Energy Legal Blog

The vexatious issue of how to design electric power capacity markets passed a milestone when FERC recently approved a contested settlement establishing a forward capacity market (FCM) in ISO-New England (ISO-NE).  FCM replaced the controversial locational installed capacity (LICAP) proposal that the ISO-NE had proposed in March 2004.  Fierce opposition to LICAP, primarily from Connecticut, led to protracted negotiations, which culminated in the FCM settlement.  Having received FERC’s approval, FCM will replace the bid-based installed capacity requirement that has been in effect since 1998, but which drew criticism since its inception because it credited capacity that was not deliverable and suffered from other flaws.

Under FCM, ISO-NE will perform forecasts of needed capacity three years in advance of the delivery year and conduct an annual capacity auction to fulfill those needs. The auction will use a descending clock principle.  Suppliers will bid in response to an initial price of twice the cost of new entry for a generator.  If there are bids for more quantity than is needed, the auction administrator lowers the price and solicits another round of bids from suppliers.  When the quantity offered in supplier bids matches the quantity needed, the auction closes and the suppliers receive the price in the final round.  The ISO-NE will conduct its first auction in December 2007.  Generators will be paid for the capacity they sell, subject to (1) not receiving payment if the capacity is unavailable when called upon and (2) offsets for peak energy revenues received (based on those for a hypothetical generator), which is intended to offset payments by load servers for price spikes in the energy market. 

FCM's locational feature will allow prices to differ between import- and export-constrained zones within New England.  A controversial element of FCM is the use of a transition period lasting until ISO-NE fully implements FCM in 2010.  During the transition, generators will receive fixed payments increasing each year.  These fixed payments drew fire from regulators in some New England states who argued that the payments were excessive.  FERC, however, found that the settlement was just and reasonable, as it would help build new and maintain existing infrastructure in New England.  FERC also stated that the settlement conformed to Congress’ directive in the Energy Policy Act of 2005 that FERC consider state objections to the LICAP plan and to evaluate alternatives.

FERC had earlier signaled its favorable reaction to the FCM settlement in another, different approach to capacity market design involving PJM Interconnection’s Reliability Pricing Model.  That design would use a gradually sloping demand curve to price capacity and differentiate prices locationally based on deliverability in the face of transmission congestion.  While agreeing with core components of the plan, FERC urged the parties to attempt to reach a settlement.