The CASPR order provided the new Commission with an opportunity to articulate its views on an issue that has vexed the agency for years: in an era of rapidly changing power systems and increasing environmental and climate change concerns, to what extent should the federally regulated wholesale markets accommodate out-of-market state policy initiatives? As states continue to pursue zero-carbon energy to achieve emissions targets, the CASPR order likely foreshadows future jurisdictional battles at FERC.
Background
New-generation resources in ISO-NE are required to bid into the capacity market at their unsubsidized cost. This market rule—known as the Minimum Offer Price Rule, or “MOPR,” in FERC-speak—is intended to mitigate the effect of out-of-market subsidies, typically from states, on the FERC-regulated wholesale markets.2 In the absence of such a rule, subsidized resources may have an incentive to bid at their lower, subsidized cost (or even submit a zero-dollar bid) to ensure clearing the capacity auction. FERC has suggested that the MOPR construct is necessary to avoid a race to the bottom of sorts, where subsidized resources bid below their competitive costs and consequently drive down the clearing price paid to all capacity resources, including those not receiving any subsidies.3
Predictably, the MOPR is controversial. Consumers in states that choose to subsidize new resources (e.g., to promote renewable energy) face the prospect of double-paying for capacity: once for each utility’s share of the region’s capacity costs, as determined by the ISO-administered capacity auction, and again for the state-sponsored resources that fail to clear the auction due to the MOPR’s bid floor. This prospect has fostered repeated challenges to MOPR-like rules over the years as FERC seeks to balance its duty to oversee competitive wholesale markets with its desire to avoid impeding the implementation of state policy goals.4
More than any other Regional Transmission Organization/Independent System Operator (RTO/ISO) market rule, the MOPR embodies the inherent tension between state and federal jurisdiction in the wholesale markets. On the one hand, the Federal Power Act leaves no question that states retain jurisdiction over generation resource planning; states are undoubtedly within their right to, among other things, encourage the construction of certain types of resources.5 On the other hand, FERC has exclusive jurisdiction over the wholesale electricity markets, the value of which lies in their ability to send accurate pricing signals to market participants across state lines based on competitive market forces.6 Through its many permutations, the MOPR represents the efforts of RTOs/ISOs and FERC to balance these competing objectives.
The CASPR Proposal
ISO-NE’s MOPR has contained a limited carveout for renewable resources since the 9th Forward Capacity Auction,7 providing an exemption from the minimum bid floor each year for up to 200 MW of renewable resources. This carveout may prove insufficient to accommodate recent state efforts to address climate change and other environmental goals, however. These efforts, if successful, will result in far more than 200 MW of subsidized renewable resources coming online in New England annually in the coming years, regardless of whether those resources clear the capacity auction. In addition to the double-payment problem described above, this wave of new resources could result “in a potentially significant overbuild of the system,” according to the ISO.8
To better integrate these state initiatives into the market, ISO-NE proposed theCASPR construct in January.CASPR’s principal component is the introduction of a new, voluntary capacity auction called the “substitution auction,” which will immediately follow the existing capacity auction. In a two-step process, ISO-NE first will clear the primary auction under the normal rules, subjecting all new resources to the MOPR.9 In the second step, existing capacity resources that (1) cleared in the first auction and (2) are willing to permanently exit the market may participate in the substitution auction, where they effectively can transfer their capacity supply obligation to state-sponsored resources that did not clear in the primary auction.10 ISO-NE will match supply (the new, state-sponsored resources) with demand (the existing resources that are willing to exit) in a sealed-bid auction to clear the market and determine a uniform clearing price. The clearing price in the substitution auction will be different from, and likely lower than, the price established in the primary auction. A state-sponsored resource that clears in a substitution auction may participate in the next year’s primary auction as an existing resource.
CASPR attempts to achieve several objectives, and it represents a potentially uneasy compromise. First, by subjecting all new supply resources to the MOPR in the first auction, it aims to minimize the price distortion associated with out-of-market subsidies. Second, the substitution auction allows state-sponsored projects to obtain a capacity supply obligation (addressing the double-payment issue) while mitigating the overbuild problem by limiting the quantity of new, state-sponsored resources to the quantity of resources permanently exiting the market.
FERC’s Order
FERC accepted the CASPR proposal in a split decision, with three of the five Commissioners writing separately. Republican Commissioner Powelson provided the lone full dissent, while Democratic Commissioner Glick dissented in part and concurred in part. Democratic Commissioner LaFleur concurred, but noted in her separate statement that she disagreed with “generic guidance” set forth in one paragraph of the order. In all, the three Commissioners provided more than 10 pages of individual statements, which is highly unusual and likely reflects the need for guidance on this topic as other ISO/RTOs contemplate similar proposals.
In his dissent, Commissioner Powelson registered his disapproval of accommodating out-of-market state actions. Unless states are prepared to “reassume complete responsibility for resource adequacy,” as they did in the days before RTOs/ISOs, Powelson argued that “they must accept that the Commission is required to take action to ensure the viability of the capacity markets.” He noted that there may be some instances in which a limited amount of state-supported resources can be accommodated, but that accommodation should not “provide a point of entry for any and all resources desired by the state, with no relation to a resource’s actual costs.” While CASPR attempts to protect the integrity of the primary auction by shifting state-sponsored resources to a separate “substitution auction,” Powelson contended that the proposal merely delays the price-suppressive effect by one year: sponsored resources can participate, unmitigated, in the primary auction after clearing in a substitution auction.
Commissioner Glick, by contrast, expressed concern over the very concept of mitigating, rather than facilitating, state policy initiatives. He noted that a broad MOPR could have the effect of erecting impediments to states’ abilities to “shape the generation mix within their borders.” He pointed out that the order does not determine when state support warrants a MOPR and when it does not—likely because, in his view, any such effort would be nearly impossible. “There is no way to truly untangle the capacity market from the various government programs that shape the current electricity sector,” he wrote, “and there is nothing in the [Federal Power Act] that supports the Commission’s current approach of applying the MOPR to only particular forms of state government involvement while ignoring other, perhaps more significant, governmental actions.” Notwithstanding these concerns, Commissioner Glick concurred in the Commission’s judgment that the CASPR proposal is just and reasonable, and not unduly discriminatory or preferential.
Despite the Commission’s efforts to provide guidance to RTOs/ISOs contemplating similar action, the order also raises some questions. For example, the Commission noted that, “[a]bsent a showing that a different method would appropriately address particular state policies, we intend to use the MOPR to address the impacts of state policies on wholesale capacity markets.”11 The order went on to note that there can be more than one way to manage the impacts of state policies, but that the Commission “will use the MOPR as [its] standard solution.” Notably, however, it is unclear whether this statement has majority support from the Commission. In her separate concurring statement, Commissioner LaFleur expressly rejected this proposition, noting that she is open to other approaches, such as carbon pricing. With Commissioner Powelson’s full dissent of the order (despite his conceptual support for a strong MOPR) and Commissioner Glick’s rejection of the need for a MOPR, the Commission’s “standard solution” remains unclear.
The impact of the CASPR order on the ISO-NE market also remains to be seen. While the intent of the proposal is to accommodate state-sponsored renewable resources, the extent of any such accommodation will be determined by the willingness of existing resources to retire—an unknown at this point.
1 ISO New England Inc., 162 FERC ¶ 61,205 (2018) (“ISO-NE Order”).
2 See, e.g., PJM Interconnection, L.L.C., 137 FERC ¶ 61,145, at P 3 (2011) (“We are forced to act, however, when subsidized entry supported by one state’s or locality’s policies has the effect of disrupting the competitive price signals that PJM’s RPM is designed to produce, and that PJM as a whole, including other states, rely on to attract sufficient capacity.”).
3 Id.
4 See, e.g., New York State Pub. Serv. Comm’n v. New York Indep. Sys. Operator, Inc., 158 FERC ¶ 61,137 (2017); PJM Interconnection, L.L.C., 143 FERC ¶ 61,090 (2013), order on reh’g, 153 FERC ¶ 61,066 (2015), vacated sub nom. NRG Power Mktg., LLC v. FERC, 862 F.3d 108 (D.C. Cir. 2017), order on remand, PJM Interconnection, L.L.C., 161 FERC ¶ 61,252 (2017); PJM Interconnection, L.L.C., 135 FERC ¶ 61,022, order on reh’g, 135 FERC ¶ 61,228 (2011), aff’d sub nom. New Jersey Bd. of Pub. Utils. v. FERC, 744 F.3d 74 (3rd Cir. 2014). A complaint challenging PJM Interconnection, L.L.C.’s MOPR rules is pending in Docket No. EL16-49.
5 See 16 U.S.C. § 824(b)(1) (2012); see also Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288, 1292 (2017).
6 See, e.g., ISO New England Inc., 158 FERC ¶ 61,138, at P 9 (2017) (“While the Commission is responsible for maintaining well-functioning markets, states have jurisdiction over generation and set renewable resources targets and renewable portfolio standards. One purpose of capacity markets is to send appropriate price signals regarding where and when new resources are needed.”).
7 The 9th Forward Capacity Auction took place in February 2015.
8 ISO-NE, CASPR Filing, Docket No. ER18-619-000, at 4 (filed Jan. 8, 2018) (“CASPR Filing”).
9 Id. at 5-6. The 200 MW carveout for renewable resources gets phased out through the 15th Forward Capacity Auction. Id. at 12-13.
10 CASPR Filing at 6.
11 ISO-NE Order at P 22.
