ISO-NE discussed its plans for preventing and mitigating market power as it overhauls its capacity market and resource retirement processes at the NEPOOL Markets Committee’s meeting April 8.

The RTO’s Capacity Auction Reform (CAR) project proposes to reduce the time between auctions and capacity commitment periods, transitioning the region from a forward market to a prompt construct. ISO-NE also plans to decouple resource retirements from the capacity offer process because the timing of the prompt market would not give the RTO enough time to address reliability issues created by retirements.

Under the new format, ISO-NE would require retiring resources to submit deactivation notices two years prior to their retirement from the market. As proposed, retirement notices would be binding and trigger an ISO-NE review process of potential reliability and market power issues. (See ISO-NE Gives Updates on Prompt, Seasonal Capacity Market Changes.)

The market power analysis would include a conduct test to evaluate whether the resource is expected to be economic and a net portfolio benefits test to study whether a market participant’s overall portfolio would benefit from the resource retirement.

If a resource fails both tests, ISO-NE would issue a penalty equal to 1.5 times the participant’s expected portfolio-wide revenue increase from the retirement. These charges would be credited as a refund to all market participants.

“The market power charge is expected to be used infrequently,” said Kevin Coopey, principal analyst at ISO-NE. “Ideally, the risk of being charged deters the exercise of market power.”

The tests and charges would be based on expected market outcomes prior to the forward auction, instead of the actual market results.

“By evaluating market power at the notification deadline, we consider the perspective of the participant at the time of the deactivation notification,” Coopey said.

Coopey said basing market power charges on the actual auction results would create a nearly two-year delay for participants to learn the actual charge amount, creating significant uncertainty associated with unexpected events distorting market results and risks of excessively large charges.

Some stakeholders expressed concern about reconciling differences between the market expectations of participants and the ISO-NE Internal Market Monitor.

“The IMM acknowledges that different assumptions may be reasonable when the market participant holds different market information or beliefs,” Coopey said. “The IMM will accept different assumptions when they are reasonably justified.”

Responding to stakeholder requests for ISO-NE to allow participants to withdraw retirement requests, Coopey said the RTO is “considering the feedback,” adding that “the increased optionality of having withdrawable notifications must be balanced against the risk of increasing the likelihood of reliability retentions.”

ISO-NE has expressed concern that participants could fish for out-of-market resource retentions if they are allowed to withdraw a retirement request when a resource is not retained.

Responses to the proposal for a market power charge have been mixed, with some stakeholders arguing the proposal may not be punitive enough to prevent exercising market power, while others made the case it would be too punitive and could create reliability issues by preventing deteriorating resources from retiring.

Ben Griffiths of LS Power advocated for more flexibility on the timing of retirement submissions, proposing that resources not needed for reliability should be allowed to retire with less than two years of advance notice.

“Without commenting on the merits of the two-year notice proposal, allowing for accelerated exit of resources determined nonessential for reliability would reduce market inefficiencies and resource owner concerns about forced market participation,” Griffiths said.

“Optional, expeditious deactivation for non-reliability resources lets the region split the difference on notification: Longer notice period lets the region proactively explore reliability implications of each deactivating resource, while accelerated exit allows it to avoid a lengthy exit period when they aren’t needed,” he added.

Also at the MC meeting, ISO-NE presented its plans for mitigating market power concerns on offers within the capacity market. Andrew Copland of ISO-NE said that “in the ISO’s current design, most key components of seller-side market power mitigation framework will remain substantively unchanged.”

He said ISO-NE will run a conduct test and a pivotal-supplier test to evaluate market power, and it plans to impose a “binding offer ceiling at the IMM’s estimated competitive offer price” for resources that fail both tests. Copland said ISO-NE will publish a capacity cost review threshold; all offers that surpass the threshold will be subject to cost review by the IMM.

Copland also noted that ISO-NE is updating its auction participation rules for the prompt market and will require “all commercial resources capable of providing capacity … to offer it into the auction.”

He said resources that hold unused capacity interconnection rights pose a barrier for other resources looking to enter the market and could cause these resources to incur significant interconnection costs. He noted that participants can include multiple cost levels within a capacity offer from a single resource to account for the potential added costs of offering a resource’s full capacity.