On June 6, 2013, the Federal Energy Regulatory Commission (“FERC”) issued an Order conditionally accepting the New York Independent System Operator, Inc.’s (“NYISO”) proposal to implement buyer-side and supplier-side market power mitigation measures for monthly installed capacity (“ICAP”) spot markets in new capacity zones similar to measures currently in effect for New York City, effective Sept. 1, 2012, subject to certain conditions. The mitigation measures are intended to assure that market clearing capacity prices reflect competitive outcomes where particular buyers and/or sellers have both the ability and incentive to exercise market power.

The Order marks the latest effort by FERC and independent system operators to guard against artificial suppression of capacity market prices that would discourage investment in needed generation, while at the same time continuing to ensure that sellers of capacity are unable to exercise market power. So as not to upset investor expectations, however, FERC agreed that certain projects already in construction could be grandfathered (i.e., exempted) from mitigation.

FERC denied calls by the New York Public Service Commission and eight large New York transmission owners to defer adoption of the mitigation measures, finding instead that the very factors which give rise to the need to create a new capacity zone also give rise to supplier-side market power concerns within that zone. Thus, FERC held that it is just and reasonable to apply supplier-side market power mitigation rules during the first capacity auction for a new capacity zone. FERC similarly concluded that buyer-side mitigation measures are necessary to assure a competitive outcome, reasoning that any new capacity zone is apt to be dominated by one or two large buyers with an economic incentive to lower prices through uneconomic entry.

As with the supplier-side mitigation measures applied in New York City, the supplier-side mitigation measures in new capacity zones will apply only to so-called Pivotal Suppliers. In New York City, a Pivotal Supplier is an entity that, together with its affiliates, controls 500 MW or more of unforced capacity, some portion of which is necessary to meet the New York City location minimal ICAP requirement. However, in recognition of the fact that what is a “pivotal” number of megawatts may vary from zone to zone, FERC stated that it was leaving it to the NYISO to propose a different figure for any new capacity zone it proposes.

FERC approved NYISO’s proposal to grandfather (i.e., exempt) from the mitigation measures projects that, as of the date of NYISO’s filing proposing a new capacity zone, have “Commenced Construction” and have received Capacity Resource Interconnection Service (“CRIS”), or meet specific requirements regarding a CRIS transfer at the same location. The purpose of the grandfathering rule is to balance the capacity revenue expectations of investors in projects that were initiated long before the creation of a new capacity zone, with the need to prevent entities from strategically making uneconomic investments.

For a project to be deemed to have “Commenced Construction” for purposes of grandfathering, it must have established functional ingress and egress routes, cleared and graded the project site, obtained power service to the site, prepared footings, and poured foundations consistent with purchased equipment specifications and project design. FERC rejected an alternative showing proposed by NYISO that would have deemed a project to have Commenced Construction if a comparable financial commitment were made, “as approved by the ISO in accordance with ISO procedures.” FERC held that this alternative was vague and would have given NYISO too much discretion. FERC required NYISO to delete the alternative and to make a compliance filing consisting of specific criteria for establishing whether a comparable financial commitment has been made.

FERC denied calls to require NYISO to exempt Special Case Resources (such as demand response), small suppliers, and renewable generation from the buyer-side mitigation measures for new capacity zones, consistent with NYISO’s established treatment of such resources in the New York City capacity zone. However, FERC directed NYISO to evaluate and consider with its stakeholders whether modifications to the buyer-side mitigation rules in a new capacity zone are warranted to balance the need for mitigation of buyer-side market power against the risk of over-mitigation, and to report the results of this evaluation to FERC within 120 days.

Finally, FERC accepted NYISO’s proposal to use its existing tariff provisions relating to buyer-side mitigation exemption and offer floor determinations for non-grandfathered projects in a new capacity zone, but to depart from the New York City provisions with respect to information disclosures, timing, and information sources for new capacity zones. However, FERC ordered NYISO to make a compliance filing within 30 days, making clear that the mitigation exemption determinations it will make for new projects in a new capacity zone prior to the effectiveness of Demand Curves for the new capacity zone are for informational purposes only (i.e., to establish an indative Mitigation Net Cost of New Entry).