Commissioner James Danly Statement
May 27, 2022
Docket No. ER22-1528-000
I dissent from this order[1] accepting the Federal Power Act (FPA) section 205[2] filing by ISO New England Inc. (ISO-NE) and the New England Power Pool largely eliminating the Minimum Offer Price Rule (MOPR), which was designed to protect ISO-NE’s capacity markets from the exercise of buyer-side market power. This “compromise” filing[3] 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).[4] I dissent 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.[5] The proposed rate does exactly that and is therefore manifestly unjust and unreasonable.
I have explained, at length, the legal requirements of competitive markets and our obligation to mitigate the exercise of buyer-side market power via state-sponsored resources bidding below cost and suppressing capacity prices.[6] While in theory a MOPR is not the only mechanism a market could adopt to prevent state-sponsored resources from suppressing capacity prices, a properly designed market must employ some mechanism to prevent the exercise of buyer-side market power. The one thing it cannot do is simply allow the exercise of that market power to happen. And that is precisely what the majority allows today: the states pay new renewables out of market, and these resources—now made indifferent to price—turn around and bid zero in the capacity market. Such bids, we are told, are to make certain the subsidized resource gets a commitment, and are never (we are told) for the purpose of suppressing prices. Nevertheless, these bids will have an “inevitable, albeit indirect, effect on FCA prices.”[7] The result will be the elimination of competition in the capacity market and the certainty that capacity market rates will bear no relation to the market rates that would have resulted had there been no exercise of market power. The rate, consequently, is not a market rate, and cannot, therefore, be just and reasonable as a market rate.
This is the majority’s doing. ISO-NE justifies this “more nuanced mechanism” because “[s]everal New England state policymakers and federal regulators have made it clear: the MOPR must go or be overhauled.”[8] Chairman Glick expressly threatened that RTOs must get rid of MOPRs or the Commission would do so unilaterally.[9] ISO-NE quotes Chairman Glick and Commissioner Clements arguing that “the [ISO-NE] MOPR appears to act as a barrier to competition, insulating incumbent generators from having to compete with certain new resources that may be able to provide capacity at lower cost.”[10] Exactly how are incumbent generators supposed to compete with state-subsidized resources? The whole point of a subsidy is to give certain resources an artificial (i.e., anti-competitive) advantage over other market players. Otherwise, what does a subsidy do?
The real question is why existing generators support the end of a competitive capacity market in New England. No generator protested. In fact, existing generators filed stomach-churning comments giving up on competitive capacity markets in exchange for a transition mechanism for the next two auction cycles (Forward Capacity Auctions (FCAs) 17 and 18, referred to herein as the Transition Mechanism), featuring somewhat-less-than-fully manipulated capacity markets (up to 700 MWs of subsidized renewables in the next two FCAs) and ISO-NE’s promises for two future reforms.[11] The Transition Mechanism to a non-competitive capacity market supposedly remedies “concerns about how the elimination of [the] MOPR would affect investor confidence and reliable operation of the New England Power System.”[12] I do not see how two FCAs of only somewhat manipulated capacity auctions is going to do anything to instill investor confidence or resolve reliability concerns.
As for the two promised reforms, the majority already says they are not necessary for this filing to be just and reasonable.[13] The first promised reform is to credit resources, particularly renewables, for the capacity they actually provide rather than according to fictional aspirations. This reform is fully independent of any questions related to the MOPR and ought to be made regardless of this proceeding. Why is ISO-NE currently jeopardizing reliability by pretending renewables provide more capacity than they do?[14] The second promised reform is a day-ahead ancillary services market, which is another idea that should be independently pursued and that has nothing to do with whether ISO-NE’s capacity market is just and reasonable. As to how that reform will fare should it ever reach the Commission, no one can say. We rejected a section 205 proposal on this very subject less than two years ago.[15]
Existing generators presumably made this Faustian bargain because they see no practical way to defeat elimination of the MOPR. The majority has made perfectly clear its intent to let states freely manipulate the markets in pursuit of their ambition to develop new renewables.[16] The states have established renewable goals through legislation that simply ignores inconvenient nuances like their policies’ effects on cost and reliability. This is unlikely to change absent a major reliability crisis, which, as NERC[17] and other entities[18] have made clear, seems more and more likely by the day.[19]
The more cynical answer for why generators did not protest this filing is that existing generator owners also tend to be developers and may have decided they can earn more by getting in line for their own handouts[20] or from RMRs.[21] This begs the question, if all new entry is state-sponsored, and all necessary existing generation can obtain RMRs, why not simply return to cost-of-service ratemaking, thereby protecting ratepayers, ensuring reliability, and saving us all the trouble?
Since no one dared to protest, this order only hints at much of the “debate” on the topic of buyer-side market power mitigation, such as the trope that new renewables have no incentive to manipulate capacity prices so therefore there is no market manipulation.[22] This ignores the role of the states who pay the subsidies (via taxpayers, of course) and obviously (think they) benefit from these same bought and paid-for resources bidding zero and “reducing” costs in the capacity market. The question is not whether the tiny brand-new solar farm has market power. The question is whether the state subsidies supporting that new solar project amount to market power. The states have the taxpayer dollars, and the states have the market power. This is not a complicated manipulative scheme as far as they go, yet nearly the entire industry has adopted it as a mantra for eliminating genuine competition in the capacity markets. That obviously includes the majority.
Chairman Glick’s concurrence misapprehends my dissent, stating that I have “recast the MOPR as a reliability tool.”[23] Not so. What I am saying is that it is necessary (both legally and economically) to mitigate the anticompetitive, price-suppressive effects of state subsidies on the prices in our capacity markets. To do otherwise is to abandon our statutory duty to ensure that the market’s formula rate is just and reasonable. To do otherwise is also to countenance flawed market design which will (ultimately) result in reliability failures. The MOPR is but one mechanism by which to ensure just and reasonable rates through mitigation of but one form of market-skewing price suppression.
Perhaps a moment of remedial instruction is called for: capacity markets are there for a purpose—to obtain a sufficient quantity of a commodity. That commodity is generation capacity, and that quantity is the administratively-established reserve requirement. Why obtain this commodity at such expense and trouble at all? In order to guarantee that the markets will have adequate generation resources to meet peak demand. The only way to ensure that there are adequate resources to meet peak demand is to have a market that sends the correct price signals to encourage the orderly entry and exit of the right quantity of the right type of resources. If the market is flawed, the wrong price signals will be sent. The wrong price signals will imperil the market’s ability to ensure resource adequacy. And one of the best ways to ensure that price signals are skewed is to suppress prices by means of out-of-market subsidies.
I conclude with a dose of reality: this scheme will fail. This order will compromise reliability. All-in ratepayer costs will increase substantially. Placed beside the Commission’s draft natural gas pipeline policy statements, which seem geared toward discouraging—if not outright prohibiting—the development of new natural gas pipelines,[24] the New England region appears severely exposed. And New England is not alone. With every day that passes, with every pipeline that is delayed, and with every order that undermines the price signals in the markets, we come closer to a disaster. And when it happens, my colleagues will have presided over a predictable, avoidable, and catastrophic failure. Perhaps then they will stop accommodating the states’ uneconomic policies and will instead, consistent with our statutory obligations, act to ensure that our markets are just and reasonable and can function as intended.
For these reasons, I respectfully dissent.
[1] ISO New England Inc., 179 FERC ¶ 61,139 (2022).
[2] 16 U.S.C. § 824d.
[3] New England Power Generators Association, Inc. April 21, 2022 Comments at 3-4 (NEPGA April 21, 2022 Comments).
[4] See, e.g., Constellation Mystic Power, LLC, 165 FERC ¶ 61,267 (2018), order on clarif., 172 FERC ¶ 61,044 (2020).
[5] Cal. ex rel. Lockyer v. FERC, 383 F.3d 1006, 1013 (9th Cir. 2004) (quoting Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C. Cir. 1990)) (“In a competitive market, where neither buyer nor seller has significant market power, it is rational to assume that the terms of their voluntary exchange are reasonable, and specifically to infer that the price is close to marginal cost, such that the seller makes only a normal return on its investment.”) (emphasis added).
[6] Comm’r James P. Danly, White Paper: Commissioner James Danly on the Requirement that Competitive Markets be Protected from the Exercise of Market Power Applied to RTO Capacity Markets, FERC (June 17, 2021), https://cms.ferc.gov/news-events/news/white-paper-commissioner-james-danly-requirement-competitive-markets-be-protected; Comm’r James P. Danly, Danly Office White Paper: The Requirement that Competitive Markets be Protected from the Exercise of Market Power Applied to RTO Capacity Markets, FERC (May 20, 2021), https://www.ferc.gov/news-events/news/danly -office-white-paper-requirement-competitive-markets-be-protected-exercise; Comm’r James P. Danly, Danly Office White Paper: The Requirement that Competitive Markets be Protected from the Exercise of Market Power Applied to RTO Capacity Markets, FERC (May 20, 2021), https://www.ferc.gov/news-events/news/danly-office-white-paper-requirement-competitive-markets-be-protected-exercise.
[7] ISO New England Inc., 179 FERC ¶ 61,139 at P 53.
[8] Transmittal at 6 (emphasis added). I must take a moment to address Commissioner Christie’s concurrence. Noting that five of the six New England states joined the New England States Committee on Electricity’s (NESCOE) comments, and no state opposed the ISO-NE MOPR reform proposal although some states did not support the Transition Mechanism, he says that the “obvious conclusion is that the ISO-NE MOPR reform proposal is in furtherance of the public policies chosen by the elected policy makers of New England.” ISO New England Inc., 179 FERC ¶ 61,139 (Christie, Comm’r, concurring at P 4). He also notes that the sixth state—New Hampshire—opposed and did not join certain of NESCOE’s comments in the stakeholder process. See id. (Christie, Comm’r, concurring at P 4 n.11). Because five states support the ISO-NE MOPR reform proposal and New Hampshire failed to oppose the proposal in this docket, he concludes that the New England states’ elected leaders support the proposal. See id. (Christie, Comm’r, concurring at P 4). Such support and New Hampshire’s lack of opposition in the record, he argues, see id. (Christie, Comm’r, concurring at PP 4, 6), resolves the issue in favor of accepting ISO-NE’s tariff revisions. I cannot agree with this. Though I, too, believe that the states play an inestimably important role under the FPA, it is the Commission that is charged with ensuring that rates are just and reasonable and no amount of state acquiescence (or, as in this case, partial acquiescence) can overcome that obligation. State agreement is but one of many indicators that a proposal might be just and reasonable. In any event, the D.C. Circuit has squarely found that “mitigation measures . . . do not entail direct regulation of facilities, a matter within the exclusive control of the states. See 16 U.S.C. § 824(b)(1).” New Eng. Power Generators Ass’n, Inc. v. FERC, 757 F.3d 283, 290 (D.C. Cir. 2014). The Third Circuit also has rejected a state’s claim that the Commission “is preventing New Jersey from using the resources it has chosen to promote,” holding that “FERC is doing no such thing.” N.J. Bd. of Pub. Utils. v. FERC, 744 F.3d 74, 97 (3d Cir. 2014) (NJBPU). Finding that ISO-NE’s reforms are not just and reasonable and retaining mitigation measures do not thwart a state’s choice to promote preferred resources. If they want their preferred capacity, even in the face of a Commission-imposed mitigation regime, they are entitled to it. The states simply must pay for it. See id., 744 F.3d at 97 (“Thus, as in Connecticut Department of Utility Control, New Jersey and Maryland are free to make their own decisions regarding how to satisfy their capacity needs, but they ‘will appropriately bear the costs of [those] decision[s],’ . . . including possibly having to pay twice for capacity.”) (quoting Conn. Dep’t of Pub. Util. Control v. FERC, 569 F.3d 477, 481 (D.C. Cir. 2009)). The states could also exit the market and return to cost-of-service ratemaking. See, e.g., Ill. Commerce Comm’n v. FERC, 721 F.3d 764, 776 (7th Cir. 2013) (“A further answer to both the substantive and procedural questions . . . is that [regional transmission organization (RTO)] members who think they’re being mistreated by the . . . tariff, can vote with their feet. Membership in an RTO is voluntary . . . .”); accord N.H. Rev. Stat. § 3:8 (“The words ‘Live Free or Die,’ written by General John Stark, July 31, 1809, shall be the official motto of the state.”). Fundamentally, I agree with Commissioner Christie that, if a state abandons its duty to advocate for its ratepayers, it will live with the consequences of that choice—the Commission can only rule on the record before it. ISO New England Inc., 179 FERC ¶ 61,139 (Christie, Comm’r, concurring at PP 4-5 & n.11).
[9] See Rich Heidorn Jr., PJM MOPR in the Crosshairs at FERC Tech Conference, RTO Insider LLC (March 23, 2021), https://www.rtoinsider.com/articles/20033-pjm-mopr-in-the-crosshairs-at-ferc-tech-conference (“Glick also said the commission would act unilaterally if necessary. ‘I think we should, to the extent we can, allow and enable the RTOs themselves and the stakeholders to come up with their own proposals [for] an approach that’s different than the current MOPR rules around the country,’ Glick said. ‘To the extent they don’t come up with something, I think we have an obligation under the Federal Power Act to act where rates and terms in these markets are unjust and unreasonable. In my opinion, I’ve said several times before, they are certainly in PJM, and so, if for whatever reason PJM and the stakeholders aren’t able to act, I think . . . we need to do it for them.’”).
[10] Transmittal at 6 (quoting ISO New England Inc., 178 FERC ¶ 61,050 (2022) (Glick, Chairman & Clements, Comm’r, concurring at 4)).
[11] See, e.g., NEPGA April 21, 2022 Comments; Calpine Corporation, et al. April 21, 2022 Comments.
[12] Calpine Corporation, et al. April 21, 2022 Comments at 10.
[13] ISO New England Inc., 179 FERC ¶ 61,139 at P 56.
[14] See Transmittal at 40 (“Working with the region, the ISO plans to overhaul the manner in which resources participating in the FCM receive capacity values, away from the current approach that produces values based on the ability of the resource to serve gross peak load, to a methodology that accredits resource capacity values based on their marginal reliability contribution to reducing expected unserved load (whenever it may occur).”) (citation omitted); id. at 40 n.142 (“As Dr. Chadalavada explains, ‘It is anticipated that the revised approach will account for intermittency, limitations on fuel supplies, and other factors traditionally ignored in resource adequacy assessment and capacity qualification processes (and largely ignored in the ISO’s current process).’”).
[15] ISO New England Inc., 173 FERC ¶ 61,106 (2020).
[16] As to the concurrence of my colleagues, Commissioner Clements and Commissioner Phillips, they describe the MOPR as “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.” ISO New England Inc., 179 FERC ¶ 61,139 (Clements, Comm’r, & Phillips, Comm’r, concurring at P 1); id. (Clements, Comm’r, & Phillips, Comm’r, concurring at P 2) (“Each of the six New England states have enacted renewable and alternative portfolio standards, and some have enacted statutes and regulations to promote the development of clean energy resources by facilitating their financing through long-term power purchase agreements. Yet, if left unchecked, ISO-NE’s MOPR could exclude many of these resources from the capacity market, essentially ignoring the available capacity from these resources and forcing consumers to pay higher prices for unneeded capacity in a region with among the highest electricity prices in the nation.”) (citations omitted). States appropriately bear the costs of their own public policy decisions, and we at the Commission bear the responsibility of ensuring that capacity market rates are just and reasonable, as the courts have long held. See NJBPU, 744 F.3d at 97 (“Thus, as in Connecticut Department of Utility Control, New Jersey and Maryland are free to make their own decisions regarding how to satisfy their capacity needs, but they ‘will appropriately bear the costs of [those] decision[s],’ . . . including possibly having to pay twice for capacity.”) (quoting Conn. Dep’t of Pub. Util. Control v. FERC, 569 F.3d at 481).
[17] See N. Am. Elec. Reliability Corp., 2022 Summer Reliability Assessment (May 2022), https://www.nerc.com/pa/RAPA/ra/Reliability%20Assessments %20DL/NERC_SRA_2022.pdf.
[18] See, e.g., Cal. Indep. Sys. Operator Corp., 2022 Summer Loads and Resources Assessment (May 18, 2022), http://www.caiso.com/Documents/2022-Summer-Loads-and-Resources-Assessment.pdf; Midcontinent Indep. Sys. Operator, Lack of Firm generation may necessitate increased reliance on imports and use of emergency procedures to maintain reliability (Apr. 28, 2022), https://www.misoenergy.org/about/ media-center/miso-projects-risk-of-insufficient-firm-generation-resources-to-cover-peak-load-in-summer-months/; PJM Interconnection, L.L.C., Energy Transition in PJM: Frameworks for Analysis (Dec. 15, 2021), https://pjm.com/-/media/committees-groups/committees/mrc/2021/20211215/20211215-item-09-energy-transition-in-pjm-whitepaper.ashx (addressing renewable integration).
[19] Chairman Glick says that I am “prone to hyperbole” when I warn that blackouts are the likely outcome of the majority’s misguided policies to prop up renewables at the expense of competitive markets and existing fossil resources. Rich Heidorn Jr., Summer Forecasts Spark Warnings of “Reliability Crisis” at FERC, RTO Insider LLC (May 19, 2022), https://www.rtoinsider.com/articles/30170-summer-forecasts-spark-warnings-reliability-crisis-ferc. Chairman Glick appears to be confusing “hyperbole” with “reality.” California and Texas have already experienced blackouts. Over two-thirds of the nation faces “elevated [reliability] risk” this summer. Ethan Howland, FERC commissioners respond to elevated power outage risks across two-thirds of US, Utility Dive (May 20, 2022), https://www.utilitydive.com/news/ferc-nerc-power-outage-risks-summer-drought/624111/ (“At its monthly meeting Thursday, Federal Energy Regulatory Commission members dissected the North American Electric Reliability Corp.’s warning that roughly two-thirds of the United States faces [sic] heightened risks of power outages this summer.”). I prefer a policy correction before we have more blackouts. Today’s order makes blackouts in New England, and their grave attendant consequences, far more likely.
[20] See, e.g., Kavya Balaraman, California governor floats 5-GW, $5.2B ‘reliability reserve’ amid possible electricity shortfalls, Utility Dive (May 17, 2022), https://www.utilitydive.com/news/california-5-gw-reliability-reserve-shortfall-caiso-puc/623864/ (“Newsom is requesting that the state legislature create a strategic electricity reliability reserve, which he referred to as ‘a fancy way of saying putting together 5,000 MW that’s available at a moment’s notice.’ The reserve could include ‘existing generation capacity that was scheduled to retire,’ as well as new storage projects and diesel and natural gas back-up generation, according to the revised budget.”); Evan Halper, Biden administration launches $6 billion nuclear plant bailout, The Washington Post (Apr. 19, 2022), https://www.washingtonpost.com/business/2022/04/19/biden-administration-launches-6-billion-nuclear-plant-bailout/ (“The Biden administration moved Tuesday to revive America’s troubled nuclear power industry with $6 billion in spending aimed at keeping open financially strapped plants.”); Timothy Gardner, Illinois approves $700 million in subsidies to Exelon, prevents nuclear plant closures, Reuters (Sept. 13, 2021), https://www.reuters.com/ world/us/illinois-senate-close-providing-lifeline-3-nuclear-power-plants-2021-09-13/ (“The Illinois Senate on Monday saved two Exelon Corp[.] nuclear power plants from closure by passing a bill that will provide $700 million in subsidies to the company over five years for generating virtually carbon-free power.”).
[21] See, e.g., Constellation Mystic Power, LLC, 165 FERC ¶ 61,267, order on clarif., 172 FERC ¶ 61,044.
[22] See, e.g., Joint Statement of Chairman Glick and Commissioner Clements Regarding the Fair RATES Act on PJM MOPR, Docket No. ER21-2582-000, at P 20 (Oct. 19, 2021).
[23] ISO New England Inc., 179 FERC ¶ 61,139 (Glick, Chairman, concurring at P 3).
[24] See Certification of New Interstate Nat. Gas Facilities, 178 FERC ¶ 61,107 (2022) (Updated Certificate Policy Statement); Consideration of Greenhouse Gas Emissions in Nat. Gas Infrastructure Project Revs., 178 FERC ¶ 61,108 (2022) (Interim GHG Policy Statement); see also Certification of New Interstate Nat. Gas Facilities, 178 FERC ¶ 61,197, at P 2 (2022) (converting the two policy statements issued on February 18, 2022, Updated Certificate Policy Statement, 178 FERC ¶ 61,107 and Interim GHG Policy Statement, 178 FERC ¶ 61,108, to “draft policy statements”).