FERC Says ISO-NE Capacity Market Susceptible To Exercise of Market Power, Orders Use of Zonal Sloped Demand Curves

FERC yesterday issued an order finding that ISO New England Inc.’s (ISO-NE) forward capacity market tariff is unjust, unreasonable, unduly discriminatory or preferential, "because it applies vertical demand curves within constrained zones, which does not sufficiently address concerns such as price volatility and a susceptibility to the exercise of market power as part of its Forward Capacity Market (FCM) rules."

FERC instituted a proceeding in Docket No. EL16-15-000 pursuant to section 206 of the Federal Power Act (FPA) to require ISO-NE to submit tariff revisions by March 31, 2016 that provide for inclusion of zonal sloped demand curves in its FCM rules, to be implemented beginning with the eleventh Forward Capacity Auction (FCA 11).

Currently, ISO-NE uses a sloped demand curve on a system-wide basis, but vertical curves at the zonal level in constrained zones.

"When vertical demand curves are used, even small increases or decreases in supply can result in large changes in price, because a fixed amount of capacity must be procured. In addition, because a small decrease in supply can lead to a significantly higher price, sellers may have an incentive to withhold certain resources. Further, given the shift in New England’s capacity supply in recent years, as noted in the Commission’s January 24, 2014 Order on administrative pricing, it is even more important to ensure that the market produces accurate price signals," FERC said

"While the Commission in the Demand Curve Changes Order accepted ISO-NE’s system-wide demand curve as an improvement to ISO-NE’s then-existing Tariff and has previously rejected calls to direct ISO-NE to submit zonal sloped demand curves, the Commission did so considering the practical challenges of immediately implementing zonal sloped demand curves, as explained by ISO-NE in its pleadings. The Commission at that time determined that, on balance, it was just and reasonable to allow ISO-NE to delay implementing zonal sloped demand curves until FCA 10 because the system-wide sloped demand curve changes would begin to address the identified concerns, and because it would be administratively difficult to implement zonal sloped demand curves for FCA 9. However, the Commission remained cognizant of the foregoing concerns and, as noted above, the Commission has monitored ISO-NE’s progress and remarked in various orders its expectation that ISO-NE would submit zonal sloped demand curves by January 2, 2014. Now, nearly a year after that date, and nearly a year and a half after the Commission first stated its expectation that ISO-NE would file zonal sloped demand curves, ISO-NE still has not filed with the Commission to incorporate the use of sloped demand curves for the constrained zones," FERC said