FERC Grapples with Accommodating State Policies in Wholesale Markets; Approves ISO New England Proposal for Subsidized Renewable Resources
Nearly a year after summoning stakeholders to discuss whether—and if so, how—the wholesale power markets should accommodate state policy goals, the Federal Energy Regulatory Commission (FERC or the “Commission”) has taken a first step toward addressing the issue. In a split decision1 issued March 9, the Commission accepted a new capacity market construct proposed by ISO New England (ISO-NE or ISO). The construct, referred to as “Competitive Auctions with Sponsored Policy Resources”(CASPR) will attempt to integrate increasing amounts of subsidized renewable resources into the ISO’s FERC-regulated wholesale markets.
The CASPR order provided the new Commission with an opportunity to articulate its views on an issue that has vexed the agency for years: in an era of rapidly changing power systems and increasing environmental and climate change concerns, to what extent should the federally regulated wholesale markets accommodate out-of-market state policy initiatives? As states continue to pursue zero-carbon energy to achieve emissions targets, the CASPR order likely foreshadows future jurisdictional battles at FERC.
Background
New-generation resources in ISO-NE are required to bid into the capacity market at their unsubsidized cost. This market rule—known as the Minimum Offer Price Rule, or “MOPR,” in FERC-speak—is intended to mitigate the effect of out-of-market subsidies, typically from states, on the FERC-regulated wholesale markets.2 In the absence of such a rule, subsidized resources may have an incentive to bid at their lower, subsidized cost (or even submit a zero-dollar bid) to ensure clearing the capacity auction. FERC has suggested that the MOPR construct is necessary to avoid a race to the bottom of sorts, where subsidized resources bid below their competitive costs and consequently drive down the clearing price paid to all capacity resources, including those not receiving any subsidies.3
Predictably, the MOPR is controversial. Consumers in states that choose to subsidize new resources (e.g., to promote renewable energy) face the prospect of double-paying for capacity: once for each utility’s share of the region’s capacity costs, as determined by the ISO-administered capacity auction, and again for the state-sponsored resources that fail to clear the auction due to the MOPR’s bid floor. This prospect has fostered repeated challenges to MOPR-like rules over the years as FERC seeks to balance its duty to oversee competitive wholesale markets with its desire to avoid impeding the implementation of state policy goals.4
More than any other Regional Transmission Organization/Independent System Operator (RTO/ISO) market rule, the MOPR embodies the inherent tension between state and federal jurisdiction in the wholesale markets. On the one hand, the Federal Power Act leaves no question that states retain jurisdiction over generation resource planning; states are undoubtedly within their right to, among other things, encourage the construction of certain types of resources.5 On the other hand, FERC has exclusive jurisdiction over the wholesale electricity markets, the value of which lies in their ability to send accurate pricing signals to market participants across state lines based on competitive market forces.6 Through its many permutations, the MOPR represents the efforts of RTOs/ISOs and FERC to balance these competing objectives.
The CASPR Proposal
ISO-NE’s MOPR has contained a limited carveout for renewable resources since the 9th Forward Capacity Auction,7 providing an exemption from the minimum bid floor each year for up to 200 MW of renewable resources. This carveout may prove insufficient to accommodate recent state efforts to address climate change and other environmental goals, however.
