FERC Subjects NYISO Demand Response Resources to Buyer-Side Mitigation Rules

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On October 7, 2020, FERC affirmed its prior determination that certain demand response resources participating in the New York Independent System Operator, Inc. (“NYISO”) capacity markets—termed Special Case Resources (“SCRs”)—should be subject to an offer floor, and required revenues from some retail-level demand response programs to be included in the offer floor calculations. Specifically, FERC: 1) addressed requests for rehearing of its February 2020 Order directing NYISO to apply its buyer-side mitigation (“BSM”) rules to all SCRs that participate in NYISO’s Installed Capacity (“ICAP”) market; 2) accepted NYISO’s compliance filing clarifying the offer floor price calculation for SCRs and directed NYISO to submit a further compliance filing; and 3) found, on the basis of a paper hearing established in the February 2020 Order, that payments received under the Distribution Load Relief Programs (“DLRP”) qualify for exclusion from the calculation of SCR offer floors, but that payments received under the Commercial System Distribution Load Relief Programs (“CSPRs”) do not. Commissioner Richard Glick issued a strenuous dissenting opinion to FERC’s order.

FERC’s October 7 order is the latest in a series of recent orders related to NYISO’s SCR program, and follows a February 2020 Order in which FERC directed NYISO to apply BSM rules to all new SCRs on the basis that that payments made to SCRs outside of the ICAP market could enable SCRs to suppress ICAP prices below competitive levels (see February 26, 2020 edition of the WER). The February 2020 Order also found that offer floors for SCRs should include only the incremental costs of providing wholesale capacity services, not payments from retail-level demand response programs designed to address distribution-level reliability needs. To that end, FERC reopened the evidentiary record and established a paper hearing to evaluate retail-level demand response programs and assess whether out-of-market payments enable SCRs to suppress ICAP market prices below competitive levels. Subsequently, in a May 2020 order, FERC clarified that the offer floor price calculation for SCRs must include any payment or other benefit provided by state-sponsored programs and directed NYISO to submit a compliance filing within 45 days reflecting its clarification (see May 21, 2020 edition of the WER).

With respect to the rehearing requests, FERC’s October 7 order affirmed its prior conclusion that all new SCRs should be subject to NYISO’s BSM rules because, according to FERC, certain payments to SCRs outside of the ICAP market could provide SCRs with the ability to suppress ICAP market prices below competitive levels. FERC also rejected arguments that the February 2020 Order intruded on New York’s authority to determine its generation mix or its ability to support its preferred resources. FERC explained that BSM rules were required to prevent uneconomic entry of SCRs as well as to avoid distorting market price signals that are necessary to encourage the investment and maintenance in generation in order to meet long-term reliability standards.

FERC then turned to NYISO’s filing submitted in compliance with the May 2020 Order, and directed NYISO to submit an additional compliance filing to explicitly exclude from the calculation of SCR offer floors “the monthly value of any payments or other benefits the [SCR] receives from a retail-level demand response program designed to address distribution-level reliability needs that the Commission has, on a program-specific basis, determined should be excluded.”

Finally, in the paper hearing proceeding, FERC found that the purpose of DLRPs is to maintain distribution-level reliability by reducing distribution system demands in response to contingencies and other emergencies. Therefore, FERC concluded that payments received under DLRPs should be excluded from the calculation of SCR offer floors. Conversely, FERC found that CSRPs are designed to meet transmission and distribution infrastructure investment needs, and to provide network load relief to the system during peak hours to address system-wide needs under peak load operating conditions. FERC thus concluded that CSRPs are concerned with utility system-wide reliability and not just distribution-level reliability, so payments received under those programs must be included in SCR offer floor calculations.

In his dissenting opinion, Commissioner Glick stated his view that FERC’s order erred in applying mitigation to SCRs—including office buildings, industrial facilities, and the like—that have not been shown to have market power; that the offer floors required for SCRs were not reasonably tied to SCRs’ potential exercise of market power; and that FERC’s order drew arbitrary distinctions between different types of retail-level demand response programs. Commissioner Glick explained that both DLRPs and CSRPs are retail-level programs directed at distribution system issues, and that mitigating CSRPs because they may indirectly benefit wholesale markets is both unreasoned and inconsistent with its treatment of DLRPs. More broadly, Commissioner Glick concluded that NYISO’s BSM rules “that were once intended only as a means of preventing the exercise of market power have evolved into a scheme for propping up prices, freezing in place the current resource mix, and blocking states’ exercise of their authority over resource decisionmaking.”

FERC’s October 7 order is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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