Do Buyer-Side Market Power Rules Apply to Demand Resources?

In one of the last orders that FERC issued before it lost its quorum on February 3, 2017, the Federal Energy Regulatory Commission (“FERC”) concluded that New York Demand Resources (e.g., electricity load that is capable of being interrupted upon request) do not have the “incentive or the ability” to artificially suppress capacity prices. (See, New York Public Service Commission, et al. v. New York ISO, 158 FERC ¶ 61,137, at P. 31 (2017) (“Order”)).  The Order also shed new light on Minimum Offer Price Rules (“MOPR”) that many Regional Transmission Organizations (“RTOs”) use.

The Order arose from a June 24, 2016 Complaint regarding NYISO’s application of MOPR to Demand Resources (known as “Special Case Resources” or “SCR” in NYISO).  MOPR apply to resources in NYISO, including Demand Resources (“DR”) that may be able to lower capacity market prices through exercise of market power.  NYISO contended that DR had the ability to depress capacity market prices, in part, because these resources could receive compensation from retail-level programs, as well as wholesale programs.  NYISO used its MOPR provisions to increase DR offers to reflect the alleged retail market subsidy. 

The Complainants argued that the NYISO’s application of MOPR rules to DR would “compel them to choose between the wholesale- and the retail-level demand response programs, even though those programs are intended to address different systems, yield distinct benefits, and compensate for different services provided.” Order at P. 5  The Complainants also explained that “while the retail-level demand response programs support distribution system reliability, NYISO’s SCR program is designed to support bulk transmission system reliability at or near peak system conditions. . . the retail-level programs and NYISO’s SCR programs are often called upon at different times of the day and on different days of the year.” Order, P. 6.

The Commission ordered that DR should be prospectively entitled to participate in both retail and wholesale programs, without NYISO applying MOPR:

We find that the Complainants have demonstrated that NYISO’s Services Tariff is unjust, unreasonable, unduly discriminatory or preferential, under section 206 of the FPA, because it applies NYISO’s buyer-side market power mitigation rules to SCRs, which have limited or no incentive and ability to exercise buyer-side market power to artificially suppress ICAP market prices. Order, P 30. (Emphasis added).

Consistent with FERC precedent, however, this holding was only applied prospectively to new DR and not to DR in NYISO that are currently subject to MOPR mitigation.

As in important sidelight, the Order’s Concurring Opinion raised serious questions regarding the future application of MOPR.  Commissioner Norman Bay, in one of his last opinions, left no uncertainty regarding his broad concerns about the application of MOPR in RTO markets:

MOPR has turned out to be unsound in principle and unworkable in practice.  No other market in the United States is subject to the same construct in which a federal agency reviews state action and imposes an administrative price floor on supply offers from certain resources that have received state support.  This places the Commission in direct and recurring conflict with the states, ignores the pervasiveness of state and federal policies that support resources in one fashion or another, and represents a significant intervention in the market that raises costs to consumers.  (Dissent, p. 1)

Commissioner Bay pointed out in a 7-page opinion that the very premise of MOPR “appears to be based on an idealized vision of markets free from the influence of public policies”; a world that does not exist.  Dissent, p. 2.  In fact, according to a 2015 U.S. Energy Information Administration report, all energy resources receive some sort of federal subsidies.  The MOPR only focuses on state subsidies, despite the fact that “all state action that increases or decreases electricity supply has an impact on the wholesale markets.” Id.  MOPR rules, moreover, do not mitigate the wholesale offers of utilities located in vertically integrated states.

Even though the Order only addressed the application of MOPR to DR in the NYISO, the Concurring Opinion raised serious unanswered questions regarding the future of MOPR in RTOs.  The tensions described by Commissioner Bay will likely grow in the future as states pursue a variety of environmental and economic programs that could be construed as illegal “subsidies” under the MOPR rules.

This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Rick Drom at (202) 659-6645 – rdrom@eckertseamans.com.