ISO New England Seeks Capacity Market Change to Address Market Power Concerns

ISO New England has sought changes to the information provided to market participants prior to the Forward Capacity Auction (FCA) to prevent pivotal suppliers from using the information to undertake strategic withdrawals.

Specifically, the ISO is seeking to cease publishing the following information prior to the auction: for each Permanent De-list Bid, the name, quantity, price, and Load Zone in which the resource is located; for each Static De-List Bid, the quantity, price, and Load Zone in which the resource is located; for Export Bids and Administrative Export Bids, the name of submitter, quantity, and interface; and for offers from New Import Capacity Resources, the name of submitter, quantity, and interface. Such information would be published only after the auction under the ISO's proposal.

Prior to the auction, the ISO will instead only publish the name of each Lead Market Participant submitting de-list bids, as well as the number and type of de-list bids submitted by each Lead Market Participant, no later than three Business Days after the ISO issues qualification determination notifications to participants.

Under the currently effective Forward Capacity Market (FCM) rules, the ISO publishes detailed information about offers from new resources and de-list bids from existing resources in advance of the FCA.

Furthermore, the public version of the Informational Filing made with FERC 90 days prior to the FCA will only include information on existing resources that qualify to participate in the FCA, as well as information on aggregate MW from new resources qualified to participate in the FCA and aggregate de-list bid amounts, rather than more detailed information on new resources, including independent market monitor (IMM) determinations regarding each offer below 0.75 times CONE, and the IMM's determinations regarding offers or bids submitted during the qualification process.

The IMM has concluded that continuing to release the current information prior to the auction, "significantly increases the risk that future FCAs will not be competitive," the ISO said.

"This is because publication of this detailed information enables auction participants to calculate when they can strategically withdraw their capacity from the descending clock auction to maximum financial advantage," ISO-NE said.

"A participant whose capacity is needed to clear the auction is a 'pivotal supplier,' and all pivotal suppliers have market power. In the FCA, a pivotal supplier can exercise market power by leaving the auction at a price above its actual costs, thereby concluding the auction (because its capacity is needed to procure the full amount required) and setting a clearing price above a competitive level," the ISO said.

"The detailed offer and de-list bid information currently published by the ISO enables a participant with one or more new resources in a given zone in the FCA to determine when it becomes a pivotal supplier in the FCA, making possible the exercise of market power described above. The detailed offer and de-list information, when coupled with certain publicly available information and information posted between FCA rounds, allows participants to calculate the maximum total capacity remaining in the auction in each zone at the end of each round in the auction. Since auction participants know the amount of capacity needed to meet each zone's reliability requirement, knowing the amount of capacity remaining in the auction in each zone enables a participant to calculate how much more capacity would have to be removed to conclude the auction. This information is sufficient for each participant to determine whether its capacity is needed to clear the auction – in other words, whether it has become a pivotal supplier. Armed with this knowledge, the capacity could be withdrawn at a price higher than actual cost, thereby setting the clearing price above a competitive level," ISO-NE said.

"These concerns become more pressing when the region is divided into more numerous, and hence smaller, zones, and where supply is tight. Smaller zones have fewer sites for power plants or demand resources, and any single resource is likely to comprise a larger percentage of the zone's needs. Moreover, where supply is not abundant, more resources are potentially pivotal suppliers," the ISO said, noting that beginning with the seventh FCA for 2016-17, four zones will be modeled in New England, including two import-constrained zones. "[T]here is reason to be concerned that in at least one of those import-constrained zones, supply will be tight," the ISO said.

"[I]f the current rules regarding the publication of information are not changed, the possibility that the results of one or more future FCAs will not be competitive increases significantly. Under these circumstances, the IMM may not be able to certify in the FCA results filing that the auction results were competitive," the ISO said.