United States: Clear Rift Highlighted By Commissioners’ Lack Of Action On New England’s Most Recent Forward Capacity Auction Results

On September 16, 2014, the Federal Energy Regulatory Commission's four Commissioners issued statements explaining a 2-2 deadlock between Chairman LaFleur and Commissioner Moeller on the one hand and Commissioner Clark and new Commissioner Bay on the other, over whether to accept rates resulting from ISO New England Inc.'s ("ISO-NE") most recent capacity auction as just and reasonable.  In addition to fueling concern that capacity resources in New England cannot necessarily rely on the results of future capacity auctions, the sharp contrast  among the Commissioners' statements provides a glimpse of what to expect when Norman Bay takes over as Chairman on April 15, 2015.1 Commissioner Bay's joint statement with Commissioner Clark also does little to alleviate concerns raised by some during his confirmation proceedings that Bay's past experience as head of FERC's Office of Enforcement will be featured prominently during his tenure as Chairman.

ISO-NE's Most Recent Forward Capacity Auction

ISO-NE's eighth Forward Capacity Market Auction ("FCA-8") was conducted in early February, 2014.  Prior to being conducted, but following expiration of the qualification deadline for new resources to participate, nearly 3,000 MW of capacity exited the market.  This abrupt drop in potential supply left a deficit of more than 1,000 megawatts going into FCA-8, when compared to the region's installed capacity requirement.  ISO-NE, as a result, termed FCA-8 "non-competitive," triggering certain administrative pricing rules under its tariff.  Following the auction, ISO-NE announced that FCA-8 had produced capacity costs of approximately $3.05 billion.  This amount nearly doubled the next highest capacity costs from prior capacity auctions in New England.

ISO-NE's tariff requires that auction results be filed with FERC pursuant to section 205 of the Federal Power Act ("FPA") – a relatively unique condition stemming from the terms of the settlement agreement which formed the basis for ISO-NE's capacity market design.  As required, ISO-NE filed the results for FCA-8 on February 28, 2014, in Docket No. ER14-1409.  Many parties intervened, with several protesting the auction results.  Despite several months and the provision of supplemental information by ISO-NE, FERC was unable to agree on whether to accept or reject ISO-NE's filing.  Instead, the split panel allowed FCA-8's rates to become effective by operation of law as of September 16, 2014, issuing individual and joint statements explaining their respective positions on the same day. 

Commissioner Moeller acknowledged the rarity of allowing a rate to become effective without an order, but noted that ". . . such a result will happen when a four-member panel finds itself deadlocked."  Despite the absence of an order, the Commissioners' statements provide important insight as to how the various issues were considered, including issues of regulatory and rate certainty, market power, and the underlying purpose behind ISO-NE's requirement to file the results from its forward capacity auctions with FERC.

Sharp Contrasts in Reasoning and Approach

Chairman LaFleur and Commissioner Moeller stated separately that they would have voted to accept FCA-8's resulting capacity rates as just and reasonable.  Conversely, Commissioners Clark and Bay, through a joint statement, made clear that they would have voted to reject these rates, and would have set the matter for a fast-track hearing and settlement procedures. 

Chairman LaFleur's statement emphasized past precedent in support of the filed rate doctrine, underscoring the importance that "the FCA be transparent and that auction participants not be subject to significant regulatory uncertainty or after-the-fact ratemaking."2  Commissioner LaFleur noted that since the start of ISO-NE's forward capacity market, FERC's review of forward capacity auction results has focused on whether ISO-NE administered its auction in accordance with its tariff and not, alternatively, whether the resulting rates are themselves just and reasonable.  Commission LaFleur reasoned that if ISO-NE followed its tariff, but FERC then found the resulting rates to be unjust and unreasonable, the only way to arrive at different rates would be through some form of retroactive ratemaking in contravention of FERC's filed rate doctrine.  Commissioner LaFleur stated that even if market power had been exercised, such market power should be addressed through prospective, tariff-imposed mitigation measures as opposed to retroactive relief.  If existing mitigation measures are found to be unjust and unreasonable, any remedy must be prospective in nature.  Commissioner LaFleur also noted that FERC has been clear in the past that it lacks authority to order retroactive relief unless a party violates its tariff, the parties agree to such relief, or there is notice that a rate is tentative and may later be adjusted.  According to Commissioner LaFleur, none of these circumstances are present with respect to FCA-8.

In direct contrast, Commissioners Clark and Bay determined that the FERC's ability to ensure that the auction results are just and reasonable, and "not merely the process leading to them," is an "important underpinning" of ISO-NE's capacity market.  Clark and Bay reasoned that FERC would "abdicate its responsibility under section 205 of the FPA if it treated the FCA 8 Results Filing as a mere informational filing and determined without further review that the prices resulting from the auction must necessarily be just and reasonable."  Describing FERC as "the backstop for protecting consumers when a market produces non-competitive rates," Commissioners Clark and Bay determined that there is evidence of unmitigated market power with respect to FCA-8, and that based on the record, they could not find that ISO-NE had "carried its burden of establishing that the auction results are just and reasonable."  Clark and Bay also were not persuaded that the filed rate doctrine precludes FERC from examining whether FCA-8's resulting rates are just and reasonable, believing instead that these rates are not final until ISO-NE's filing is accepted pursuant to section 205.  Accordingly, Commissioners Clark and Bay would have instituted fast-track hearing and settlement procedures to address and consider results of FCA-8.  Commissioners Clark and Bay also stated that they also would have directed FERC's Office of Enforcement to issue a public report on what it has found to date on FCA-8, redacted as necessary to protect the identity of the subjects being investigated.  While FERC's regulations provide that information learned during the course of an investigation is non-public, Commissioners Clark and Bay determined that disclosure is warranted here "given the need for transparency and the importance of this proceeding to the New England Market."3 

Perhaps landing somewhere in the middle, Commissioner Moeller stated that he would have voted to approve the resulting rates as just and reasonable on the basis that the high prices resulted from supply and demand fundamentals.4  Commissioner Moeller agreed with Commissioner LaFleur that ISO-NE administered FCA-8 in accordance with its tariff.  However, Commissioner Moeller acknowledged that an auction process previously found just and reasonable by FERC may well result in unjust and unreasonable rates, and that higher prices deserve greater scrutiny.  Accordingly, although Commissioner Moeller would have voted to find that FCA-8's rates are just and  reasonable, he would seem to agree with Commissioners Clark and Bay that such rates are indeed subject to Commission examination under section 205 of the FPA, regardless of whether the rates result from an auction process previously determined to be just and reasonable.

Show Cause Order (EL14-99)

Despite being unable to reach agreement on whether to accept the results from FCA-8, the Commissioners on the same day issued a show-cause order requiring action by ISO-NE within 30 days.  Specifically, FERC's order requires ISO-NE to either revise its existing market rules to provide for the review and potential mitigation of offers by capacity importers in a manner similar to how existing resources' offers are reviewed, or to show cause why such revisions are not required.  FERC stated that although it has found in the past that most imports should be treated consistent with internal resources for mitigation purposes, ISO-NE's current tariff does not require the market monitor to ensure that importers' de-list bids are consistent with their going forward opportunity costs.  FERC said that it is concerned that this might create an opportunity for the exercise of market power and result in preferential and unduly discriminatory treatment favoring importers.5

Going Forward

FERC's decision to allow the results of FCA-8 to become effective by operation of law, and the Commissioners' related statements, highlights the significant regulatory uncertainty for capacity resources in New England – and possibly more broadly for all market participants.  Subsequently, parties will surely argue that this disposition puts resource owners on notice that auction prices cannot necessarily be relied upon until ISO-NE's results filing has been addressed – even where ISO-NE has conducted its auction in accordance with its tariff.  Such headwinds will surely buffet New England and may well adversely affect the cost of financing resources.  FERC's show-cause order in EL14-99 stirs in further uncertainty and may ultimately result in investors favoring other markets.  The joint statement from Commissioners Clark and Bay illuminates their view of the role FERC serves in protecting consumers and squaring that responsibility with the filed rate doctrine.  The statement also suggests FERC may utilize its enforcement arm more actively and in a "real-time" role – including in section 205 proceedings, potentially at the expense of regulatory certainty.

Footnotes

1 See https://www.ferc.gov/media/headlines/2014/080114.asp#.VBnk3kopDcs

2 Statement of Chairman Cheryl A. LaFleur, available at http://ferc.gov/media/statements-speeches/lafleur/2014/09-16-14-lafleur.asp#.VCLr2EopDcs

3 Joint Statement of Commissioners Clark and Bay, available at http://ferc.gov/media/statements-speeches/clark/2014/09-16-14-clark.asp#.VCLsXUopDcs

4 Statement of Commissioner Moeller, available at http://ferc.gov/media/statements-speeches/moeller/2014/09-16-14-moeller.asp#.VCLscEopDcs

5 ISO New England Inc., 148 FERC ¶ 61,201 (2014).

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