On May 27, 2022, a divided FERC ultimately agreed to allow ISO New England Inc. (“ISO-NE”) to sunset its current minimum offer price rule (“MOPR”) as part of its capacity market. During the next two capacity auctions, ISO-NE will permit a specified quantity of resources to enter the market without being subject to buyer-side market power mitigation review. Thereafter, ISO-NE will replace the current MOPR with a reformed buyer-side market power mitigation construct (the “MOPR Reforms”). Each of the five commissioners wrote separately, with Chairman Richard Glick, Commissioners Allison Clements and Willie Phillips, and Commissioner Mark Christie writing in concurrence and Commissioner James Daly writing in dissent.

ISO-NE holds an annual Forward Capacity Auction (“FCA”) as part of its Forward Capacity Market (“FCM”) in which capacity suppliers compete to provide capacity to the region for the relevant delivery year, which is set three years out from each auction. Suppliers that receive a capacity supply obligation in an FCA commit to, and receive payment for, providing capacity for the one-year period associated with that FCA. Currently, ISO-NE applies a MOPR that requires new capacity resources to offer their capacity at prices that are at or above a price floor set for each type of resource. Over the past decade, as New England states have sought to reduce emissions, there has been ongoing litigation as to how resources receiving out-of-market revenues should participate in the FCM (see November 25, 2022 edition of the WER).

ISO-NE’s tariff filing proposed a transition mechanism for the next to FCAs (i.e. FCA 17 and FCA 18) and MOPR Reforms that revise the buyer-side market power review and mitigation rules beginning with the following auction (FCA 19). During the transition, ISO-NE will cap its Renewable Technology Resource (“RTR”) exemption and expand the definition of “Sponsored Policy Resources” to include additional state programs and resource types. ISO-NE will also eliminate the test price rules that apply to its Competitive Auctions with Sponsored Policy Resources (“CASPR”) auction, which runs immediately after the FCA to coordinate the entry of new publicly-sponsored resources in the capacity market with the exit of older existing capacity resources willing to permanently leave. After the transition, and pursuant to the MORP Reforms, ISO-NE will divide new resources into three tranches: 1) de minimis resources (with 5 MW or less of qualified capacity); 2) competitive entrants and Sponsored Policy Resources; and 3) all other resources. Resources in the first two tranches will be exempt from buyer-side review and offer mitigation. Resources in the third tranche that make a below-cost offer must also demonstrate an associated load serving entity’s (“LSE’s”) lack of financial incentive to exercise buyer-side market power or they will be restricted from offering their capacity in the FCA below a resource-specific New Resource Offer Price Floor, which will be determined by the Independent Market Monitor (“IMM”).

With respect to the transition, FERC reasoned that ISO-NE had met its burden to show that its filing was a just and reasonable proposal, and reiterated that ISO-NE need not show that it was the best or most just and reasonable option. FERC noted that the transition period provided time for stakeholders to develop additional market reforms without delaying the proposed reforms in FCA 19 and encouraged ISO-NE to continue to work on market enhancements, including capacity accreditation.

Regarding the MOPR Reforms, FERC acknowledged it was changing policy from previous FERC decisions, but found that ISO-NE’s proposal appropriately balanced the need to mitigate the potential exercise of buyer-side market power against the harms of over-mitigation. According to FERC, the prior MOPR construct had a number of drawbacks, including potentially increasing capacity costs, over-procuring capacity, distorting FCM price signals, and interfering with New England states’ ability to meet policy objectives by mitigating state-sponsored new entrants. FERC found it appropriate to exclude resources that serve state policy goals and passive demand resources, i.e. those that are not capable of exercising buyer-side market power from the MOPR. FERC also noted that rejecting the filing would cause harm to the FCM via regulatory uncertainty and would delay any additional process that would be required to propose alternative revisions.

Chairman Glick wrote separately to explain his view that the best outcome would have been for ISO-NE to immediately implement the new MOPR rules without the transition mechanism. Glick argued that ISO-NE could have and should have done better, but reiterated that FERC was constrained to evaluating ISO-NE’s filing and noted that the New England States did not oppose the transition mechanism. Like Chairman Glick, Commissioners Clements and Phillips would have preferred to see the immediate elimination of the MOPR, but characterized ISO-NE’s proposal as the fastest path forward to eliminating the MOPR.

Commissioner Christie wrote a third concurrence stating that ISO-NE’s revisions were intended to (and, in his opinion, will) bring about the replacement of natural gas resources with intermittent resources, which raises similar impact-shifting issues that were present in PJM’s proposal to eliminate its MOPR. However, Commissioner Christie noted that no state opposed the ISO-NE’s filing, and thus concluded that the MOPR Reforms must further public policy choices made by elected policy makers in New England that should be respected by FERC.

Finally, Commissioner Danly wrote a dissent arguing that the MOPR construct was designed to protect ISO-NE’s capacity market from the exercise of buyer-side market power and the new proposal allows that exercise of market power to happen. According to Commissioner Danly, a market rate design cannot be just and reasonable if it is not competitive, and it cannot be competitive when it permits states to freely manipulate prices. Commissioner Danly also expressed concern that a fleet of new state-subsidized renewable resources is now able to force generators not receiving a subsidy, potentially including older renewables, into either premature retirement or expensive out of market Reliability Must Run (“RMR”) contracts. Danly therefore predicted that this flawed market scheme would ultimately fail and compromise reliability.