FERC, in a Jan. 7 order, denied rehearing of an order involving ISO New England’s (ISO-NE) Transmission, Markets and Services Tariff that was requested by Exelon (NYSE:EXC) and Calpine (NYSE:CPN).
As noted in the Jan. 7 order, FERC in January 2015 denied the complaint of Exelon and Calpine (together, the complainants) against ISO-NE, filed under sections 206 and 306 of the Federal Power Act (FPA), which alleged that certain provisions of ISO-NE’s tariff relevant to the forward capacity market (FCM) were unjust, unreasonable and unduly discriminatory.
Specifically, the complainants challenged the tariff provisions that require new entrants electing to “lock-in” the clearing price from the first forward capacity auction (FCA) in which they clear to submit what are, in effect, zero-price offers into subsequent FCAs during the relevant lock-in period.
FERC noted that ISO-NE administers the FCM, in which eligible resources compete in annual FCAs, to provide capacity three years in advance of the relevant capacity commitment period. While the FCA is intended to produce a single capacity clearing price for all cleared resources, under certain conditions the prices paid to cleared resources may be administratively determined by ISO-NE and differ based on whether a resource is new or existing, FERC said.
ISO-NE’s new entrant pricing provision (new entrant pricing or New Entrant Pricing Rule) allows a new entrant to lock in the first auction clearing price for up to six additional auctions in order to mitigate price risk, FERC said, adding that if a new resource elects new entrant pricing, the resource may not submit any type of de-list or export bid in subsequent FCAs for capacity commitment periods for which the resource owner elected to have the new entrant pricing apply.
In other words, FERC said, in order to lock-in the first-year price, the tariff requires that the capacity be offered as a price-taker (i.e., at a zero-price offer) in all future years for which it receives the first-year capacity price. Thus, FCM revenues for the new entrant are guaranteed during the lock-in period regardless of whether capacity clearing prices in subsequent auctions over that period exceed or fall short of the initial FCM clearing price, FERC said.
In their November 2014 complaint, the complainants argued that the combination of the price lock-in and the zero-price offer requirement unreasonably and artificially suppresses capacity prices and results in undue discrimination because new entrants are paid higher prices than other resources for providing the same capacity services, FERC said.
The complainants said that the price lock-in suppresses the clearing price in the entry (i.e., year one) FCA because new entrants will offer at an artificially low price, knowing that they will receive up to six additional installment payments in subsequent FCAs, and that the clearing price will continue to be suppressed in subsequent FCAs due to new entrants’ submittal of zero-price offers, FERC said.
The complainants noted that they were not asking FERC to eliminate the new entrant pricing lock-in, or to alter the treatment of new entrants, but rather to remedy the impacts of the resulting price suppression on other suppliers and the market, FERC said.
FERC noted that in its January 2015 order, it denied the complaint, finding that the complainants did not meet their burden under section 206 of the FPA to show that the challenged rules were unjust, unreasonable, and unduly discriminatory.
FERC said it reasoned that a resource whose construction has recently been completed and that has accepted a price lock-in typically has very low going-forward costs and would, if behaving competitively, submit an offer reflecting those costs.
FERC said it explained that by offering at a significantly higher price, a resource would risk not being selected when the market price exceeds the resource’s incremental costs and the resource could have received a profit. Furthermore, FERC noted, by requiring locked-in resources to offer near their going-forward costs, the auction can select the set of resources with the lowest costs. Thus, FERC concluded, it is efficient for such a resource to offer as a price-taker (effectively submitting a $0 price offer), because it is efficient for such a resource to be selected in the auction over resources with higher going-forward costs.
FERC added that on rehearing, the complainants argued that, in finding that they failed to satisfy their burden under FPA section 206, FERC did not provide a reasoned basis for finding that there is no artificial price suppression in the post-entry FCAs and also failed to address the complainants’ arguments regarding artificial price suppression in the entry FCA.
FERC said that the complainants stated, among other things, that the complaint addressed all capacity that is subject to the price lock-in and that must be offered into subsequent FCAs at a zero-price offer, not just how the portion of the resource’s capacity that did not clear initially is treated in future auctions for purposes of determining the clearing price and total quantity of capacity procured, as stated in the January 2015 order.
Noting that it disagrees with the complainants’ assertion that FERC failed to provide a reasoned basis for finding that the New Entry Pricing Rule, coupled with the lock-in requirement, is just and reasonable and also failed to address the complainants’ arguments regarding artificial price suppression in the entry FCA, FERC said that the January 2015 order found, and FERC affirms in the Jan. 7 order, that a competitive resource would offer into the capacity market in years two through seven at its going-forward costs, and that a new generator typically would have low going-forward costs, approaching zero.
FERC said that as it explained, the incremental costs for a newly-constructed resource are typically near zero because new resources need relatively little maintenance to satisfy their capacity obligations. By allowing sellers to reflect their going-forward costs in their offers, ISO-NE is able to select the most efficient (lowest cost) set of resources, because the low offer prices reflect low going-forward costs, FERC said, adding that those considerations support a conclusion that the zero-price offer requirement is just and reasonable.
Regarding the complainants’ argument that the lock-in option suppresses clearing prices in the entry FCA, FERC said it acknowledges that the existence of the lock-in option may result in lower capacity clearing prices than might result absent that option.
But, FERC said it disagrees that this amounts to unreasonable price suppression or undue discrimination between new and existing resources. Rather, any lowering of the entry-FCA clearing prices is an acceptable byproduct of a just and reasonable market rule – i.e. ISO-NE’s New Entrant Pricing Rule – that achieves particular and distinct objectives in the region, FERC said.
FERC said that as it stated when it accepted ISO-NE’s proposal to extend the lock-in option from five years to seven years, the lock-in option strikes a reasonable balance between incenting new entry through greater investor assurance and protecting consumers from very high prices.
Among other things, FERC said that the complainants’ requested relief – namely that ISO-NE enter lock-in resources into capacity auctions in years two through seven at higher prices and purchase uncleared capacity from those resources out-of-market – could have a significant cost impact on New England customers.
The lock-in option is available to every new resource that clears an auction in ISO-NE, FERC said, adding that in a scenario where one or more new ISO-NE resources lock in their prices in year one, and auction clearing prices in subsequent years drop such that those resources do not clear at the year-one price, New England customers could incur significant costs to pay the lock-in resources out-of- market.