The Federal Energy Regulatory Commission must reconsider orders it previously issued denying complaints filed by Exelon Corporation and the New England Power Generators Association related to ISO New England’s forward capacity market (FCM), the U.S. Court of Appeals for the District of Columbia Circuit said on Feb. 2.
The court said that FERC “failed to square its decision with its past precedent” in a decision from several years ago involving similar provisions in the capacity market operated by the PJM Interconnection, the mid-Atlantic grid operator.
The appeals court was asked to consider two petitions for review by Exelon, an investor-owned utility and merchant generation holding company, and NEPGA, a New England merchant generator association, challenging FERC orders that turned aside complaints by these same entities, joined by Calpine, a merchant generation owner.
Exelon and NEPGA challenged four FERC orders that uphold the current iteration of a tariff that governs how ISO-NE FCM participants buy and sell future capacity. The FCM is a yearly auction in which utilities and other load-serving entities pay suppliers for their generation capacity three years in the future.
NEPGA and Exelon challenged two of the rules under the tariff, which they contend altered the structure of the FCM “to the detriment of petitioners and other existing suppliers,” the court noted in its opinion.
NEPGA and Exelon are electricity suppliers that participate in New England’s FCM auction. The court said that because they have participated in the FCM in the past and are not “new entrants,” they cannot reap the benefits of the two rules challenged in this case, which benefit only new suppliers.
“Lock-in” and “capacity-carry-forward” rules
The court noted that ISO-NE adopted a price “lock-in” rule and a “capacity-carry-forward” rule, both designed to encourage new generating resources to enter the market. The rules allow new suppliers to “lock in” their first-year clearing price from the capacity auction for up to an additional six years, and require that the capacity of the price-locked resources be offered into future forward capacity auctions (FCAs) for those additional six years at a price low enough to clear the auction, which could potentially beat a price of zero.
Exelon and NEPGA argue that this low bidding by new entrants with a locked-in price reduces clearing prices paid to all suppliers, new and existing. The new entrants submit those low bids with the understanding that they will still get paid the lock-in price for their capacity. However, a minimum-offer rule for new suppliers in the entry auction – by which ISO-NE sets a price a new entrant cannot bid below – mitigates any price suppression in the entry auction.
Exelon, NEPGA filed complaints against ISO-NE
NEPGA and Exelon each filed complaints with FERC against ISO-NE under section 206 of the Federal Power Act, challenging ISO-NE’s tariff provisions that establish the lock-in and capacity-carry-forward rules.
The utility and the generator group challenged the tariff on the grounds that the provisions result in new suppliers reaping a windfall and existing suppliers getting short shrift in both the entry and post-entry auctions, the court said.
Exelon and NEPGA asserted that the rates were unduly discriminatory and, thus, unjust and unreasonable because of the interplay of two provisions:
- The provision allowing new suppliers to lock in a price at their entry auctions that they are guaranteed for a total of seven years; and
- The provision requiring the new suppliers with a locked-in price to offer their capacity in the post-entry auctions as a price-taker – i.e., requiring the locked-in suppliers to bid their capacity as low as zero.
“FERC denied both complaints with respect to the issues challenged in this appeal,” the court noted. The commission also denied subsequent requests for rehearing filed by Exelon and NEPGA.
Exelon, NEPGA point to improper price discrimination
Exelon and NEPGA argued that the combination of the lock-in rule and the capacity-carry-forward rule rendered the ISO-NE tariff unjust and unreasonable because of improper price discrimination against existing suppliers.
They relied heavily on a 2009 FERC decision that rejected a proposal to institute lock-in and capacity-carry-forward rules in the Mid-Atlantic market run by PJM. In that order, FERC rejected the rules on the grounds that the proposals would result in price suppression and discriminatory rates.
The court said that Exelon and NEPGA pointed out two differences in the ISO-NE and PJM markets that they alleged would make the price suppression effects of ISO-NE’s rules worse than what FERC rejected in PJM: (1) the PJM lock-in period was only for three years, rather than seven; and (2) the PJM lock-in option was rarely triggered, whereas the lock-in option in New England was available to any new market entrant.
Exelon and the New England generator group argued that, consistent with FERC’s PJM order, the commission “should have either rejected the lock-in and capacity-carry-forward rules, required ISO-NE to eliminate the zero-price offer requirement when it accepted a sloped demand curve, or ameliorated the price suppression for existing suppliers in some other way,” the court noted.
It said that FERC’s responses to the arguments from Exelon and NEPGA “morphed over the course of the nearly two years between the commission’s denial of NEPGA’s complaint and its denial of Exelon’s rehearing request.”
In its denial of NEPGA’s complaint, FERC said that the purpose of the rules is to mitigate the price suppressing effects of over-procurement in subsequent years, following the procurement of capacity from a new resource that exceeds the amount of new capacity required in a zone.
“Essentially, FERC said that simply because capacity gets carried forward into future FCAs, it doesn’t necessarily follow that the subsequent FCAs will also have excess capacity, and therefore prices might not be suppressed below competitive levels,” the court said. FERC also reiterated “the purpose of the rules: to ensure ISO-NE would meet capacity supply needs in the future so that the people of New England would not have power shortages.”
FERC denied NEPGA’s request for rehearing and Exelon’s initial complaint on the same day. In the denial of rehearing, FERC attempted to clarify aspects of its previous ruling. FERC found that NEPGA’s proposal would raise prices and inadequately protect consumers. FERC also rejected the argument that the PJM decision required it to alter the ISO-NE tariff.
FERC denied that its rejection of a similar proposal in PJM was dispositive because “market design and rules need not be identical among the regions to be just and reasonable.” It also noted that its accompanying order denying Exelon’s complaint would further explain the salient market differences between the ISO-NE and PJM markets.
While FERC agreed that the price-lock and capacity-carry-forward rules would cause lower prices in some circumstances, it said that Exelon had not met its burden of proving that the rules were unjust and unreasonable.
Although the mechanisms used by PJM and ISO-NE similarly resulted in price differentials for new and existing suppliers, FERC was not persuaded that this difference, in itself, rendered ISO-NE’s rules unjust and unreasonable.
FERC said that ISO-NE and PJM had “differing clearing mechanics” which made the PJM comparison imperfect.
Court says FERC failed to respond to “substantial arguments”
The appeals court said that FERC “failed to respond to the substantial arguments put forward by petitioners and failed to square its decision with its past precedent.”
The court said that the “holding and entire rationale of PJM strongly suggests that a lock-in mechanism, combined with a capacity-carry-forward rule with a zero-price offer requirement, depresses prices in a way that ‘adversely affects’ existing market participants.”
It said that the structural mechanisms of the ISO-NE market appear to exacerbate all of the problems FERC cited for rejecting the similar rule in PJM. “Petitioners point out multiple ways in which the ISO-NE tariff seems to exacerbate the type of alleged discrimination FERC had rejected in PJM, including the fact that the lock-in period is seven years and the new market entrants are all required to bid their capacity at a price of zero (if necessary) for the duration of that time.”
The court said that FERC’s responses to arguments made by Exelon and NEPGA “amounted to conclusory statements that dismissed petitioners’ concerns without providing reasoned analysis.” Moreover, the courted concluded that “[a]lthough FERC may be sincere in its change of heart and, as a substantive matter, 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 court granted the petitions and remanded to FERC “for further proceedings consistent with this opinion.”
