Dive Brief:

• A divided Federal Energy Regulatory Commission approved a plan from ISO-New England to reform its capacity market auctions, setting the stage for contentious decisions over similar proposals from other grid operators in the months to come.
• In a 3-2 vote released late Friday night, FERC approved the ISO's plan to split its capacity market auctions into two parts to better handle subsidized resources. Commissioners Richard Glick and Robert Powelson dissented, while Commissioner Cheryl LaFluer issued a separate concurrence. 
• Powelson broadly opposed the ISO's approach while LaFleur and Glick objected to language in the decision that makes minimum offer pricing rules (MOPRs) the "standard solution" to adapt markets to state energy policies. FERC will soon have to evaluate those options as part of a proposal from the PJM Interconnection, as well as apply its logic to grid resilience plans filed last week from each regional operator.

Dive Insight:

ISO-NE released its two-part capacity market proposal in April 2017 after a series of stakeholder meetings.

Dubbed Competitive Auctions with Sponsored Policy Resources (CASPR), the plan aims to prevent subsidized resources — like those covered by tax credits or mandates — from depressing prices in the capacity market. The ISO worries those resources could push unsubsidized plants offline and prevent new entries, potentially threatening reliability.

CASPR aims to prevent that by splitting capacity auctions in two. The first round would work much like current auctions, but in a second round retiring resources that earn capacity supply obligations could transfer those obligations to new, subsidized resources that do not have one. The existing resource — like an old gas plant — would then retire and pay the subsidized resource — such as wind or solar — for meeting the obligation.

The FERC majority — Chairman Kevin McIntyre and Commissioners LaFleur and Neil Chatterjee — saw little wrong with this construct. In the past, FERC has approved other rules to help adapt markets to state energy subsidies, and the majority reasoned that CASPR is an extension of that same authority to deal with more ambitious climate and clean energy goals in New England.

"[B]ased on the evidence presented in this record, CASPR will allow the [forward capacity market] to continue to meet its objective of providing resource adequacy at just and reasonable rates," they wrote. 

Importantly, ISO-NE filed the proposal under section 205 of the Federal Power Act, meaning it only had to prove that CASPR is just and reasonable, not that existing market rules are unjust. Even so, Powelson found little to like in the plan.

Two-part auctions will only "delay" price suppression caused by resource subsidies, Powelson wrote in his dissent, meaning their results "will not be reflective of the total costs of the resources procured to meet resource adequacy requirements in ISO-NE."

"Without clear price signals, private investment will not respond when needed, and as a result, the market will no longer achieve what it was designed to do – ensure that the least-cost capacity resources are there when needed," Powelson wrote. "Thus, while CASPR appears to avoid a tradeoff between the two objectives of accommodation and competitive capacity pricing, ultimately it cannot."

If states wish to choose their own resource mix, Powelson added, they should "also assume the responsibility for resource adequacy and reliability."

LaFleur and Glick, the two Democrats on the Commission, outlined a narrower objection. While they approved of CASPR, both issued statements opposing language in paragraph 22 of the ruling that would establish MOPRs as the "standard solution" for dealing with the impacts of state policy on wholesale power markets. 

In the past, the passage reads, FERC has approved MOPRs to adapt markets to state incentives, but regulators "acknowledge that there can be more than one valid method of managing such impacts."

"Accordingly, while we will use the MOPR as our standard solution, we will consider supplemental or alternative proposals to manage the impact of state policies," the paragraph concludes, "provided that those proposals are sufficiently consistent with the above-mentioned principles of capacity markets."

LaFleur rejected that reasoning, writing that while the MOPR is an "important tool," FERC should not use this "blunt instrument" for all state policies. 

Other constructs, like CASPR, could allow "resources subject to the MOPR to obtain a capacity award while not impacting or necessarily receiving the market clearing price," LaFleur wrote, and "other market design constructs, such as carbon pricing, can also achieve state objectives within the market."

For Glick, the paragraph 22 was enough to push him to vote no on the ruling, despite expressed support for CASPR itself. Reliance on MOPRs or similar policy options will "come to rank as a historically serious misstep," he wrote.

"[B]road application of the MOPR usurps the authority over generation resource decisions that Congress left to the states when it enacted the Federal Power Act (FPA)," Glick wrote. "The better course of action would be for the Commission and the RTOs/ISOs to stop using the MOPR to interfere with state public policies and, instead, apply the MOPR in only the limited circumstance for which it was originally intended: to prevent the exercise of buyer-side market power."​

Based on the opposition of LaFleur and Powelson, paragraph 22 "did not receive the votes of a majority of the Commission," Glick noted in his dissent. It remains unclear why LaFleur — the swing vote on the ruling — did not press for its removal from the decision despite her expressed opposition for the "standard solution" language. 

Regardless of paragraph 22, the CASPR ruling sets FERC up for a series of potentially contentious policy decisions. This month, the PJM Interconnection is set to ask FERC to choose between two capacity market reform proposals — a two-part auction similar to CASPR, or an expansion of its MOPR.

Additionally, the nation's grid operators also filed comments on Friday in FERC's grid resilience proceeding, set up after regulators rejected a Department of Energy plan to subsidize coal and nuclear plants. PJM included a number of other wholesale market reforms in that filing, which FERC will evaluate amid sector concerns that they could amount to a low-profile bailout for the same plants targeted by the DOE plan. 

Both PJM's capacity market plans and the resilience filings will force FERC to reengage with the thorny issues of state policy jurisdiction raised by the ISO-NE decision. The split nature of the ruling could make it vulnerable to an appeal, former FERC Chairman Norman Bay noted on Twitter:

Three implications from CASPR's fractured vote: (1) opponents will re-double their efforts on rehearing; (2) even if rehearing is denied, as a practical matter, the order is weaker on appeal; and (3) what happens to PJM's "jump ball" (two-stage capacity auction and MOPR-Ex)?

— Norman C. Bay (@NormanCBay) March 11, 2018