FERC Votes To Permanently End Use Of MOPR In New England After Two-Year Transition
June 1, 2022
by Paul Ciampoli
APPA News Director
June 1, 2022
The Federal Energy Regulatory Commission (FERC) on May 27 voted to approve a proposal submitted by ISO New England (ISO-NE) under which the grid operator will eliminate a minimum offer price rule (MOPR) in its forward capacity market (FCM) and replace it with a reformed buyer-side market power mitigation construct.
ISO-NE Proposal And Background
In March, ISO-NE and the New England Power Pool Participants Committee (NEPOOL) jointly submitted proposed revisions to the ISO-NE Transmission, Markets and Services Tariff to modify the current MOPR in the FCM.
ISO-NE proposed to permit a specified quantity of “sponsored policy resources” to enter the market without being subject to buyer-side market power mitigation review during the next two forward capacity auctions (FCA) 17 and 18, and thereafter, beginning with FCA 19, eliminate the current MOPR and replace it with a reformed buyer-side market power mitigation construct.
As part of its FCM, ISO-NE holds an annual FCA in which capacity suppliers compete to provide capacity to the New England region for the relevant delivery year, three years in the future. Suppliers of capacity that receive a capacity supply obligation in an FCA commit to, and receive payment for, providing capacity for that one-year period associated with that FCA.
Currently, ISO-NE’s buyer-side market power mitigation rules utilize a MOPR that requires new capacity resources to offer their capacity at prices that are at or above a price floor set for each type of resource. By imposing such a minimum offer price, the MOPR is intended to “mitigate” uncompetitively low bids, including resources that benefit from certain subsidies.
In its order, FERC notes that over the past decade, New England states have sought to reduce greenhouse gas emissions and meet climate goals through various mechanisms outside of the ISO-NE markets.
Those efforts have included legislation that allowed state-regulated utilities to enter into long-term contracts with certain defined resource types.
However, the MOPR does not allow resources receiving out-of-market revenues to account for that support in their offer prices, unless the support is widely available to other market participants.
As noted by ISO-NE in its filing, new resources supported through state legislation carry an elevated risk that their subsidized offers will be mitigated, making it more likely that they will fail to clear in the FCA.
ISO-NE acknowledges that, because capacity obligations generally must be met through resources that have cleared the FCA, exclusion of state-sponsored resources from the FCM forces consumers to effectively pay for capacity twice — once to meet the resource adequacy objectives of the FCM and a second time to meet the policy objectives of the states.
ISO-NE said that its MOPR reforms are necessary to facilitate entry into the FCM of substantial amounts of capacity from state-sponsored resources over the next several decades, avoiding the potential for an inefficient overbuild of the region’s capacity.
ISO-NE explained that New England states have undertaken significant clean energy and decarbonization initiatives over the last five years such that the existing market rules designed to accommodate the participation of state-sponsored resources within the FCM are unlikely to sufficiently address the potential for excess capacity procurement throughout the region.
Accordingly, ISO-NE proposed to implement certain MOPR reforms to replace the existing rules for state-sponsored resources, following a two-year transition period.
The grid operator proposed a transition mechanism for FCAs 17-18 to permit a defined quantity of state-sponsored resources unmitigated entry into the FCA in a measured fashion to protect reliability, investors, and consumers.
ISO-NE proposed a graduated replacement of the MOPR for two central reasons: (1) concerns about adverse impacts to reliability from inefficient retirements and from likely delays in the development of state-sponsored resources, and (2) the need to provide the region time to undertake market reforms to facilitate the reliable transition to the new resource mix.
Details On FERC Order
In its order, FERC determined that ISO-NE has shown that the proposed revisions “appropriately balance the need to mitigate the potential exercise of buyer-side market power against the harms of over-mitigation.”
FERC said that ISO-NE’s proposal “minimizes the potential for an inefficient overbuild of capacity while providing the necessary time for an orderly transition of the region’s resource mix that will protect reliability and provide market certainty.”
Implementing the MOPR reforms in conjunction with a limited transition mechanism “is a just and reasonable approach in this circumstance because it strikes a reasonable balance among” different considerations raised in the proceeding, including efforts to ensure resource adequacy, minimize potential adverse effects on reliability that could result from an immediate change to the market rules, promote market certainty, and limit the costs associated with over-mitigation.
FERC said that the purpose of the MOPR is to prevent the exercise of buyer-side market power and that it is not a tool designed to maintain reliability.
The MOPR “does not change the capacity accreditation of resources nor the total amount of capacity targeted in an auction. However, as it does directly change resources’ offers by imposing offer floors, it can impact the clearing price of an auction and alter which resources clear the auction,” FERC said.
“Therefore, ISO-NE has presented a reasonable case for why immediate removal of the MOPR in ISO-NE could exacerbate existing reliability challenges insofar as a one-time price shock to the capacity market could cause what it describes as the ‘disorderly’ or inefficient retirement of resources that could prove necessary to maintain reliability during extended cold conditions.”
FERC also found that the transition mechanism “promotes market stability and provides a measure of predictability to market participants by specifying the maximum amount of state-supported resources that may clear in FCAs 17 and 18 prior to implementation of the MOPR reforms in FCA 19.”
Commissioners Weigh In
In a concurrence to the order, FERC Chairman Richard Glick said he believes that the best outcome here would have been for ISO-NE to immediately implement its new MOPR, i.e., without the transition mechanism.
“Simply put, ISO-NE could have, and should have, done better. Nevertheless, ISO-NE submitted a different proposal—one that delays reform of the MOPR by two years—and we must evaluate the filing before [us],” he wrote.
When considered in that context, Glick believes that the proposed transition mechanism “is part of a just and reasonable package of reforms.”
In addition, “and critically, the New England States have explained that they do not oppose the transition mechanism,” he noted.
He said he recognizes that the changing resource mix is forcing the Commission, RTOs, and the states to take a new tack to ensuring reliability. “No one can dispute that. But the right way—and, in my view, the only just and reasonable way—to do so is by designing wholesale electricity markets to ensure reliability in light of that changing resource mix rather than trying to roll back the resource mix clock.”
He said it is not the Commission’s role to choose one resource type over another, or to second guess the wisdom of state resource decisionmaking. “Instead, we must ensure, in a resource-neutral manner, that wholesale electricity markets are procuring the services need[ed] to keep the lights on and the grid in balance.”
As a result of the order, ISO-NE “is free to do just that rather than engaging in a Sisyphean attempt to stymie state efforts through the capacity market. In this respect, I strongly encourage ISO-NE to move forward expeditiously in developing and filing a capacity accreditation proposal to ensure that the FCM is accurately valuing the capacity contribution of all resources. Done right, capacity accreditation can serve as a prime example of how Commission-jurisdictional markets can ensure reliability in a manner that compliments, rather than contradicts, states’ exercise of their sovereign authority—exactly the type of ‘cooperative federalism’ that I believe should typify the Commission’s interaction with the states and its regulation of wholesale markets more generally,” wrote Glick.
Commissioners Allison Clements and Willie Phillips offered a joint concurrence.
“We vote to accept ISO-NE’s tariff filing because it sets the region on course to eliminate the Minimum Offer Price Rule (MOPR), a likely unjust and unreasonable tariff mechanism that, if left uncorrected, could force customers in New England to pay millions or even billions to prop up capacity that they do not want or need,” they said.
While immediate elimination of the MOPR “would likely better serve ISO-NE’s customers than the proposal that has been filed, such a proposal is unfortunately not before us. And at this late hour, nor could the MOPR be immediately eliminated without causing great uncertainty and delay for FCA 17,” wrote Phillips and Clements.
They cautioned “that we believe this proceeding presents unique circumstances, which may not be present in the case of a similar transition mechanism in a different setting.”
Commissioner Mark Christie concurred in approving the filing “due largely to my belief that RTO capacity markets – which are administrative constructs, not true markets — should attempt to accommodate the public policies of the states as long as the impacts, both in costs and reliability, of one or more states’ public policies are not being forced onto other states not sharing those public policies.”
He said that the threat of such impact-shifting to other states in a multi-state RTO was present in PJM’s proposal last year to eliminate its MOPR.
“Here, however, and in distinct contrast to the PJM MOPR proceeding in which Pennsylvania and Ohio expressed strong opposition in a filing in the proceeding, no state in ISO-NE has filed in this record opposing the MOPR’s reform in ISO-NE,” Christie said.
At the same time, he said that while the policy makers of New England “have made their choices and I respect them, I believe that this proposal, even given the transition mechanism, holds the potential for negative effects on the reliability of electric power service in New England and may even cause higher prices for consumers when state officials find it necessary to procure back-up sources of dispatchable power to keep the lights on, as California is now evidently finding it necessary to do.”
Commissioner James Danly dissented from the order, arguing that the filing approved by FERC “ensures that the capacity market in New England will no longer serve any meaningful purpose except to be used as a tool to suppress prices paid to existing generators. Meanwhile, a fleet of new, state-subsidized renewable resources will force any generator that is not receiving a subsidy—potentially including older renewables—into premature retirement or into expensive, out-of-market reliability must-run contracts (RMR).”
He said he was dissenting “because a market rate design cannot be just and reasonable if it is not competitive, and it cannot be competitive when it permits states to freely manipulate prices. The proposed rate does exactly that and is therefore manifestly unjust and unreasonable.”