Commissioner James Danly Concurrence in Part and Dissent in Part Regarding New York Independent System Operator, Inc.

Commissioner James Danly Statement
May 10, 2022
Docket No. ER22-772-001

I concur in today’s approval[1] of New York Independent System Operator, Inc.’s (NYISO) proposals regarding resource accreditation and demand curve computation.  I dissent from its approval of NYISO’s proposed revisions to its buyer-side market power mitigation rules (BSM Rules).

I cannot support the portion of the order that excludes state-preferred resources that come under New York State’s Climate Leadership and Community Protection Act (CLCPA) from NYISO’s BSM Rules.  As I have explained before,[2] buyer-side market mitigation is required in order for us to find market rates to be just and reasonable.

NYISO proposes to exclude certain resources from the BSM Rules or otherwise from an offer floor.[3]  According to NYISO:

[i]f the BSM Rules do not evolve, they are likely to more significantly interfere with CLCPA policies by mitigating new entrants that are necessary to the achievement of New York State’s policy objectives.  In particular, there is cause for concern that the BSM Rules will result in over-mitigation of new intermittent and storage resources entering the capacity market as part of the NYISO’s Class Year 2021 interconnection cost allocation process.  Over-mitigation of such resources would result in needlessly higher costs to consumers, and market inefficiencies.

This change will help to ensure that the NYISO is not engaging in over- or under-mitigation, while accommodating New York State’s reserved authority under section 201 of the FPA to address its resource mix.  It is just, reasonable, and not unduly discriminatory to exclude resources that serve CLCPA objectives from the BSM Rules because the statute, and state programs adopted thereunder, are expected to be the principal driver of changes to the resource mix in New York State over the next two decades. [4]

As I previously explained in another proceeding,[5] the institution of BSM Rules and the consequent mitigation of the offers of state-supported resources do not represent an unlawful intrusion into the FPA’s reservation of the states’ authority over generation.  The courts of appeals in both the Third Circuit and the District of Columbia Circuit have unequivocally rejected this argument in New Jersey Board of Public Utilities v. FERC[6] and New England Power Generators Association, Inc. v. FERC.[7]  With respect to NYISO, the Commission has as well.[8]

The Third Circuit recognized that states “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.”[9]  This equally applies to the decisions of New York state.

NYISO cites my statement in a different proceeding involving PJM Interconnection, L.L.C. (PJM) as arguing that “buyer-side market power measures must continue to guard against artificial price suppression.”[10]  Correct.  Mitigation of the price-suppressive effects of state subsidies is required to ensure that rates produced by NYISO’s capacity market are just and reasonable.  Courts have so held.[11]

In 2011, the Commission issued a series of orders approving changes to minimum offer price rules in PJM that included elimination of an exemption from mitigation for resources built pursuant to a state mandate.  On appeal, New Jersey tried to argue that the Commission interfered with its rights under the FPA saying: “‘FERC here interferes directly and materially with state efforts to sponsor new capacity resources precisely because those efforts could affect market prices.’”[12]  The Third Circuit determined that New Jersey was wrong.[13]  The court explained that “what FERC has actually done here is permit states to develop whatever capacity resources they wish, and to use those resources to any extent that they wish, while approving rules that prevent the state’s choices from adversely affecting wholesale capacity rates.  Such action falls squarely within FERC’s jurisdiction.”[14]

The court held:

After reviewing the FERC Orders at issue here and the relevant case law, we conclude that FERC did not exceed its jurisdiction in eliminating the state-mandated provision.  Under the FPA, FERC has jurisdiction over rules affecting the rates of the transmission or sale of energy in interstate commerce.  See 16 U.S.C. § 824d.  Here, it is undisputed that New Jersey and Maryland’s plans to introduce thousands of megawatts of new capacity into the Base Residual Auction would have had an effect on the prices of wholesale electric capacity in interstate commerce.  See Mississippi Power & Light Co. v. Mississippi, 487 U.S. 354, 374, 108 S.Ct. 2428, 101 L.Ed.2d 322 (1988) (holding, among other things, that FERC had jurisdiction over power allocations that affect wholesale rates, and stating that “[s]tates may not regulate in areas where FERC has properly exercised its jurisdiction to determine just and reasonable wholesale rates or to insure that agreements affecting wholesale rates are reasonable.”) (emphasis added); Municipalities of Groton v. FERC, 587 F.2d 1296, 1302 (D.C. Cir. 1978) (rejecting jurisdictional challenge to FERC’s authority to levy deficiency charges on utilities that failed to procure generating capacity sufficient to meet its load requirements, and stating that, “[i]t is sufficient for jurisdictional purposes that the deficiency charge affects the fee that a participant pays for power and reserve service, irrespective of the objective underlying that charge.”).[15]

The D.C. Circuit reached the same conclusion later that year in an appeal of ISO New England’s buyer-side market power mitigation provisions.[16]  The petitioners in that case similarly argued that “the orders serve to dictate which resources a utility must use to satisfy its capacity obligations, in violation of the FPA” and that “FERC’s orders impermissibly determine the makeup of a state’s resource portfolio.”[17]

The court rejected the claim that the Commission, in imposing buyer-side market power mitigation measures, “improperly regulat[ed] ‘facilities used for the generation of electric energy.’”[18]  In finding that the Commission acted within its jurisdiction, the court explained that “states remain free to subsidize the construction of new generators, and load serving entities to build or contract for any self-supply they believe is necessary” and that the Commission acted within its authority in “regulat[ing] the ‘price constructs that result in offers into the capacity market from these resources that are not reflective of their actual costs.’”[19]

The court held:

Out-of-market resources—whether self-supplied, state-sponsored, or otherwise—directly impact the price at which the Forward Capacity Market auction clears.  As the price of capacity is indisputably a matter within the Commission’s exclusive jurisdiction, FERC likewise has jurisdiction to mitigate buyer-side market power as to out-of-market entrants.  We agree with the Commission’s finding that it has jurisdiction over mitigation matters “affecting or relating to wholesale rates” under FPA § 201 and 206.  Third Order ¶ 220 (emphasis omitted) (citing Conn. Dep’t of Pub. Util. Control, 569 F.3d at 478, 481).  We stress that FERC’s mitigation measures here do not entail direct regulation of facilities, a matter within the exclusive control of the states.  See 16 U.S.C. § 824(b)(1).  The Commission also found that uneconomic entry, regardless of resource and regardless of intent, “can produce unjust and unreasonable prices by artificially depressing capacity prices.”  Id. ¶ 170.  As it is FERC’s statutory obligation to ensure that rates are appropriate, we must respect its decision to maintain just and reasonable rates through curbing or mitigating buyer-side market power.[20]

As in NJBPU and NEPGA, state subsidies in New York are growing and provide out-of-market subsidies to preferred resource types.  Unmitigated out-of-market subsidies will suppress clearing prices in the ICAP market, which will distort bidding behavior and warp price signals.  As a result, NYISO’s proposed BSM Rules that exclude state-favored resources from mitigation will fail to prevent the exercise of market power and thereby fail to ensure that capacity market prices are just and reasonable.

We are obligated to evaluate the effects of state subsidies on our jurisdictional wholesale markets in order to ensure that rates that these markets produce will be just and reasonable.[21]  We have no latitude to evade this bedrock requirement of our statute.  And we cannot ignore the effects of state subsidies in order to favor certain categories of generators, even if those also happen to be the generators preferred by the states, and even if that state preference is enshrined in state law.

NYISO argues that there will be no cost-shifting to other states.[22]  Even if this were true, the argument ignores the inevitable price-suppression its proposal will have.  The generators that will suffer will be the marginal dispatchable units whose offers must reflect their fuel costs.[23]  They will fail to clear the market when subsidized units undercut their offers and will end up being denied the capacity payments they require to remain solvent.  The ultimate result is foreordained: the retirement of dispatchable resources as more subsidized resources drive them out of the market.

Aside from the fact that these suppressed prices cannot be found to be just and reasonable, the consequent retirements will have profound consequences for the entire system and the effects will extend beyond New York’s borders.  When the inevitable price suppression caused by unmitigated state subsidies results in the premature retirement of too many conventional, dispatchable resources, reliability will be compromised.  The Commission knows the consequences of these retirements.  As we have recently been reminded by the North American Electric Reliability Corporation, dispatchable generation is absolutely necessary to maintain system reliability:

The North American bulk-power system (BPS) is undergoing major transformation, driven by a rapidly changing generation resource mix.  Traditional baseload generation plants are retiring, while significant amounts of new natural gas and variable energy generating resources are being developed.  During this transition, natural gas-fired generation is becoming more critical to provide both “bulk energy” and “balancing energy” to support the integration of variable energy resources.[24]

And, even as the Commission approves another proposal that undercuts the necessary market prices to ensure a reliable mix of generation, the harmful effects of such policies are becoming more evident.  California is now forecasting a 1,700 MW capacity shortfall this summer—increasing to 1,800 MW by 2025—in the late afternoon hours when the output of solar facilities starts to wane and there is no dispatchable capacity available to pick up the slack.[25]  And similar warnings are being issued by other system operators across the United States “as traditional power plants are being retired more quickly than they can be replaced by renewable energy and battery storage.”[26]

NYISO’s BSM Rule revisions are unjust and unreasonable because they will allow state subsidies to suppress capacity prices through the exercise of buyer-side market power.  This price suppression will deprive needed dispatchable generation of the revenue required to remain in service which will result in the premature retirement of generators with needed attributes.  NYISO will be increasingly unable to ensure resource adequacy as those generators exit the market and reliability, in turn, will suffer.

For these reasons, I respectfully concur in part and dissent in part.