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Appeals Court Remands Alleged Capacity Market Price Manipulation Complaint To FERC; Says FERC's "Breezy" Analysis That No Manipulation Occurred Lacked Support

August 9, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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The U.S. Court of Appeals for the D.C. Circuit has remanded to FERC a complaint concerning the results of the 2015 Midcontinent ISO capacity auction, finding that FERC's conclusion that the outcome of the auction was just and reasonable, because the auction complied with the applicable tariff, lacked adequate explanation, and was therefore arbitrary and capricious.

As previously reported, the April 2015 auction resulted in capacity prices for Zone 4 (Illinois) of $150 per megawatt-day -- more than 40 times the price in those neighboring regions and a nearly ninefold increase from the prior year’s price of $16.75.

In a complaint at FERC, Public Citizen, Inc. alleged that the spike in prices from $16.75 to $150.00 for Zone 4 in the 2015/16 auction, "may be the result of illegal manipulation and gaming of the auction bidding process, specifically capacity withholding, contrary to Section 222 of the FPA." (FERC Docket EL15-70)

Although Public Citizen alleged manipulation, the FERC complaint, and appeal, did not specifically address any market participant behavior, and was focused on the results of the auction. Public Citizen has alleged withholding by Dynegy. Dynegy has said that its offers were competitive, and that there was no physical or economic withholding

FERC's Office of Enforcement did separately open a formal, non-public investigation into whether market manipulation occurred in the auction. FERC closed the investigation, stating that auction pricing did not violate the Commission’s regulations regarding market manipulation, and that no further action was appropriate to address the allegations of market manipulation.

See more background on the FERC proceeding here

On appeal, the Court rejected Public Citizen's argument that the Commission must approve every individual auction price before it goes into effect. "That is not what the market-based rate scheme requires," the Court said

The Court further said that, "we lack the power to review the Commission’s discretionary decision to close its investigation into market manipulation in the 2015 Auction."

However, the Court on appeal found that FERC's decision denying the complaint concerning the auction results was arbitrary and capricious. The Court noted that FERC identified various problems with the tariff that required revisions going forward. "The Commission failed to adequately explain why the problems it identified in the existing auction rules affecting pricing -- problems it ordered fixed going forward -- did not also affect the fairness of the 2015 Auction itself. That omission is particularly glaring in light of the starkly anomalous rates that the Auction produced. Based on the unwonted record before the Commission and the multi-year Commission investigation into market manipulation that record prompted, the agency’s conclusory and unreasoned decision to sustain the 2015 Auction rates does not hold up," the Court said

"[T]he Commission failed to reconcile its prospective holding that the tariff could no longer protect against anticompetitive behavior with its conclusion that the conspicuously uneven 2015 results -- obtained under the same flawed tariff terms -- were not similarly infected. Nor did the Commission provide any explanation for its determination that market manipulation did not lead to unjust and unreasonable rates," the Court said

"In its December 2015 Order, the Commission ruled that some of MISO’s tariff provisions -- those used to calculate the initial reference level and local clearing requirements -- were 'no longer just and reasonable for prospective application[.]' 2015 Order 3 (J.A. 910). Most relevant here, the Commission determined that it made no sense to estimate MISO sellers’ opportunity costs by reference to the PJM market because of both the demonstrated lack of past demand and transmission availability for generators located within MISO to sell their energy capacity into PJM, as well as future changes to the PJM marketplace. Id. 92. ... Yet in its 2019 Order, the Commission ruled that the sharply disparate rates produced in the 2015 Auction by that same tariff -- applying its no-longer-valid opportunity-cost assumptions -- were just and reasonable. In doing so, the Commission made no effort at all to reconcile its ruling with its 2015 Order’s findings that the tariff relied on flawed pricing assumptions," the Court said

"That apparent flaw directly affected the boundaries within which rates were set. For example, without those impugned assumptions about opportunity costs, the initial reference level in 2015 likely could have been set at $0 per MW-day, just as the Commission ordered for future auctions. Instead, based on opportunity costs that the Commission’s 2015 Order directly called into question, the initial reference level was set at $155.79 per MW-day. With an initial reference level of $0, generators like Dynegy would have been limited to offering capacity at a price of no more than roughly $25 per MW-day, and thus would have been unable to submit the 600% higher offers that they did in the 2015 Auction. See 2015 Order 93. Because this apparent flaw in the 2015 Auction rules led to an outlier auction clearing price of $150 per MW-day, the Commission was obligated to explain why its opportunity cost analysis in the 2015 Order did not require the conclusion that the 2015 Auction results -- that were predicated on the same flawed opportunity-cost assumption -- were not unjust and unreasonable," the Court said

The Court also said that FERC failed to adequately address Public Citizen’s allegation that Dynegy engaged in market manipulation which produced unjust and unreasonable results in the 2015 auction.

Among other things, the Court said, "the Commission’s unexplained reliance on the 'definition' of market manipulation did not answer Public Citizen’s core allegation—that Dynegy may have manipulated its auction offers to garner an unreasonably high price."

"[T]he Commission backhanded the extraordinary price spike with the anodyne statement that 'an Auction Clearing Price is not unjust and unreasonable because it is higher than expected.' 2019 Order 84. Okay. But that does not excuse the Commission from grappling with the unusual magnitude of the rate increase and its incongruity with other rates within the same auction. The Commission also ignored the chronological link between the spike and Dynegy’s acquisition of pivotal sources of electrical generation within Zone 4," the Court said

"On this record, the Commission’s generic assertion that 'higher' prices alone do not suggest market manipulation misses the mark. The clearing price was not just higher, but was massively higher than the rates in every other zone, and substantial evidence in the record raised the question of a market failure. What this record required was nothing more and nothing less than a reasoned assessment of the evidence as a whole. Yet the Commission did not provide 'even the scantest reasoning to support its finding' that the massive price spike in Zone 4 'had nothing to do with market manipulation.' 2019 Order (Glick, Commissioner, dissenting)," the Court said

"[I]nstead of weighing the evidence, the Commission’s orders repeatedly asserted that the Zone 4 clearing price was necessarily just and reasonable 'because it resulted from the application of MISO’s tariff, which had previously been accepted as a just and reasonable approach' to mitigating anticompetitive behavior. 2019 Order 86 (J.A. 106). ... Ah, but 'previously been accepted' is exactly the problem. In the same year this auction occurred, the Commission found that the same tariff could no longer produce just and reasonable results. And it did so based in part on empirical grounds that applied just as much to the 2015 Auction as to future auctions," the Court said

"To put it simply, because the record evidence raised a substantial question of whether the tariff provisions had adequately mitigated exercises of market power or market manipulation in the 2015 Auction, the Commission could not rely reactively on compliance with a hobbled tariff as the lodestar of competitiveness," the Court said

"That is not to say that an extraordinary price spike necessarily evidences market manipulation or a malfunctioning auction process. The Commission could, on an appropriate record, reasonably conclude that a particular price spike, while unusual, was not unjust or unreasonable. The problem in this case is that the Commission did not do that work. And that failure made its order arbitrary and capricious," the Court said

"Because the Commission’s orders did not adequately explain its conclusion that the 2015 Auction results in Zone 4 were just and reasonable given the evidentiary record and the Commission’s own findings in the 2015 Order, we remand to the Commission for further analysis and explanation," the Court said

The Court remanded the case to FERC for further proceedings.

No. 20-1156

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