FERC last week approved NYISO’s revised buyer-side market (BSM) power mitigation rules, prompting a warning from Commissioner Richard Glick that the commission had threatened the future of organized capacity markets by explicitly excluding state-supported resources from mitigation exemptions.

Thursday’s 3-1 ruling followed on a February order that partly approved NYISO’s proposal for implementing renewable resource and self-supply exemptions to the BSM rules in its capacity market and directed the ISO to submit a compliance filing revising some provisions (ER16-1404). (See FERC Narrows NYISO Mitigation Exemptions.) It also denied a request for rehearing of the February order by a handful of New York state agencies and the American Public Power Association.

Glick’s dissent aimed not so much at the exemption rules but at their selective application, arguing that FERC’s approach to BSM mitigation “has degenerated into a scheme for propping up prices, protecting incumbent generators and impeding state clean energy policies.” He warned that the commission’s efforts “to ‘save’ capacity markets are more likely to hasten their eventual demise.”

The commission on Thursday accepted nearly all the revisions in NYISO’s compliance filing, effective for new resources entering the Installed Capacity Market (ICAP) starting with interconnection Class Year 2019. Approvals covered:

• NYISO’s proposal to use a “renewable exemption limit” formula to calculate a megawatt cap of renewable resources exempt from BSM mitigation specific to each mitigated zone.
• Inclusion of an “incremental regulatory retirement” component in the renewable exemption limit, which will adjust the megawatt cap to reflect the retirement of resources that can be attributed to “direct” regulatory actions taking place since the prior ICAP study period. The feature is intended to address NYISO’s concern that state policies can create a supply of “out-of-market” resources that depress capacity prices.
• Use of an unforced capacity reserve margin (URM) impact component in the renewable exemption limit formula, which is intended “to capture the change in the URM in a mitigated capacity zone that reflects how URM market requirements are expected to increase in response to renewable resource entry.”
• Implementation of a “renewable exemption bank” through which unforced capacity megawatts not used in prior interconnection studies are “carried over” into subsequent studies, ensuring “that any UCAP megawatts derived from the other three factors — change in forecasted peak load, incremental regulatory retirements and the URM impact — remain available to qualified renewable exemption applicants in future buyer-side market power mitigation determinations, thereby keeping supply and demand in the capacity market in balance even where entry and exit are lumpy over time.”

The commission conditionally accepted NYISO’s proposed role for its Market Monitoring Unit in determining what resources qualify as incremental regulatory retirements. It directed NYISO to revise the proposal by removing the commission as the arbiter in the event of a disagreement between the ISO and the MMU and instead designate that the ISO’s decision would prevail.

“Thus, absent a Section 206 complaint, the commission will not have a prescribed role in such determinations,” FERC wrote. “We find that NYISO’s proposal invites delay to a time-sensitive process. In particular, we find that if the commission fails to act on a disagreement within 60 days, suspending the Class Year process could result in unacceptable delays to an already complex process that NYISO is working to streamline and for which developers need greater certainty.”

Rehearing Rejected

Thursday’s ruling also denied a rehearing request by the New York Public Service Commission, New York State Energy Research and Development Authority, New York Power Authority, Long Island Power Authority (referred to as the NY Parties) and APPA, which asked the commission to review its February finding that public power entities should not be eligible for NYISO’s self-supply exemption in the capacity market. The NY Parties also sought rehearing of FERC’s decision to reject a statewide 1,000-MW cap for the renewable resources exemption.

The commission disagreed with the contention by APPA and the NY Parties that the decision to exclude state resources from the self-supply is arbitrary and capricious and inconsistent with the 2015 complaint order that originally forced NYISO to alter its exemptions policy. It noted that the complaint order “expressed ‘concerns regarding the state’s ability to artificially suppress prices by channeling uneconomic entry through an exempted load-serving entity’ and directed NYISO to ‘consider the impacts of state decisions to subsidize resources that are owned or contracted for by a self-supplied load-serving entity.’”

The commission at the time had also required NYISO “to propose net-short and net-long thresholds ‘tight enough to prevent a load-serving entity from being able to deliberately overpay for a resource in an attempt to manipulate ICAP market prices in a way that benefits the load-serving entity’s other purchases from the ICAP market.’”

The February 2020 order found that NYISO “had failed to comply with these directives because NYISO’s proposal to allow certain instrumentalities of the state to be eligible for the self-supply exemption did not account for the state’s ability to suppress ICAP market prices through self-supplied load serving entities.”

The commission noted that its February ruling found “the net-short threshold is premised on the assumption that a load-serving entity’s incentive is to minimize the costs of serving its customers, and that this assumption does not hold true for certain state entities, such as NYPA,” whose own mission statement “supports the conclusion that NYPA’s main focus is the welfare of New York state as a whole,” including supporting businesses and nonprofits that provide jobs and services to the state.

FERC found that the incentive of “certain instrumentalities of the state to act on behalf of the whole state” was critical in determining whether the proposed net-short and net-long thresholds would fulfill their purpose.”

In denying the request to rehear its rejection of NYISO’s statewide 1,000-MW renewable resources exemption cap, the commission contended that the cap was inconsistent with a previous order to “narrowly tailor” such caps to mitigated capacity zones. The commission said it disagreed with the NY Parties’ contention that FERC’s requirements will result in a more restrictive cap than that considered in the 2015 complaint order.

“We further disagree that the February 2020 order interferes with New York state’s authority to determine the mix of generation resources in [the New York Control Area]. The commission does not improperly intrude on the states’ authority to determine its energy resource mix and the development of new generation merely by implementing wholesale rules affecting matters within the states’ jurisdiction.”

‘Misguided Belief’

In his scathing dissent, Commissioner Glick contended that Thursday’s ruling “perverts buyer-side market power mitigation into a series of unnecessary and unreasoned obstacles to New York’s efforts to shape the resource mix.”

Glick said the application of BSM power mitigation to entities “that are not buyers or buyers that lack market power is nonsensical. Moreover, even when applied to buyers who may have market power, mitigation must reasonably address their potential to exercise that market power.”

He argued that the commission has “abandoned” the intended narrow focus of BSM mitigation rules by no longer requiring “a resource to be a buyer, much less a buyer with market power, before subjecting that resource to buyer-side market power mitigation.”

“Buyer-side market power rules — often referred to as minimum offer price rules, or MOPRs — that were once intended only as a means of preventing the exercise of market power have evolved into a scheme for propping up prices, freezing in place the current resource mix and blocking states’ exercise of their authority over resource decision-making,” Glick wrote. “The result is an ever-expanding system of administrative pricing that is, ironically enough, justified on the basis that it promotes competition. But, in reality, the commission is not promoting anything remotely resembling actual competition.”

The “administrative pricing regimes” instead “create a systemic bias in favor of existing resources and curtail resources’ incentive and ability to compete across all possible dimensions,” he wrote.

Glick also warned that FERC’s actions to support capacity prices are encroaching on the authority of states to shape their resource mix and compromising the integrity of capacity markets, putting the future of those markets at risk.

“We got to this point largely because of the commission’s misguided belief that it must ‘protect’ capacity markets from the influence of state public policies. However, as explained below, the commission’s efforts to prop up prices by mitigating the effects of state public policies upset the jurisdictional balance that is the heart of the [Federal Power Act] and interfere with capacity markets’ ability to produce efficient market outcomes,” he said.

“The more the commission interferes with state public policies under the pretext of mitigating buyer-side market power, the more it will force states to choose between their public policy priorities and the benefits of the wholesale markets that the commission has spent the last two decades fostering,” Glick said. “Although that should be a false choice, the commission is increasingly making it into a real one.”