170 FERC ¶ 61,106

UNITED STATES OF AMERICA

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

(Issued February 20, 2020)

AGENCY: Federal Energy Regulatory Commission

ACTION: Order on Rehearing and Clarification

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 rule will become effective [INSERT DATE 60 days after date of 

publication in the FEDERAL REGISTER].

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

ashley.dougherty@ferc.gov
Docket No. RM19

-2-001 ii

Mary Ellen Stefanou (Legal Information)

Office of the General Counsel

Federal Energy Regulatory Commission 

888 First Street, NE

Washington, DC

(202) 502-8989

mary.stefanou@ferc.gov

SUPPLEMENTARY INFORMATION:
170 FERC ¶ 61,106

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Neil Chatterjee, Chairman;

 Richard Glick and Bernard L. McNamee.

 

Refinements to Horizontal Market Power Analysis for 

Sellers in Certain Regional Transmission Organization 

and Independent System Operator Markets

Docket No. RM19-2-001

ORDER NO. 861-A

ORDER ON REHEARING AND CLARIFICATION

(Issued February 20, 2020)

I. Introduction

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 

Sellers2 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 

 1 Refinements to Horizontal Market Power Analysis for Sellers in Certain Reg’l 

Transmission Org. & Indep. Sys. Operator Mkts., Order No. 861, 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).
Docket No. RM19-2-001 - 2 -

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 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

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.

 3 Order No. 861, 168 FERC ¶ 61,040 at P 38.

4 Id. P 51.
Docket No. RM19-2-001 - 3 -

II. Discussion

A. Capacity Procurement Mechanism Soft Offer Cap

1. Final Rule

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

 

2. Requests for Clarification and Rehearing

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 

 5 Refinements to Horizontal Market Power Analysis for Sellers in Certain Reg’l 

Transmission Org. & Indep. Sys. Operator Mkts., 165 FERC ¶ 61,268 (2018) (NOPR).

6 See Order No. 861, 168 FERC ¶ 61,040 at P 33.

7 Id. P 40.
Docket No. RM19-2-001 - 4 -

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

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

3. Commission Determination

We grant CAISO’s request and clarify that the CAISO Capacity Procurement 

 8 CAISO Motion for Clarification at 2.

9 Id. at 2, 3.

10 PG&E Request for Rehearing at 6-7.

11 Id. at 11-12.
Docket No. RM19-2-001 - 5 -

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.

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.

 12 Cal. Indep. Sys. Operator Corp., 153 FERC ¶ 61,001, at PP 13, 29 (2015).

13 CAISO Tariff section 43A.4.1.1.2.

14 See Order No. 861, 168 FERC ¶ 61,040 at P 40.

15 Id. P 39. 
Docket No. RM19-2-001 - 6 -

B. Retention of Screens for Capacity Sellers in CAISO

1. Final Rule

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

2. Request for Rehearing

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 

 16 Id. P 38.

17 Id. P 39.
Docket No. RM19-2-001 - 7 -

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 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.

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. 

 18 PG&E Request for Rehearing at 4.

19 Id. at 7.
Docket No. RM19-2-001 - 8 -

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

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 

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 

 20 Id. at 13.

21 Id. at 14.
Docket No. RM19-2-001 - 9 -

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

3. Commission Determination

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.

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 

 22 Id. at 16-21.

23 Order No. 861, 168 FERC ¶ 61,040 at P 39.
Docket No. RM19-2-001 - 10 -

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. 

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

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. 

 24 Id. P 42.
Docket No. RM19-2-001 - 11 -

III. Document Availability

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, N.E., Room 2A, 

Washington D.C. 20426.

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.

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 ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-

8371, TTY (202)502-8659. E-mail the Public Reference Room at 

public.referenceroom@ferc.gov.
Docket No. RM19-2-001 - 12 -

IV. Effective Date

This rule will become effective [INSERT DATE 60 days after date of 

publication in the FEDERAL REGISTER].

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.