By Joel Yu and Christopher Hargett

A $1,000/MWh energy market offer cap in organized wholesale electric markets regulated by FERC has served as an effective customer protection for more than 15 years.[1]

Only once has an operational constraint resulted in legitimate energy offer spikes to levels near or above $1,000/MWh in some regions: the polar vortex in winter 2013-14.

In response, regional market operators scrambled to initiate measures modifying the existing cap so that generators could recover legitimate costs if it happened again.

When FERC initiated proceedings to improve price formation in organized electric markets, with due consideration of the $1,000/MWh cap, stakeholders began debating. Almost two years later, they still are, raising numerous concerns over any changes to the existing offer cap.[2]

In a September 2015 “Stakeholder Soapbox,” Consolidated Edison highlighted two principles to consider in reforming this important customer protection. First, the $1,000/MWh energy market offer cap plays a critical role in mitigating potential market power abuse. Second, the markets must also appropriately compensate generators for their performance in extreme conditions.

FERC’s Offer Cap Rulemaking is Responsive to Stakeholder Concerns

In its January 2016 proposed rule, FERC strikes a balance giving careful consideration to customer interests in the pursuit of uniform, transparent and efficient energy market pricing.

The proposed rule allows energy offers in excess of $1,000/MWh to set market clearing prices only when underlying costs have been verified before the start of the market clearing process. Offers not verified before the start of the market clearing process would be ineligible to set market clearing prices, though legitimate costs could be recovered through out-of-market payments based on an after-the-fact review.

Over the past two years, Con Edison has advocated that the $1,000/MWh offer cap is a critical “fail-safe” consumer protection against potential market power abuse when markets may not be functioning competitively, due to either high load or other system conditions.

Likewise, NYISO’s Market Monitor states that “prices are generally more sensitive to withholding and other anticompetitive conduct under high load conditions” due to the scarcity of marginal suppliers.[3] Experience has demonstrated this when both electric and gas systems are experiencing high demand conditions.

FERC addressed this concern by proposing to maintain the $1,000/MWh offer cap on market-based offers. By requiring pre-verification of underlying costs when offers exceed the cap, the proposed rule should help protect consumers against high energy prices due to anti-competitive supplier conduct.

Specifically, this proposal protects consumers from potential attempts to exercise market power in either the electric or natural gas markets. This is especially so because natural gas is an increasingly dominant fuel for electric production and typically marginal when electric demand exceeds base load. With its robust enforcement authority for both commodities, FERC can provide additional customer and market power protection.[4]

Con Edison and others have supported out-of-market payments for generators needing to recover marginal costs in excess of $1,000/MWh, while acknowledging FERC’s goal of making energy market pricing more transparent and efficient.

By allowing cost-based offers to exceed $1,000/MWh subject to verification, FERC provides generators with assurance that even during rare circumstances, such as the polar vortex, costs can be recovered through market clearing prices or out-of-market payments.

Thus, the proposed rule strikes an appropriate balance between customer and supplier interests.

FERC Establishes an Effective Framework for Organized Markets to Develop Regional Implementation Rules

Con Edison, along with numerous other stakeholders, also cautioned against any proposal that would create disparate offer caps among neighboring organized markets given potential unintended and harmful impacts across seams.

Sensitive to this concern, FERC’s proposal will apply the new offer cap construct uniformly across the markets. While specific regional implementation may vary to address regional differences, FERC’s proposed framework provides for regional price differences driven by system constraints, not by variations in regional offer cap rules.

FERC’s proposal sets out clear policy objectives and rationale for the revised offer cap construct. It is a good and fair solution. Con Edison encourages FERC to adopt its proposal without significant alteration or delay.

Christopher Hargett and Joel Yu are senior policy advisors at Con Edison. Subsidiaries Con Edison Company of New York and Orange and Rockland Utilities are transmission owners within NYISO. A subsidiary of Orange and Rockland Utilities, Rockland Electric, is a transmission owner within PJM.

[1] See FERC’s NOPR, Docket RM16-5, 154 FERC 61,038 (January 21, 2016) at p. 55.

[2] Currently, the energy market offer cap does not allow offers exceeding $1,000/MWh to set market clearing prices, except in PJM where the offer cap was recently raised to $2,000/MWh.

[3] 2014 State of the Market Report for the New York ISO Markets, Potomac Economics, May 2015, p.17.

[4] See Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005).