United States: FERC Exempts Certain Demand Response Resources From Buyer-Side Mitigation In NYISO; Bay Questions FERC's Minimum Offer Price Rule Policy Rationale In Concurrence

Last Updated: February 27 2017
Article by Adrienne Thompson and Daniel Archuleta

On February 3, 2017, FERC partially granted a complaint against the New York Independent System Operator, Inc. ("NYISO") regarding the application of buyer-side market power mitigation rules to demand response resources in NYISO's installed capacity market ("ICAP"). In its order, FERC found that NYISO's application of its mitigation rules was unjust and unreasonable as to future demand-side generators. FERC allowed prospective exemptions for such resources, but denied exemptions for such resources currently subject to NYISO market power mitigation. Separately, outgoing Commissioner Bay wrote a lengthy concurrence in which he argued that FERC should reconsider the rationale behind its minimum offer price rule policy ("MOPR") and its applicability in wholesale electricity markets.

In June 2016, a group of New York state agencies and renewable energy advocates (collectively, "Complainants") filed a complaint against NYISO, arguing that NYISO's application of its buyer-side market power mitigation rules to demand response resources (called Special Case Resources, or "SCRs") in the ICAP market was "unjust and unreasonable" under the Federal Power Act ("FPA"). In particular, the Complainants argued that the complexity and administrative burden of such mitigation rules on SCRs will negatively impact resource participation at the wholesale level. Complainants added that rather than being allowed to fully participate in both wholesale demand response (through NYISO) and retail-level demand response (through utilities), demand response providers would be incentivized to participate only in the most lucrative and least burdensome program. As a result, Complainants asserted that demand response resources would be used inefficiently, program costs would soar, and New York state clean energy goals would be undermined.

Complainants therefore sought a blanket exemption from NYISO's buyer-side market power mitigation rules for all SCRs, or, alternatively, the exclusion of payments for retail-level demand response programs from SCR offer floor calculations.

In response, NYISO agreed that it would be reasonable to exempt SCRs from buyer-side market power mitigation rules because the current evidence suggested that retail-level demand response programs have not resulted in suppressed ICAP market prices. However, NYISO noted that if retail-level demand response compensation continued to increase, thereby allowing SCRs to suppress ICAP market prices, then mitigation measures should be allowed. In no case, NYISO argued, would it be appropriate to exempt SCRs currently subject to mitigation, since that would disrupt settled market expectations. Several additional parties intervened to support or protest the complaint. In particular, the Electric Power Supply Association ("EPSA") and Independent Power Producers of New York, Inc. ("IPPNY") intervened and argued against the complaint, arguing that SCRs should be subject to all buyer-side mitigation measures the same as all other resources.

In its order, FERC partially granted and partially denied the complaint. FERC found that application of NYISO's buyer-side market power mitigation rules to SCRs was unjust, unreasonable and unduly discriminatory or preferential under the FPA because such resources "have limited or no incentive and ability to exercise buyer-side market power to artificially suppress ICAP market prices." In making this finding, FERC rejected arguments that SCRs—typically individual or small aggregated sets of "resources"—have the same ability to suppress ICAP market prices as larger market participants. FERC did note, however, that to the extent that market power could later be exerted, NYISO would be obligated to mitigate such behavior. This stance, the majority of Commissioners noted, was consistent with its long-standing MOPR policy. Finally, FERC denied the complaint to the extent that Complainants requested exemption for existing SCRs currently subject to mitigation, noting that doing so would be contrary to FERC's practice of applying such relief prospectively.

Writing in a separate concurrence, outgoing Commissioner Bay argued that, although the correct result was reached in this case, FERC should go further and reconsider its long-standing MOPR policy and whether it is being too broadly applied to wholesale electricity markets—especially following the Supreme Court's 2016 decision in Hughes v. Talen Energy Mktg., LLC. (see April 27, 2016 edition of the WER). In the estimation of Commissioner Bay, the MOPR "appears to be based on an idealized vision of markets free from the influence of public policies." As he argued, however, such a world does not exist, due to the pervasive influence of federal subsidies, state energy policies, and even non-subsidy-based state actions like favorable zoning or tax decisions. Federal preemption law post-Hughes suggests, according to Commissioner Bay, that FERC should limit its use of the MOPR to only the "rare situation where the state action impermissibly interferes with wholesale rates." Anything beyond that, he argued, will continue to place FERC in tension with the states and their "celebrated [role as] being laboratories for experimentation."

NYISO was directed to submit a compliance filing within thirty days of the order. The order and Commissioner Bay's concurrence can be read here.

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