were compensated for providing demand-response or oil-inventory services.
FERC in October 2013 largely accepted the ISO-NE's selection of the bids from 20 entities to participate in the 2013-2014 winter reliability program. But the U.S. Court of Appeals for the District of Columbia Circuit in December 2015 ruled that FERC could not have properly evaluated the program's rates without examining the profit margins included in market participants' bids. It therefore remanded the matter so FERC could either justify its decision or revise it to ensure that the rates under the program are just and reasonable.
Responding to the remand, FERC in August 2016 directed the ISO-NE to both have its market monitor evaluate the auction's competitiveness and submit recommendations regarding the reasonableness of the bid results.
The ISO-NE attached to its Jan. 23 filing the market monitor's report on its analysis, which explained that four market participants accounted for nearly 70% of supply bid and the auction "failed to attract sufficient supply to meet the target procurement."
"In this case, every market participant possessed market power," the market monitor said.
However, the ISO-NE said the "vast majority," or 75%, of supply was offered at prices that appear reasonable, and the remaining apparently noncompetitive offers may have been the result of several factors that have nothing to do with market power. For instance, the grid operator said some participants may have priced their bids for the entire three-month winter period rather than per month, as directed, while others may have taken an unusually conservative approach in valuing their inventory and assessing risk due to the "novelty of the program."
Bids with high markups resulted in a "potential cost overage" of approximately $6.6 million, or 9% of the total cost of the program, the ISO-NE explained. However, the market monitor determined that those excesses are "small compared to what may have occurred," given that the pay-as-bid auction design actually provides an incentive for participants to bid above cost, and the program included no mitigation mechanism to "prevent participants from exercising the market power [they] generally knew they held."
The ISO-NE accordingly concluded that the bid results were reasonable and "there is insufficient demonstration of market power to warrant modification of program payments."
"Moreover, a decision to reopen the winter reliability program could undermine future reliability programs," the grid operator said. "In the event that ISO-NE again has to take action to preserve reliability on short notice, it will rely on participant confidence and willingness to participate, both of which could be undermined by reopening the 2013-2014 program." (FERC docket ER13-2266)