By Michael Kuser, Amanda Durish Cook and Rich Heidorn Jr.

Following FERC’s two-day technical conference on tensions between wholesale electric markets and state energy policy initiatives in early May, the commission invited comments on five potential paths forward (AD17-11).

The paths include a continuation of the status quo (Path 3), with the courts sorting out whether state initiatives — such as the zero-emission credits for Exelon nuclear plants in New York and Illinois — violate federal jurisdiction; changes to the minimum offer price rule (MOPR) (Paths 1 and 5); and market rule changes to accommodate state policies (Path 2) or incorporate them into RTO and ISO pricing (Path 4).

The commission also asked commenters to rate the urgency of the issue and solicited suggestions on how FERC should go forward procedurally.

More than 80 commenters responded, although many repeated their past positions and did not provide feedback on the paths the commission outlined. Based on RTO Insider’s review of the comments, below is a summary of the supporters and detractors of each path.

“As was evident after the conference,” observed Duke Energy, “there is no consensus on a path forward and what a particular path entails.” (See RTO Markets at Crossroads, Hobbled FERC Ponders Options.)

Paths 2 and 4 appeared to be the most popular, although there were supporters and detractors for all of the proposals.

The range of challenges to the capacity market constructs in PJM, ISO-NE and NYISO — the Eastern markets that were the focus of the technical conference — raises the prospect that FERC could relax the markets’ participation requirements. Public power advocates, who have been seeking relief for years, peppered their comments with repeated demands to let them acquire capacity via bilateral contracts, with capacity auctions playing a much smaller, “residual” role.

Path 1: Limited or No Minimum Offer Price Rule

FERC Description

“An approach that would either not apply the minimum offer price rule to state-supported resources, or limit application of the minimum offer price rule to only state-supported resources where federal law pre-empts the state action providing that support.”

Background

If FERC were to abandon the MOPR altogether, it would likely invite court challenges alleging it was allowing states to usurp its authority under the Federal Power Act. Thus any relaxation of MOPR is likely to be constrained by the Supreme Court’s 2016 rulings in Hughes v. Talen and Electric Power Supply Association v. FERC. (See Court’s Reticence Frustrates Energy Bar.)

Supporters

Load-serving entities are the biggest fans of this approach, which also is supported by the Nuclear Energy Institute (NEI) and some commenters in the renewables camp.

The National Rural Electric Cooperative Association (NRECA), American Municipal Power and Old Dominion Electric Cooperative support Path 1 or 2 or a combination of the two.

The American Public Power Association (APPA) called for “a greatly limited MOPR that provides full exemptions for self-supply and state-sponsored resources, or the ability to remove such resources from the capacity market clearing process altogether.”

The Transmission Access Policy Study Group (TAPS), which represents transmission-dependent utilities in 35 states, considers it “potentially viable.”

NEI, the Sierra Club and the Natural Resources Defense Council’s Sustainable FERC Project all expressed support, with NRDC calling it the solution “most likely to support proper price formation.”

Opposed

Groups representing consumers led the opposition, with the Electricity Consumers Resource Council (ELCON) rejecting it as “too extreme.”

A group of 60 large industrial, commercial and institutional energy consumers in New York who filed as “Multiple Intervenors” also opposed it, saying “it presumes that state public policies that unduly impact or interfere with competitive wholesale electricity markets must be accommodated in most circumstances, and that the preferred ‘solution’ in cases where federal law pre-empts state action is the application of a minimum offer price rule.”

“While MOPRs may be appropriate in certain circumstances, Multiple Intervenors disagrees that they represent the only — or even the best — response to all state public policies that trespass into the commission’s jurisdiction,” the group said.

NRG Energy also opposed Path 1, saying it would exacerbate price suppression in wholesale markets by allowing subsidized resources to enter the markets at prices below actual cost. It has proposed a “Forward Clean Attribute Market” in the New England Power Pool’s Integrating Markets and Public Policy (IMAPP) initiative.

NRG, Dynegy, Eastern Generation and the Electric Power Supply Association (EPSA) filed a federal court suit in October claiming the New York ZECs intrude on FERC’s jurisdiction over interstate electricity transactions. The same companies filed suit in February challenging Illinois’ ZECs for Exelon’s Quad Cities and Clinton nuclear plants and have also asked FERC to reject the subsidies.

Path 2: Accommodation of State Actions

FERC Description

“An approach that would accommodate state policies that provide out-of-market support with the operation of the wholesale markets by allowing state-supported resources to participate in those markets and, when relevant, obtain capacity supply obligations, subject to adjustments necessary to maintain certain wholesale market prices consistent with the market results that would have been produced had those resources not been state-supported.”

Background

Proposals for two-tiered capacity auctions that would clear subsidized resources separately fall into this path.

Supporters

LSEs are the biggest supporters, with the NRECA, AMP, ODEC and Eastern Massachusetts Consumer-Owned Systems backing the concept. The American Forest and Paper Association also favored a Path 2 solution, saying “each of the other four pathways are likely to prove impractical and more expensive for consumers.”

APPA said it supports efforts to accommodate state actions, “assuming such accommodation also covers resources procured by public power and cooperative utilities. Such an accommodation should be designed broadly so that there is no determination by the RTO of what constitutes ‘legitimate’ state policies.”

The New England States Committee on Electricity (NESCOE) noted that NEPOOL’s IMAPP initiative “has focused on developing approaches that align with Paths 2 and 4.” At the conference, ISO-NE presented its proposal for a two-tiered auction that it said would incorporate state-mandated renewable generation while preventing oversupply and addressing objections to a regional carbon tax. (See ISO-NE Two-Tier Auction Proposal Gets FERC Airing.)

The Advanced Energy Management Alliance (AEMA) said FERC should direct ISO-NE, NYISO and PJM to file Path 2-type changes in capacity market rules to support “the rights of states to control their own energy policy and to procure carbon-free resources that wholesale markets can integrate cost-effectively” while ensuring they do not distort wholesale prices.

New York City said Paths 2 and 4 provide the “best opportunities to correct current market constraints” on renewable resources and new technologies procured under public policy goals.

“The appropriate future is clearly a combination of Paths 2, 4 and 5,” NRG said, adding that they are consistent with a “pro-markets approach [that] appears to have wide support from across the stakeholder community.”

Independent power producers Calpine and Dynegy also expressed support for Path 2, with Calpine calling it a “mid-term solution.” Dynegy says Path 2 “is the next step: a robust stakeholder process to fully develop and refine the proposed solutions that have recently been presented by the ISOs/RTOs (ISO-NE’s Competitive Auctions with Subsidized Policy Resources (‘CASPR’) proposal and PJM’s capacity market repricing proposal).”

Brookfield Renewable, the Conservation Law Foundation and NextEra Energy, which are promoting their Carbon-Linked Incentive for Policy Resources (CLIPR) proposal as a long-term Path 4 solution, say Path 2 may be needed in the interim.

“Feasible Path 4 solutions — like the CLIPR proposal — must be identified simultaneously with the formulation of any interim short-term proposal, as doing so will avoid the risk that the interim Path 2 solution outlives its useful life to the detriment of the market and more robust and comprehensive long-term solutions,” the “CLIPR Coalition” said.

Avangrid said a combination of Paths 2 and 3 is best for multi-state regions, “while Path 4 is better suited to single-state wholesale markets.”

Opposed

ELCON and New York’s Multiple Intervenors opposed, with ELCON rejecting it as a “kluge.”

PJM’s Independent Market Monitor, which opposed all but Paths 4 and 5, said “it would be a mistake for ISO/RTOs to explicitly accommodate state-level subsidies” in their capacity market design.

The American Wind Energy Association said any Path 2 solution should be “technology-neutral.” It questioned “the feasibility of any Path 2 solution that proposes to differentiate … ‘subsidized’ resources from ‘unsubsidized’ resources and calculate the competitive offer price of the ‘subsidized’ resources.”

The New York Public Service Commission, which is backing a plan to integrate carbon pricing into the NYISO market, said Path 2 “illustrates the limitations of the five paths.”

Path 3: Status Quo

FERC Description

“An approach that would rely on existing tariff provisions applying the minimum offer price rule to some state-supported resources, and continuing case-by-case litigation over the specific line to be drawn between categories of state actions that may, or may not, result in a state-supported resource being subject to the minimum offer price rule.”

Background

At the hearing, acting FERC Chair Cheryl LaFleur urged stakeholders to avoid “unplanned and piecemeal regulation,” saying “it would be a bad outcome for customers and market participants in terms of cost, reliability and regulatory certainty.”

Supporters

Few commenters embraced the status quo, although ELCON called it the only path that is “tenable.” Duke endorsed it, saying that stakeholder discussions occurring in the RTOs/ISOs “should run their course” and that it is not necessary for the commission to take “prescriptive” action. “Threshold legal issues are pending before the courts, and the resolution of these issues should be allowed to play out before any further action is taken at the federal level,” ELCON said.

The large New York customers group said that while it is “not optimal,” it “may be the most realistic among the choices identified” by FERC.

AWEA said it would support Path 3 only if FERC continues to exempt renewable resources from the MOPR.

Opposed

TAPS called it “unsustainable and unworkable,” and NRECA and APPA also opposed, with the latter saying, “No participants expressed support for this option at the technical conference.

“The lack of support for the status quo has persisted throughout the history of the capacity markets and must be recognized in determining future paths,” APPA said.

NRDC said Paths 3 and 5, “as well as some approaches to implementing Path 2,” would violate the Federal Power Act by improperly discriminating between resources. “The act of defining what is or is not a ‘subsidy’ will inevitably entail arbitrary and discriminatory line-drawing efforts, as has become increasingly clear through FERC’s decisions regarding the application of the MOPR to resources supported by state policies,” it said.

Dynegy said Path 3 is “unsustainable.”

“Dynegy has already been negatively impacted by the ZEC subsidy programs and will continue to be negatively impacted absent relief from the courts or commission action. In a ‘status quo’ scenario, Dynegy will be unable to proceed with capital improvements [and] hiring, and will need to evaluate shutdowns of generating plants that are more cost efficient than the subsidized nuclear units.”

Path 4: Pricing State Policy Choices

FERC Description

“An approach in which state policies, to the extent possible, would value the attributes (e.g., resilience) or externalities (e.g., carbon emissions) that states are targeting in a manner that can be readily integrated into the wholesale markets in a resource-neutral way. For those state policies that cannot be readily valued and integrated into the wholesale markets, Path 4 would also require consideration of what, if anything, the commission should do to address the market impacts of these state policies. For instance, other approaches for these state policies may include accommodation, application of the minimum offer price rule or an exemption from the minimum offer price rule.”

Background

A carbon price adder is one potential Path 4 solution, but it has been rejected by the New England states.

Supporters

The NYPSC said its work with NYISO to incorporate carbon into the wholesale electricity markets “might be viewed as an endorsement of Path 4.”

Path 4 also won support from Dominion Energy, Calpine, Dynegy, Exelon, NEI, Vitol and the Solar Energy Industries Association (SEIA).

EPSA gave Path 4 conditional support. “The challenge will be to define those resource attributes (e.g., flexibility) or externalities (e.g., carbon emissions) that should be integrated into the wholesale market, and then to develop a mechanism to value those qualities in a resource-neutral manner,” EPSA said, adding that it “is confident that, if these objectives can be identified, the ISOs/RTOs and market stakeholders can establish workable and efficient means to integrate these objectives into competitive market structures.”

APPA also gave a qualified endorsement, saying it could result in “an efficient means of achieving environmental or other policy goals if it were limited to a single price adjustment, such as a carbon tax or adder.” The group said it would only support this “achieve” approach “if it were done along with and not as a replacement to an accommodation of state policies or a move to a voluntary residual capacity market.”

AWEA said Path 4 is its first choice and would allow the markets to “better value the benefits and externalities of renewable energy that are not being currently captured.”

It also expressed concern that the five paths could tread on state sovereignty, asking FERC to consider carbon pricing. “Since there is currently no real conflict between state-supported renewable energy resources and wholesale markets, nor has there been one over the decades for which these policies have been in place, there is no basis for the commission to suddenly upset this balance by infringing upon state sovereignty and undoing the intent of state laws that seek to promote renewable energy.”

The Brookfield “CLPR Coalition” said Path 4 is preferable to Path 2. It asked FERC to issue a policy statement directing the RTOs to submit “achieve” solutions to the commission in the near term and requiring them to file quarterly reports on their progress.

Opposed

Opponents include the Natural Gas Supply Association, NRECA, TAPS and the large New York customers, the last of which said they were skeptical that it could be implemented effectively and benefit customers.

ELCON said the proposal would be the “most prone to abuse” of the alternatives. “It would fail in real-world conditions because some states would not respect market-based solutions. They would concoct attributes that are not realistically fungible or tradable for the purpose of selectively internalizing externalities or for socializing the costs of command-and-control mandates.”

AEMA said FERC should allow RTOs and stakeholders to develop solutions but not force them to file proposals. “Pricing state policy into energy and ancillary markets, through mechanisms such as carbon adders, raises several controversial issues. Capacity market solutions are not plagued with such controversial questions, and if the commission were to direct ISOs to pursue both capacity and energy market solutions simultaneously, it would slow the progress of the capacity market solution,” AEMA wrote.

Economist James F. Wilson said the commission should set a long-term goal “of seeing more revenues from the energy and ancillary services markets, and eventually phasing out the capacity constructs, or converting them to voluntary mechanisms, recognizing the changing nature of `resource adequacy.’

“The energy and ancillary services markets hold the potential to efficiently guide the changing resource mix over time, including incorporating public policy objectives such as decarbonization that presently are not reflected in the markets; the capacity constructs cannot do this,” Wilson continued. “Reducing the role of the capacity constructs will require resisting the frequent pressures to change them in ways that raise capacity prices and/or lead to clearing substantial excess capacity.”

Cliff Hamal, managing director of Navigant Economics, said “the most fundamental assumption” underlying capacity markets — setting capacity prices based on the cost of building new gas-fired generation — may no longer be valid. “What if policy options, such as those that promote low-carbon resources and demand reductions have eliminated the need for regular additions of gas-fired generation? A case could be made that we have already reached that point, or might do so in the near future. If so, the fundamental basis for setting capacity prices through the net-[cost of new entry]-based demand curve auction is no longer valid.”

Path 5: Expanded Minimum Offer Price Rule

FERC Description

“An approach that would minimize the impact of state-supported resources on wholesale market prices by expanding the existing scope of the minimum offer price rule to apply to both new and existing capacity resources that participate in the capacity market and receive state support.”

Background

The MOPR came up frequently at the technical conference with some witnesses calling for its expansion and others seeking its relaxation or abolition. (See Uncertain Future for MOPR.)

Supporters

EPSA and EPSA members Dynegy and Calpine would like to see this path pursued immediately, while the NGSA says it is fine as a short-term fix but not as a long-term solution. Calpine also sees it as a “near-term” fix.

Competitive Power Ventures called for expansion of the MOPR to reserve price signals, the implementation of a “universal” carbon price into the energy markets and RTO dispatch decisions and improvements to price formation.

Opposed

NRDC, which said it would not be just and reasonable, was joined in opposition by Hydro-Quebec, the New York Power Authority, NEI, Dominion, FirstEnergy, East Kentucky Power Authority, the New York Multiple Intervenors, the PJM Industrial Customer Coalition, ELCON, TAPS, NRECA and APPA.

APPA called it “the worst possible outcome,” which would result in “an overly administered noncompetitive market that would frustrate resource development pursuant to policy decisions.”

“This would greatly benefit the pure merchant facilities, leading to a significant decline in resource diversity, a higher cost of capital and a lack of any type of planning or optimization of resources. Because the states will likely continue to seek to procure or retain resources based on policy preferences, an expanded MOPR also increases the risk of overbuilding and double-payment for capacity.”

The Multiple Intervenors was also opposed, saying that MOPRs “have the effect of sheltering incumbent generation owners from competition and impeding market entry.”

AWEA said it could open “the door to widespread mitigation of legitimate state policies and, in turn, uncertainty for renewable energy investors.”

“If the commission approves a MOPR based on factors other than limiting the application of the MOPR to only state-supported resources where federal law pre-empts the state action, then it becomes difficult to draw a clear boundary limiting commission interventions,” AWEA said. “As this path has no discernable limit to what types of public policies would be exposed to a MOPR, it could lead to an environment where legitimate state renewable energy policies could be impeded by the risk of being mitigated.”

In a joint filing, AWEA, Advanced Energy Economy, Alliance for Clean Energy New York, American Council on Renewable Energy, Mid-Atlantic Renewable Energy Coalition, RENEW Northeast, and Wind on the Wires also opposed expanding MOPR.

“All energy resources benefit from subsidies and/or favorable policies and, therefore, a singular focus on incentives for certain resources such as renewables, would be discriminatory,” they said. “Contrary to the claims of some of the panelists at the technical conference, Northeast power systems are performing better as a result of the availability and integration of renewable energy into the resource mix. Negative pricing is rare and, more importantly, not responsible for negative economic impacts on other generation sources. Gas prices, not renewables, are the primary factor reducing revenues for nuclear, coal, and other supply sources.”

Economist James F. Wilson also opposed Path 5. “The markets are not nearly as fragile, and the impacts of public policy resources not nearly as substantial, as some stakeholders suggest,” he said.

Rob Gramlich of Grid Strategies said FERC should continue to treat public policies as “exogenous, as a factor that may affect market participants’ behavior and willingness to pay or accept money for a transaction, but not something for the commission to mitigate or undo. One can disagree with some of the laws state and federal legislatures pass, and FERC can offer its input into legislative processes, but it would be a major shift in the regulatory paradigm for the federal electricity market regulator to go beyond intervening to remedy market power and manipulation and enter the realm of mitigating public policy.”

“A wide range of state and federal policies have affected quantities and prices in power markets since the inception of U.S. electricity markets,” Gramlich continued. “For example, there might not be any nuclear generation in operation were it not for the Price-Anderson Act limiting liability for unit owners. We might not have as much natural gas generation if intangible drilling costs were not allowed to be deductible as a current business expense under federal tax law.”

Urgency

There was wide disparity on the urgency of the issues, with those most affected — merchant generators — calling for swift action. (See Power Markets at Risk from State Actions, Speakers Tell FERC.)

Yes

NEI and IPPs — though on opposite sides of the nuclear subsidy debate — agreed on the need for a speedy resolution. NEI said RTO markets are not just and reasonable if they don’t provide sufficient revenues to retain nuclear generation threatened by low-cost natural gas.

EPSA said immediate action is needed to “insulate” wholesale markets “from current distortive state actions while all stakeholders collaborate on identifying market structures that help address defined public policy goals.” Also calling for urgency were Calpine, Eastern Generation, the Independent Power Producers of New York, the New England Power Generators Association, LS Power and NRG, which said that competitive markets are “under siege.”

NRG said FERC should actively participate in suits challenging the ZECs and act on pending complaints before the commission on the subject of the MOPR.

The R Street Institute, a free-market think tank, said FERC should have “an extremely high sense of urgency.”

Dynegy also called for swift action, criticizing Exelon Senior Vice President of Competitive Market Policy Kathleen Barron, who told FERC on May 1 that “we have some time to talk about where we go.”

No

Exelon responded that FERC should implement energy market fixes to eliminate the need for ZECs before considering any of the paths identified.

The PJM ICC said there was “no need for rush to judgment” and ELCON said the “problem at hand is too important to be rushed.”

NRDC said there is no evidence of a “crisis,” pointing out that reserve margins in PJM, ISO-NE and NYISO are all currently higher than their targets.

The Union of Concerned Scientists said the “proposed solutions are premature due to lack of [a] coherent argument” for action. “The calls for urgent action by stakeholders have presumed that there is clarity regarding the nature and size of the alleged problem with the capacity markets,” it said. “As far as the renewable portfolio standards, there is neither urgency, nor a clear statement sorting the issue.”

Procedural Steps

NRECA and Exelon said FERC should convene technical conferences in each region and require the grid operators to file progress reports on their stakeholder processes.

ELCON said any action should be a common solution across all RTOs to avoid exacerbating seams issues. Xcel Energy — which doesn’t operate in the three Eastern RTOs — said FERC should reiterate that the docket is limited to RTO/ISO markets, urging it to “do no harm” to unbundled states.

EPSA said energy price formation should be a priority, calling for completion of Notices of Proposed Rulemaking on the pricing of fast-start resources (RM17-3) and addressing uplift allocation and transparency (RM17-2). (See FERC: Let Fast-Start Resources Set Prices; FERC Seeks More Transparency, Cost Causation on Uplift.)

The R Street Institute called for FERC to issue a new NOPR setting a “bright line” on state policies that would be subject to the MOPR or legal challenges. “This would offer a more proactive approach than retroactive litigation, deter egregious interventions and perhaps disarm state-federal tensions.”

Public Citizen said the paths outlined by FERC are too narrow to solve the problems and that competitive markets may not always be the best solution. It said the commission should start by conducting an evidentiary hearing on whether RTO markets are resulting in just and reasonable outcomes. It also called for governance changes to allow non-governmental organizations voting rights in the RTO/ISO stakeholder process.