[Federal Register Volume 85, Number 45 (Friday, March 6, 2020)]
[Rules and Regulations]
[Pages 13009-13012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03929]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM19-2-001; Order No. 861-A]


Refinements to Horizontal Market Power Analysis for Sellers in 
Certain Regional Transmission Organization and Independent System 
Operator Markets

AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Order on rehearing and clarification.

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SUMMARY: In this order on rehearing, the Federal Energy Regulatory 
Commission grants clarification in part and denies rehearing of certain 
revisions to its regulations regarding the horizontal market power 
analysis required for market-based rate sellers that study certain 
Regional Transmission Organization or Independent System Operator 
markets and submarkets therein.

DATES: This order on rehearing and clarification is effective May 5, 
2020.

FOR FURTHER INFORMATION CONTACT: 
Ashley Dougherty (Technical Information), Office of Energy Market 
Regulation, Federal Energy Regulatory Commission, 888 First Street NE, 
Washington, DC 20426, (202) 502-8851, [email protected]
Mary Ellen Stefanou (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street NE, Washington, 
DC, (202) 502-8989, [email protected]

SUPPLEMENTARY INFORMATION:

I. Introduction

    1. On July 18, 2019, the Commission issued Order No. 861,\1\ which 
modified its regulations regarding the horizontal market power analysis 
required for market-based rate Sellers \2\ that study certain Regional 
Transmission Organization (RTO) or Independent System Operator (ISO) 
markets and submarkets therein. Specifically, in Order No. 861, the 
Commission relieved Sellers located in certain RTO or ISO markets and 
submarkets therein of the obligation to submit indicative screens to 
the Commission in order to obtain or retain authority to sell energy, 
ancillary services, and capacity at market-based rates. The 
Commission's regulations continue to require Sellers that study an RTO, 
ISO, or submarket therein, to submit indicative screens for 
authorization to make capacity sales at market-based rates in any RTO/
ISO market that lacks an RTO/ISO administered capacity market subject 
to Commission-approved RTO/ISO monitoring and mitigation.\3\ For those 
RTOs and ISOs that do not have an RTO/ISO-administered capacity market, 
the Commission found that Commission-approved RTO/ISO monitoring and 
mitigation is no longer

[[Page 13010]]

presumed sufficient to address any horizontal market power concerns for 
capacity sales where there are indicative screen failures. However, 
Sellers studying such markets would be relieved of the requirement to 
submit indicative screens if they sought market-based rate authority 
limited to sales of energy and/or ancillary services in those 
markets.\4\
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    \1\ Refinements to Horizontal Market Power Analysis for Sellers 
in Certain Reg'l Transmission Org. & Indep. Sys. Operator Mkts., 
Order No. 861, 84 FR 36374 (July 26, 2019), 168 FERC ] 61,040 
(2019).
    \2\ The term ``Seller'' is defined as any person that has 
authorization to or seeks authorization to engage in sales for 
resale of electric energy, capacity or ancillary services at market-
based rates. 18 CFR 35.36(a)(1).
    \3\ Order No. 861, 168 FERC ] 61,040 at P 38.
    \4\ Id. P 51.
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    2. On August 15, 2019, California Independent System Operator 
Corporation (CAISO) filed a motion for clarification of Order No. 861. 
On August 19, 2019, Pacific Gas and Electric Company (PG&E) filed a 
request for rehearing, or in the alternative clarification, of Order 
No. 861. As discussed further below, we grant CAISO's requested 
clarification and deny PG&E's request for rehearing and alternative 
request for clarification.

II. Discussion

A. Capacity Procurement Mechanism Soft Offer Cap

1. Final Rule
    3. In describing CAISO's Capacity Procurement Mechanism, the 
Commission stated that the soft offer cap for the Capacity Procurement 
Mechanism is an estimate of the cost of new entry. In response to the 
Commission's notice of proposed rulemaking (NOPR),\5\ some commenters 
argued that California's Resource Adequacy program coupled with CAISO's 
backstop procurement process, including the Capacity Procurement 
Mechanism, offer adequate safeguards against the exercise of horizontal 
market power in the sale of capacity.\6\ In response, the Commission 
noted that ``the soft offer cap is an estimate of the cost of new entry 
and does not necessarily reflect a mitigated, `going forward' cost of 
any existing generator and does not address concerns regarding local 
market power.'' \7\
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    \5\ Refinements to Horizontal Market Power Analysis for Sellers 
in Certain Reg'l Transmission Org. & Indep. Sys. Operator Mkts., 84 
FR 993 (Feb. 1, 2019), 165 FERC ] 61,268 (2018) (NOPR).
    \6\ See Order No. 861, 168 FERC ] 61,040 at P 33.
    \7\ Id. P 40.
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2. Requests for Clarification and Rehearing
    4. CAISO seeks clarification and PG&E requests rehearing regarding 
the Commission's description of CAISO's Capacity Procurement Mechanism 
soft offer cap. CAISO and PG&E state that the Commission's 
characterization of the soft offer cap as the cost of new entry for 
resources is not technically correct. CAISO states that the ``soft 
offer cap is based on the levelized going-forward fixed costs of a 
reference resource, plus a 20 percent adder.'' \8\ Thus, CAISO 
recommends ``that the Commission clarify Order No. 861 to state that 
the [Capacity Procurement Mechanism] soft offer cap represents an 
estimate of going-forward costs plus a 20 percent adder, as opposed to 
an estimate of the cost of entry.'' \9\ PG&E states that the Commission 
should grant rehearing and remove the requirement for capacity sellers 
in CAISO to submit indicative screens because the Commission based its 
conclusion that the Capacity Procurement Mechanism is inadequate to 
mitigate local capacity market power in CAISO on the incorrect finding 
that the soft offer cap is based on the cost of new entry.\10\
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    \8\ CAISO Motion for Clarification at 2.
    \9\ Id. at 2, 3.
    \10\ PG&E Request for Rehearing at 6-7.
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    5. PG&E notes that the Commission erred in Order No. 861 when it 
stated that the soft offer cap is an estimate of the cost of new entry, 
and PG&E contends that the soft offer cap mitigates local capacity 
market power by limiting Capacity Procurement Mechanism compensation to 
the marginal unit's going-forward fixed costs, plus a 20 percent 
adder.\11\
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    \11\ Id. at 11-12.
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3. Commission Determination
    6. We grant CAISO's request and clarify that the CAISO Capacity 
Procurement Mechanism soft offer cap represents an estimate of going-
forward costs plus a 20 percent adder, as opposed to an estimate of the 
cost of entry. We note that the Commission approved this definition of 
the soft offer cap,\12\ which is included in CAISO's tariff.\13\ As 
discussed further below, the change in characterization of the soft 
offer cap does not affect the determinations made in Order No. 861.
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    \12\ Cal. Indep. Sys. Operator Corp., 153 FERC ] 61,001, at PP 
13, 29 (2015).
    \13\ CAISO Tariff section 43A.4.1.1.2.
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    7. We deny PG&E's request for rehearing. While the Commission 
incorrectly characterized the Capacity Procurement Mechanism soft offer 
cap in Order No. 861, the Commission also stated that the soft offer 
cap does not provide mitigation comparable to the mitigation applied to 
the RTO/ISO administered capacity markets.\14\ As discussed further 
below, the Commission declined to extend Order No. 861's relief to 
capacity Sellers located in CAISO for several reasons, including the 
lack of a transparent market price for capacity in CAISO and the fact 
that capacity sales are not reviewed, approved, or monitored by 
CAISO.\15\ We find that these reasons continue to apply and, therefore, 
deny PG&E's request for rehearing and continue to require that capacity 
Sellers in CAISO submit indicative screens for capacity sales. For the 
same reasons, we also will not permit capacity Sellers in CAISO to rely 
on a rebuttable presumption that the Capacity Procurement Mechanism 
adequately mitigates Sellers' horizontal market power.
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    \14\ See Order No. 861, 168 FERC ] 61,040 at P 40.
    \15\ Id. P 39.
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B. Retention of Screens for Capacity Sellers in CAISO

1. Final Rule
    8. In Order No. 861, the Commission required capacity Sellers in 
CAISO to continue to submit indicative screens and eliminated the 
rebuttable presumption that Commission-approved RTO/ISO market 
monitoring and mitigation is sufficient to address any horizontal 
market power concerns regarding sales of capacity in CAISO.\16\ The 
Commission stated that, although the majority of capacity sales within 
CAISO are made through the Resource Adequacy program, these sales are 
not reviewed, approved, or monitored by CAISO. The Commission explained 
that the California Public Utilities Commission (CPUC) reviews and 
approves capacity purchases by load serving entities through the 
Resource Adequacy program pursuant to resource requirements established 
by the CPUC, but that these purchases are not necessarily the result of 
competitive solicitations. The Commission also explained that there is 
no transparent market price determined under Commission-approved rules 
for capacity in CAISO comparable to the market price for capacity 
established by RTOs/ISOs with centralized capacity markets.\17\
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    \16\ Id. P 38.
    \17\ Id. P 39.
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2. Request for Rehearing
    9. PG&E requests rehearing of the Commission's decision to retain 
indicative screens for capacity Sellers in CAISO and asks that the 
Commission conclude that existing Commission-approved capacity backstop 
mechanisms in CAISO adequately mitigate the potential for capacity 
market power and, therefore, that capacity Sellers in CAISO do not need 
to submit indicative screens.\18\ PG&E explains that CAISO and the CPUC 
have created a two-step process to ensure that adequate supply 
resources are available

[[Page 13011]]

to meet the demand for electricity in California. PG&E states that 
first, load serving entities are required to demonstrate to both the 
CPUC and CAISO that they have procured an adequate amount of Resource 
Adequacy capacity to meet their forecasted peak demand as well as a 
planning reserve margin. PG&E states that load serving entities rely 
primarily on the bilateral market to procure these resources, and this 
bilateral market, the procurement requirements, and associated rules 
are generally called the Resource Adequacy program.
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    \18\ PG&E Request for Rehearing at 4.
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    10. Second, PG&E states that if load serving entities fail to meet 
their Resource Adequacy requirements, CAISO may procure additional 
capacity through the Capacity Procurement Mechanism, and that ``[t]he 
[Capacity Procurement Mechanism] is thus a backstop procurement that 
fills any remaining need for supply-side resources.'' \19\ PG&E states 
that when CAISO procures backstop capacity through the Capacity 
Procurement Mechanism, CAISO runs a competitive solicitation process, a 
pay-as-bid auction with a soft offer cap, which serves to mitigate 
market power in these competitive solicitation processes and, if 
designed properly, can also mitigate prices in the bilateral Resource 
Adequacy market in a manner similar to other RTO/ISO capacity markets.
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    \19\ Id. at 7.
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    11. PG&E argues that, given the current role that the Capacity 
Procurement Mechanism plays in mitigating market power in CAISO, and in 
light of the ongoing CAISO stakeholder process to improve the Capacity 
Procurement Mechanism so that it more effectively limits the abuse of 
market power through market power tests and enhanced mitigation, the 
Commission erred in Order No. 861 in concluding that CAISO should be 
treated differently than other RTOs/ISOs. PG&E asserts that the 
Commission should therefore grant rehearing and determine that the 
Capacity Procurement Mechanism works in tandem with California's 
Resource Adequacy program to mitigate capacity market power, and that 
this creates a rebuttable presumption that Sellers of capacity cannot 
exercise horizontal market power and therefore are not required to 
submit indicative screens studying the capacity market in CAISO.\20\
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    \20\ Id. at 13.
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    12. PG&E next argues that if the Commission nonetheless continues 
to find CAISO's existing Capacity Procurement Mechanism to be 
inadequate to mitigate the potential for market power, the Commission 
should modify Order No. 861 to require improvements to the Capacity 
Procurement Mechanism so that it provides adequate mitigation of 
capacity market power comparable to other RTOs/ISOs.\21\
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    \21\ Id. at 14.
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    13. PG&E also requests that, in the event that the Commission 
continues to require Sellers of capacity in CAISO to submit indicative 
screens, it should host a technical conference or otherwise clarify how 
the assumptions and modeling process should be adjusted to reflect that 
the energy market-focused indicative screens are now only being used as 
an indicator for market power in certain capacity markets.\22\
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    \22\ Id. at 16-21.
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3. Commission Determination
    14. We deny PG&E's request for rehearing and motion for 
clarification. We disagree with PG&E's assertion that the Capacity 
Procurement Mechanism adequately mitigates the potential for capacity 
market power such that the Commission should lift the requirement that 
Sellers of capacity in CAISO submit indicative screens. In CAISO, 
capacity is primarily procured in the bilateral market, and the 
Capacity Procurement Mechanism serves as a backstop procurement 
mechanism, not a mitigation construct for the bilateral market.
    15. CAISO does not have a centralized capacity market, and thus, as 
explained in Order No. 861, there are no transparent capacity prices 
determined under Commission-approved rules, similar to the market 
prices for capacity that are established in RTOs/ISOs with centralized 
capacity markets.\23\ The vast majority of capacity sales within 
California are bilateral sales, and those sales are not reviewed, 
monitored, or approved by CAISO. The CPUC regulates capacity purchases 
by load serving entities to ensure compliance with the CPUC's Resource 
Adequacy program. However, the bilateral Resource Adequacy procurement 
processes are not subject to Commission review to ensure competitive 
process. Load serving entities' Resource Adequacy capacity purchases 
and their associated prices are only transparent to the relevant 
regulatory authority, be it the state utility commission, a municipal 
utility board, a city council, or some other authority.
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    \23\ Order No. 861, 168 FERC ] 61,040 at P 39.
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    16. We also deny PG&E's request to require that the Capacity 
Procurement Mechanism be modified so that it provides adequate 
mitigation of capacity market power comparable to other RTOs/ISOs. Such 
a requirement would be outside of the scope of this rulemaking. As 
noted in Order No. 861, relief from the requirement to submit 
indicative screens may be extended to capacity Sellers in CAISO in the 
future, if CAISO develops an ISO-administered capacity market that is 
subject to Commission-approved market monitoring and mitigation.\24\
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    \24\ Id. P 42.
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    17. Finally, we deny PG&E's request to hold a technical conference 
or otherwise clarify how to adapt the market power screens for 
different capacity products. In Order No. 861, the Commission did not 
require adjustments to the current market power screens, and we thus 
find this request to be outside the scope of this rulemaking. The 
market power screens were designed to show the lack of presumption of 
market power for energy, capacity, and ancillary services and will 
continue to serve this purpose in markets that lack an RTO/ISO 
administered capacity market subject to Commission-approved RTO/ISO 
monitoring and mitigation.

III. Document Availability

    18. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
internet through FERC's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5:00 
p.m. Eastern time) at 888 First Street NE, Room 2A, Washington, DC 
20426.
    19. From FERC's Home Page on the internet, this information is 
available on eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or 
downloading. To access this document in eLibrary, type the docket 
number excluding the last three digits of this document in the docket 
number field.
    20. User assistance is available for eLibrary and the FERC's 
website during normal business hours from FERC Online Support at 202-
502-6652 (toll free at 1-866-208-3676) or email at 
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202)502-8659. Email the Public Reference Room at 
[email protected].

[[Page 13012]]

IV. Effective Date

    21. This order on rehearing and clarification is effective May 5, 
2020.

    By the Commission.

    Issued: February 20, 2020.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2020-03929 Filed 3-5-20; 8:45 am]
BILLING CODE 6717-01-P