Despitegenerators' assertions that market power concerns the proposal was meant toaddress are "vastly overblown," FERC revisions to the 's processfor retiring resources from its forward capacity market, albeit with acondition.
Thegenerators had argued that no evidence exists to show that the option ofsubmitting a non-price retirement request, or NPRR — which the proposal would eliminate— has ever been used to exercise market power through physical withholding, butthe commission said that is irrelevant to its consideration of the ISO-NE'sproposal. "Our review here is limited to whether ISO-NE's proposal is justand reasonable and not preferential or unduly discriminatory" and the gridoperator "has met this burden," FERC said.
Historically,capacity suppliers in New England have been able to submit de-list bidsspecifying a price below which they do not wish to provide capacity from theirexisting resources approximately eight months ahead of the next forwardcapacity auction, or FCA. Suppliers seeking to withdraw a resource from thecapacity market for a single year would submit a static de-list bid, whilethose looking to permanently exit a resource from that market alone wouldtender a permanent de-list bid. In either case, delist bids could only reflectthe net going-forward costs of a capacity resource; future capital expensescould not be included.
Acapacity supplier wishing to permanently retire an existing resource from allmarkets, however, could submit an NPRR that allowed the resource to exit thecapacity market without regard to price, and could do so as late as 120 daysbefore the FCA. Unlike those submitting de-list bids, a capacity suppliersubmitting an NPRR could not be compelled to continue operating its resource,even if that resource had been found to be needed to maintain reliability.
Butthe ISO-NE in December 2015 proposed to revise its FCM rules and reform theprocess for retiring generators to allow suppliers to submit retirement de-listbids that would let them price the full retirement of an existing resource fromall markets. The grid operator explained that the reforms were needed tocorrect certain weaknesses in the process, such as it failed to address thepotential for a capacity supplier to exercise market power by retiring aresource prematurely to artificially increase prices in a way that benefits theremainder of its generation portfolio.
TheISO-NE accordingly proposed to replace the NPRR with a new retirement de-listbid that would reflect the net present value of the resource using a discountedcash flow, or DCF, approach, and to also apply that DCF approach to thepermanent de-list bid review process. Both of those types of bids would undergoa review by the ISO-NE's internal market monitor to address potential marketpower concerns associated with uneconomic retirements. Additionally, the ISO-NEproposed to revise its existing FCA timeline to ensure that retirement bids aresubmitted before the "show-of-interest" window for new resourcescloses.
Variousparties weighed in onthe proposal, mostly to argue that it is not needed and in fact may mute legitimateprice signals as it attempts to head off a problem that may not even exist.
Inaccepting the changes April 12, FERC found that the revisions to the timelinewill benefit the market by giving project sponsors that are consideringdeveloping new resources better and more timely information about when andwhere new capacity may be needed. They also will help inform new entrants'decisions on whether to enter the FCM in the next auction and allow the ISO-NEto better reflect resource retirements in its capacity zone determinationprocess, the commission said.
Asfor the other revisions, FERC was unpersuaded by arguments that the zonalsloped demand curves the ISO-NE is developing will sufficiently reduce the needfor the proposed reforms. While the sloped curves may lessen the risk, thepotential for the exercise of supplier-side market power still is there,according to the agency.
FERCalso dismissed concerns about the likelihood of over-mitigation, noting thatthe ISO-NE's proposal is similar to other measures the grid operator currentlyemploys to protect its capacity markets from the exercise of market power.
"Forexample, as in the instant proposal, the current buyer-side mitigation rulesapply preemptive mitigation to address market power concerns in instances wherea supplier offers a price deemed to be uneconomic," FERC explained. "Inaddition, ISO-NE's instant proposal allows for consultation with the IMMregarding whether the information supporting the retirement bid is reasonable."
Moreover,noting that the consultative approach proposed by the grid operator isconsistent with the way static de-list bids currently are handled, FERC said "theinstant proposal appropriately extends such an evaluation to retirementrequests."
Argumentsthat the test the IMM will use to determine if a capacity supplier's retirementof a resource will benefit other generation resources in its portfolio — aconcern that arose with the retirement of the Brayton Point generating station— were similarly discounted, as that test will "produce an objectivemeasure indicating a potential exercise of market power and, accordingly, theneed for mitigation," the commission said. That test also will only beused "in narrow circumstances" when a supplier chooses to unconditionallyretire a resource, FERC noted.
However,FERC conditioned its approval on the ISO's submitting a compliance filingwithin 30 days establishing a materiality threshold for determining whether aparticular proxy de-list bid will replace a retirement bid in an FCA.Establishing such a threshold will help lower the risk that the IMM willmitigate conduct that is not actually an exercise of market power, FERCexplained. (ER16-551)