Commissioner Robert F. Powelson Statement
March 9, 2018
Docket No. ER18-619-000
"Today’s order accepts as just and reasonable ISO-New England Inc.’s (ISO-NE) Competitive Auctions with Sponsored Policy Resources (CASPR) proposal. Supporters state that the proposal will achieve a necessary balance between allowing states to accomplish certain policy goals, while also protecting the viability of the Forward Capacity Market (FCM) and the benefits it provides. In this respect, both CASPR, and today’s order accepting it, are well intentioned. However, good intentions do not necessarily lead to just and reasonable outcomes. The two goals that CASPR tries to achieve are fundamentally in conflict and cannot coexist in one market. By trying to both accommodate state policies and protect the FCM, CASPR will likely only accomplish one goal at the expense of the other. Today’s decision threatens the viability of the FCM to serve as a mechanism to ensure resource adequacy in ISO-NE, and therefore, it is unjust and unreasonable and should be rejected.
"In the late 1990s and early 2000s, states across the country, including many in New England, restructured their investor owned public utilities.1
These states moved away from the vertically integrated model, where utilities not only control the generation, transmission, and distribution of electricity, but are responsible for resource planning, and voluntarily relinquished resource planning to regional grid operators. Under the new model, regional grid operators collaborated with stakeholders to create competitive markets to procure sufficient generation to meet regional resource adequacy goals (e.g., reserve margins) based on operational constraints and resource production costs. The Commission became responsible for ensuring those capacity markets yield a reliable resource mix at just and reasonable rates.
"The primary goal of capacity markets has been to leverage the forces of competition to select resources needed to meet resource adequacy requirements at least cost in a non-discriminatory and non-preferential manner. Under this approach, the risk of deploying capital has largely been borne by private investors, not captive utility customers. The benefits of this approach have been substantial, particularly in terms of lower wholesale energy and capacity rates and increased technological innovation (e.g., improved heat-rate efficiency).
"In recent years, however, certain restructured states in New England have again taken an active role in resource planning by attempting to procure select types of generation resources in their state. These efforts began with the enactment of renewable/alternative energy portfolio standards and more recently, have involved other forms of out-of-market support for select resources. Absent state support, these resources would likely fail to be procured through the market due to their relatively high costs.
"There is no question that states are entitled to procure any resources they prefer. It is important to note, however, that no New England state has signaled a desire to change current responsibilities for resource adequacy.2
Grid reliability and resource adequacy remain within the purview of the regional grid operator, and it is the Commission’s responsibility to ensure that this objective is accomplished at just and reasonable rates.
"To complicate matters further, restructured states are providing financial support to resources outside of the market and, in turn, expecting the market to accommodate those resources to ensure their ratepayers do not “pay twice” for capacity. Generally, I share this concern. However, the states had the opportunity to foresee this “double-payment” problem when they made the decision to support resources outside the market. In many cases, market rules such as the Minimum Offer Price Rule (MOPR) were already in place when those decisions were made. So unless the states are willing to reassume complete responsibility for resource adequacy, they must accept that the Commission is required to take action to ensure the viability of the capacity markets. Thus, ISO-NE is in a conundrum where states chose to join an organized market, and yet want the ability to procure certain resources of their choosing.
"The CASPR proposal appears attractive because it is the result of extensive compromise and presents a solution to this complicated situation. However, the major flaw in the proposal, and one that I believe cannot be overcome by the benefits of a compromise solution, is that the “competitively-based” market clearing price will not provide a meaningful signal to the marketplace. Markets for resource adequacy are designed to signal when and where new generation resources are needed, and when and where existing generation resources are no longer needed. These price signals are skewed when resources receiving out-of-market revenue participate in the market alongside resources that do not receive similar support, because they are able to offer into the market at a lower price that is reflective of the out-of-market revenues they are receiving rather than a price that is reflective of their total costs. This is precisely what CASPR permits, after the first year, once a state-supported resource obtains a capacity supply obligation. Consequently, under CASPR’s “competitively-based” pricing, total resource costs are not internalized in the market clearing price, and the ability of the market to produce a transparent price is eroded. As more subsidized resources enter the market, the less reflective the “competitively-based” price will be of total resource costs.
"The “competitively-based” market clearing price under the CASPR proposal delays the suppressive effect that subsidized resources have on the market clearing price from the first year to subsequent years. As a result, the “competitively-based” price in any given year will not be reflective of the total costs of the resources procured to meet resource adequacy requirements in ISO-NE. It is unclear what value, if any, such a price signal will provide. Without clear price signals, private investment will not respond when needed, and as a result, the market will no longer achieve what it was designed to do – ensure that the least-cost capacity resources are there when needed. Thus, while CASPR appears to avoid a tradeoff between the two objectives of accommodation and competitive capacity pricing, ultimately it cannot.
"I am further concerned about the signals that today’s decision sends to New England stakeholders. Instead of incentivizing developers to compete for market revenues, the message the Commission is sending to market participants is that the best way to ensure the future viability of a particular resource is to seek state support. This is not a prudent policy choice. Additionally, today’s decision makes it less likely that states will pursue long-term market solutions, such as putting a price on carbon, or valuing other desired resource attributes within wholesale energy and capacity markets, because those resources could be accommodated by CASPR. The Secretary of Energy, Rick Perry, has expressed a belief that our nation’s electricity markets are not “pure” markets. Today’s decision underscores that sentiment by further diluting market signals.
"Critically, CASPR will not be a final resolution to the problem. Rather, CASPR is one of many incremental attempts by grid operators to unsuccessfully revise markets to respond to state interventions. In 2014, stakeholders in New England came together to address states’ desires to allow certain preferred resources to enter the market. The result was the current Renewable Technology Resource MOPR exemption (RTR Exemption).3
However, after the Commission accepted the RTR Exemption, Massachusetts enacted legislation to procure roughly 2,800 MW of state-supported resources.4
Thus, CASPR is not the first, and will not be the last, attempt to accommodate the New England states. Instead, it is a complicated, patchwork solution that will neither accommodate the desires of the states, nor send proper price signals to market participants. I will not be surprised if, in the near future, the Commission is once again in the position of changing market rules to accommodate the states.
"In some cases, there may be sufficient justification to accommodate a limited amount of state-supported resources in the market. Today’s order acknowledges this but ultimately goes too far. Innovative technologies just entering the marketplace that have relatively high costs could benefit from such accommodation. However, accommodation is only acceptable if two conditions are met. First, the impact of such resources on market prices would need to be limited. Some approaches have tied the amount of state-supported resources eligible to be accommodated to the amount of expected load growth; I believe that is a reasonable approach. Second, any state-supported resources accommodated in the market should be accommodated with the expectation that those resources would eventually become competitive with other, non-supported resources in the market. Accommodate, in this sense, would support the development of new and innovative resources types for a limited amount of time until those resources could compete without state support. It would not provide a point of entry for any and all resources desired by the state, with no relation to a resource’s actual costs.
"While the majority of my concerns with CASPR focus on the impact that it will have on the FCM, it is also apparent that CASPR may not effectively achieve its other goal of accommodating state-supported resources. The FCM has been clearing at lower prices over the past few years, making it unlikely – if this trend continues – that a resource near retirement (i.e., one with high going forward costs) would clear in the primary auction. As a result, there may be few or no resources eligible to swap capacity supply obligations with eligible state-supported resources. Further, even those resources that may be good candidates for participation in CASPR’s substitution auction will still need to pass a reliability assessment by ISO-NE to determine if the system can be reliably maintained if that resource retires. Given ISO-NE’s recent fuel security study5
and its operational experience during cold weather events this winter, it appears that the resources most likely to participate in the substitution auction (e.g., old oil-fired resources) are either anticipated to be critical to fuel-security in the region, or were used heavily during recent weather events to avoid emergency actions, making it more likely that such resources will not meet the qualifications necessary to participate in the substitution auction because ISO-NE will need to retain them for reliability. Thus, it is questionable whether CASPR will even accommodate state policy resources.
"Notwithstanding my dissent today, I commend ISO-NE, market participants, and the states for working together to address a complex issue. CASPR is the result of an impressive stakeholder process dating back to late 2016. However, despite the appeal of supporting a proposal that is the outcome of such negotiations, I must stay firm in my beliefs regarding the value of competitive markets and the role of the Commission to protect the integrity of those markets. I understand that states wish to choose the resources that produce energy in their state. Nevertheless, if states do want to be in control of those choices, they should also assume the responsibility for resource adequacy and reliability.
"Ultimately, CASPR is unjust and unreasonable because it attempts to accomplish two fundamentally conflicting goals, and in doing so, jeopardizes the integrity of the FCM. Today’s decision fails to recognize this, and therefore precludes us from considering the future of the New England market. If the region wants to focus on state-supported resources as the source of entry in the market, then states should first consider whether a change in the current responsibilities for resource adequacy is necessary. However, if the states are comfortable with the status quo with respect to the responsibilities for resource adequacy, they should work with stakeholders to develop a long-term solution that considers alternative market designs that solve the problem as opposed to accommodating it.
"Accordingly, I respectfully dissent. "
- 11 A major driving force behind electric restructuring was the belief, which I share, that competitive markets produce greater efficiencies, and therefore lower prices for consumers, than traditional regulation.
- 22 New England States Committee on Electricity, Post-Technical Conference Comments, Docket No. AD17-11 (June 22, 2017), at 8.
- 33 ISO New England, Inc., 147 FERC ¶ 61,173 (2014).
- 44 An Act to Promote Energy Diversity” was signed by the Governor of Massachusetts on August 8, 2016, and requires electric utilities in the state to procure 9.45 terawatt-hours per year from “clean energy generation” and 1,600 MW of nameplate capacity from offshore wind.
- 55 ISO-New England Inc., Operational Fuel-Security Analysis, January 17, 2018.