By Rich Heidorn Jr.

FERC on Friday approved ISO-NE’s reduction in the dynamic delist threshold for Forward Capacity Auction 13, turning aside protests by generators.

The commission reduced the threshold to $4.30/kW-month from the $5.50/kW-month the RTO had used in FCAs 10-12 (ER18-620). The threshold, which must be revised every three years, is a key parameter for generators considering retirement, which must submit delist bids to opt out of the capacity auction.

ISO-NE’s auction use static and dynamic delist bids. A static bid must be filed before the auction for review by the Internal Market Monitor; bids below the dynamic delist bid threshold will be removed from the capacity market for one year.

Dynamic delist bids are submitted during the auction and are not subject to IMM review. If the auction price falls below a resource’s delist bid, that resource is removed from the auction and does not acquire a capacity supply obligation.

ISO-NE’s proposed threshold is calculated by the IMM, whose objective is to set the level slightly below the competitive price from the marginal resource in the FCA to increase the likelihood that the marginal bid is subject to a market power review. If the threshold is too high, the RTO says, existing suppliers — who know the remaining supply in each FCA round — can exert market power by increasing the FCA clearing price through their dynamic delist bids.

FCA 13 will be the second consecutive reduction in the threshold. In FCA 9, the threshold was raised from $1/kW-month to $3.94/kW-month.

Methodology

The IMM calculated the $4.30 threshold based on the most recent supply-and-demand curve information and data on shortage conditions and resource performance. The Monitor said it was unable to use recent static delist bid data to represent net going-forward costs because suppliers have submitted fewer static bids in recent auctions. Instead, the IMM estimated going-forward costs using a proxy price calculated from a weighted average of capacity that remained in the auction during the last round of FCA 11. It also used several “implied bids” — bids from resources that did not submit a dynamic bid in the final round of the auction, instead remaining to the end-of-round price of $4/kW-month.

ISO-NE said the decrease in the threshold is consistent with changes in supply and demand, noting that the amount of capacity in the RTO has increased each year since FCA 9, while the installed capacity requirement has consistently decreased. The RTO estimated a surplus of 1,250 MW for FCA 12.

Protests

The New England Power Generators Association (NEPGA) protested the RTO’s threshold, saying the IMM’s methodology was inconsistent with that used in updates since FCA 9 and that it will distort market signals and harm reliability. It noted that the Monitor disregarded cost-based offers from fossil steam resources that had been used in the past, instead using a forecast of future market conditions.

The generators group also challenged ISO-NE’s assumption that the capacity market faces a surplus in future auctions, and that the number of hours of capacity scarcity conditions will decrease.

By sending a market signal that offers above $4.30/kW-month are unlikely to clear, NEPGA said, generators will be inclined to make below-cost offers to obtain capacity revenues.

Public Service Enterprise Group also protested, saying the $5.50/kW-month threshold is already less than 70% of the net cost of new entry (CONE) for FCA 12 and that offers in that range should be considered competitive. The first seven auctions used a threshold that was 80% of net CONE, PSEG said.

Ruling

FERC sided with the IMM’s methodology, saying it was reasonable given the changing supply-and-demand dynamics since the last update. “We agree with ISO-NE and [the New England Power Pool] that the question before the commission in this proceeding is whether ISO-NE has demonstrated that its proposed dynamic delist bid threshold and the methodology that the IMM used to calculate it are just and reasonable, not whether ISO-NE’s proposal is more or less just and reasonable than protesters’ proposed alternatives,” FERC said.

It added, “The fact that the IMM used different data than it has used in the past to calculate the dynamic delist bid threshold does not, on its own, render ISO-NE’s filing unjust and unreasonable.

“While NEPGA argues that the dynamic delist bid threshold should be based on the costs of oil-fired resources because they are typically the marginal resource, we find compelling ISO-NE’s statement that, under current market rules and conditions, it is difficult to forecast with certainty the type of resource that will submit the marginal bid,” the commission continued. “As ISO-NE notes, several different resource types have submitted dynamic delist bids near the auction clearing price in the last two auctions.”

It rejected NEPGA’s prediction that bids above the reduced threshold will not clear as “speculative.”

“We agree with ISO-NE that suppliers should not rely on the dynamic delist bid threshold as an indicator of the likely clearing price in the next auction; the purpose of the dynamic delist bid threshold is not to signal the likely market clearing price but instead to help ensure that the marginal bid is subject to IMM review for the potential exercise of market power. Further, the proposed dynamic delist bid threshold does not prevent capacity suppliers from submitting properly supported delist bids that exceed the threshold.”

The commission said PSEG’s protest that the reduced threshold will exacerbate problems with the delist process was beyond the scope of the proceeding.