On March 9, 2018, the Federal Energy Regulatory Commission (FERC), in a split decision, approved ISO-New England Inc.’s (ISO-NE) proposed tariff revisions to accommodate entry of additional clean energy resources into the Forward Capacity Market (FCM).[1] ISO-NE’s Competitive Auctions with Sponsored Policy Resources (CASPR) revises the Forward Capacity Auction (FCA) rules to include a secondary auction to “facilitate the transfer of capacity supply obligations (CSOs) from existing capacity resources, which commit to permanently exit ISO-NE’s wholesale markets” to new, state-incentivized clean energy resources known as “Sponsored Policy Resources.”

Existing resources that shed their CSO in the substitution auction will retain a one-time “severance payment” for the difference between the clearing prices in the primary and substitution auctions. With the exception of approved tariff changes regarding FCM settlements, CASPR takes effect immediately, to coincide with the start of the year-long auction administration cycle for FCA 13.

FERC’s order is an important one, as it approves tariff revisions that reconcile the need to maintain competitive capacity auction markets with the gradual entry of new clean energy resources into those markets, two imperatives that are “fundamentally in tension,” according to ISO-NE.[2] Concurring and dissenting opinions by Commissioners LaFleur, Powelson, and Glick provide insights into the Commissioners’ individual positions on these issues.

Why a New FCA Market Design Now?

For many years, laws in the New England states have required utilities and retail suppliers of electricity to obtain a portion of their supply from renewable or clean energy resources. More recently, states within ISO-NE have supplemented these requirements by promulgating more stringent Renewable Portfolio Standards (RPS) or laws that require electric utilities to enter into long-term contracts for renewable energy generation. CASPR is ISO-NE’s attempt to safeguard against any negative effects of such “out-of-market contracts” with “Sponsored Policy Resources” on ISO-NE’s capacity market, including clearing price suppression and the overbuilding of capacity resources. Sponsored Policy Resources include any new capacity resource that:

[R]eceives an out-of-market revenue source supported by a government-regulated rate, charge or other regulated cost recovery mechanism; and qualifies as a renewable, clean or alternative energy resource under a renewable energy portfolio standard, clean energy standard, alternative energy portfolio standard, renewable energy goal, or clean energy goal enacted (either by statute or regulation) in the New England state from which the resource receives the out-of-market revenue source and that is in effect on January 1, 2018.[3]

One issue of contention was the January 1, 2018 effective date, which proponents of CASPR described as a key part of the compromise among ISO-NE stakeholders. FERC accepted the definition, including the effective date, noting that it is impossible to build a rule for not-yet-enacted state statutes and regulations. ISO-NE did, however, commit to reconsider the definition if there are changes in state statutes and regulations.

How Does CASPR Change the FCA?

CASPR supplements the FCA with a second, “substitution auction.” The FCA’s primary auction will remain largely unchanged, and set the capacity price that accrues to regional load. Following the primary auction, existing resources that have acquired a CSO in the primary auction may offer a demand bid in the substitution auction “indicating a willingness to permanently retire from all ISO-NE markets at a certain price.”[4] In this second auction, “the supply curve consists of capacity sell offers from Sponsored Policy Resources that did not already obtain a [CSO] in the primary auction.”[5] Existing resources that clear the substitution auction will transfer their CSO to Sponsored Policy Resources and pay the substitution auction clearing price, which Sponsored Policy Resources obtaining the capacity supply obligations will receive. In this manner:

[E]xisting resources that clear in the substitution auction generally will shed their [CSO] at a lower price than they received in the primary auction and retain a one-time net payment equal to the difference between the primary auction clearing price and the substitution auction clearing price, much like a severance payment. In exchange, those existing resources will agree to permanently exit ISO-NE’s wholesale markets through termination of their interconnection rights.[6]

In considering the CASPR proposal under section 205, FERC explained that it must evaluate whether, under CASPR, the FCM “will continue to maintain resource adequacy at just and reasonable rates … [and] whether the FCM can continue to attract and maintain resource investment where the system requires it, and to do so at a reasonable cost.”[7] In approving the proposal, FERC found that CASPR meets these criteria.

What is the MOPR and Why is it Important?

In the primary auction, CASPR requires all new capacity resources to adhere to the minimum offer price rule (MOPR), which seeks to ensure a competitive capacity market by requiring such resources bid their capacity at or above a set, resource-specific price floor. Importantly, the MOPR does not permit resources that receive “out-of-market revenue” e.g., revenue from long-term contracts executed with incumbent electric utilities pursuant to a state-required competitive procurement, to reflect such revenue or aspects of such revenue, such as decreased developer risk, in a lower bid price. The MOPR is not applicable to CASPR’s substitution auction. Significantly, FERC rejected ISO-NE’s External Market Monitor’s alternate proposal that Sponsored Policy Resources must be subject to a MOPR floor price no higher than the cost of a new non-sponsored resource.

More broadly, the order makes clear FERC’s intention to use the MOPR as the “standard solution” in ensuring accurate price signals and maintaining competitive capacity markets in the future. “Absent a showing that a different method would appropriately address particular state policies,” FERC stated that it will “use the MOPR to address the impacts of state policies on the wholesale capacity markets.”[8]

But Should the MOPR be The “Standard Solution?”

Not all of the commissioners agreed. Commissioner LaFleur (concurring) argued against the uniform use of the MOPR as “a blunt instrument – against the impacts of all state policies,” and suggested that other market constructs, including carbon pricing, could integrate state renewable energy policies into the wholesale capacity markets.[9] In contrast to a “cookie cutter” application of the MOPR, Commissioner LaFleur encouraged future “market design proposals developed by other RTO/ISOs and their stakeholders” that provide for “region-specific solutions of different types.”[10]

Commissioner Glick (concurring in part, dissenting in part) forcefully disagreed with FERC’s broad application of a MOPR to “accommodate” state renewable policies into the wholesale capacity market. Because each state retains power to determine its resource mix under the Federal Power Act, Commissioner Glick explained that it follows that state policies will affect matters within FERC’s jurisdiction. That effect, he noted, “is not necessarily a problem for the Commission to solve, but rather the natural consequence of congressional intent.”[11] Commissioner Glick argued that ISOs should thus facilitate – not mitigate – the implementation of governmental policies “aimed at legitimate policy considerations, such as clean air and combatting climate change.”[12] According to Commissioner Glick, the MOPR runs counter to this policy imperative and imposes substantial costs on consumers. Because the MOPR restricts the extent to which a State Sponsored Resource may receive a CSO – even if the resource has already been selected for construction and operation by means of a competitive procurement or some other state law mechanism – Commissioner Glick argued that the MOPR compels load-serving entities to procure additional capacity in excess of the amount necessary to maintain resource adequacy, with such excess costs accruing to consumers. For Commissioner Glick, FERC should “get out of the business of mitigating the effects of state public policies and instead encourage the RTOs/ISOs to work with the states to pursue a resource adequacy paradigm that respects states’ role in shaping the generation mix.”[13]

What is the basis of Commissioner Powelson’s dissent?

In dissent, Commissioner Powelson argued that the CASPR market design will not “provide a meaningful signal to the marketplace” due to the fact that resources receiving state incentives or revenues outside of the FCA may participate in the market alongside resources that lack similar support, and bid into the FCA at a lower price that is not reflective of their true cost.[14] His dissent notwithstanding, Commissioner Powelson acknowledged that “there may be sufficient justification to accommodate a limited amount of state-supported resources in the market” in limited instances.[15] Such accommodation is only acceptable if (1) the effect of such resources on market price is limited, e.g., tied to the expected amount of load growth; and (2) such resources “would eventually become competitive with other, non-supported resources in the market.”[16]

Where do we go from here?

ISO-NE requested an effective date of March 9, 2018 in part, and June 1, 2018, in part, to allow it to build the rules into the administrative process for the FCA 13 auction, which will occur in February 2019 for delivery year 2022-2023. Parties will have the opportunity to seek rehearing of the order, with such requests due by April 8, 2018.