Electricity Markets

Court rejects challenges to New England renewables exemption

The U.S. Court of Appeals for the District of Columbia Circuit on July 31 rejected challenges to an exemption to the minimum offer price rule in the ISO New England forward capacity market for a limited amount of qualifying renewable energy.

“We conclude that FERC engaged in reasoned decision-making to find that the renewable exemption to the minimum offer price rule results in a just and reasonable rate,” the court said in its decision.

The case before the appeals court involved a petition for review of FERC orders that carve out an exception to the minimum offer price rule for certain qualifying renewable energy resources in the New England energy market. The petition for review was made by a group of power generation companies, utility holding companies, and power distribution and sales companies (collectively known as “the generators”).

ISO-NE forward capacity market

ISO New England administers a forward capacity market for the region. It conducts the forward capacity market pursuant to rules set out in a jurisdictional tariff approved by FERC.

ISO New England sets prices in the forward capacity market by administering a forward capacity auction. One of the rules in the ISO New England forward capacity auction is the minimum offer price rule. The theory supporting this rule is that the improper exercise of market power can occur if a generation resource submits capacity to the auction at a below-cost price, suppressing the clearing price. According this theory, states and some utilities participate in the market as both buyers and sellers of power, giving them the opportunity to exercise this type of market power. The American Public Power Association does not agree with the use of a minimum offer price rule, which can adversely impact public power.

The appeals court noted that the minimum offer price rule mitigates this type of market power by requiring new resources to submit capacity to the auction above a minimum price floor. The minimum price floor is set at the approximate net cost of entry of a new generation resource.

The petition for review concerns an exemption to this rule that allows a limited amount of state-sponsored renewable generation sources to submit price offers below the minimum price floor.

ISO-NE reforms included renewable exemption

In April 2014, ISO New England filed a package of reforms to its tariff under section 205 of the Federal Power Act. The reforms implemented a new system-wide sloped demand curve to replace vertical curves and included a plan for developing local sloped demand curves in the future.

In the reformed tariff, ISO New England included a limited renewable exemption to the minimum offer price rule. The tariff allows up to 200 megawatts of qualifying new entrant renewable capacity to be exempt from the minimum offer price rule beginning with the ninth capacity year auction. It also included a carry-over rule, allowing any unused portion of the 200-MW renewable capacity to carry forward for two additional auctions (three years), up to a total cap of 600 MW.

The group of power entities that filed the petition for review protested the renewable exemption, arguing that it was unjust and unreasonable because it would undermine competitive entry and result in significant price suppression.

But FERC in May 2014 approved ISO New England’s reformed tariff, rejecting the generators’ arguments regarding the renewable exemption.

Court’s analysis

In its decision, the appeals court established that an exemption to the minimum offer price rule can be just and reasonable under the Federal Power Act.

The court noted that FERC has, at various times, considered exemptions to the minimum offer price rule in other markets. In some cases, the Commission accepted an exemption, despite the potential for price suppression.

“In those cases in which the Commission has considered exemptions to the minimum offer price rule, it considered exemptions using a fact-specific balancing test, factoring in the scope of the exemption, the existence of sloped demand curves, and the overall impact on the market, and only accepted exemptions that were appropriate based on the specific features of the market,” the court said.

FERC “engaged in the same type of analysis in the present case, and its conclusion is not contrary to precedent. This type of balancing requires an expert understanding of the market, which is well within the Commission’s realm of expertise. We see no reason to disturb the Commission’s balancing just because it came out in favor of the renewable exemption despite the potential for price suppression.”

The court also said it would defer to the Commission’s conclusion that the renewable energy exemption had only a limited potential for price suppression because of the implementation of the sloped demand curve, the prediction of a flatter supply curve, and predicted load growth and retirements. “Therefore, we deny the generators’ petition for review.”

In its decision, the court notes that ISO New England decided that changing market conditions necessitated phasing out the renewable energy exemption and that FERC accepted ISO New England’s revised tariff phasing out the renewable energy exemption. That revised tariff was not the subject of the petition before the appeals court.