Complaints alleging that Dynegy, Inc. (Dynegy) engaged in market manipulation by withholding capacity from the 2015/16 Planning Auction (the 2015/16 Auction) for Local Resource Zone 4 of the Midcontinent Independent System Operator (MISO) were recently rejected by the Federal Energy Regulatory Commission (FERC) because it deemed the results of the 2015/16 Auction to be just and reasonable. However, two FERC Commissioners expressed concern after the FERC Chairman terminated a non-public formal investigation into the same allegations without consultation of other Commissioners.

In early April of each year, MISO conducts a voluntary capacity auction in which load-serving entities within MISO can procure resources needed to meet their capacity obligations under the MISO Tariff for the Planning Year, beginning the following June 1. Capacity prices for MISO’s 2013/14 Auction cleared at $1.05/MW-day for each pricing zone, and the maximum clearing price in any zone during the 2014/15 Auction was $16.75/MW-day.

Price Separation Raises Red Flags

In December 2013, Dynegy acquired 4,393 MW of coal-fired generation, most of which is located in MISO Zone 4. Thereafter, in the 2015/16 Auction, substantial price separation existed between Zone 4 and the other MISO pricing zones—the capacity market clearing price in most zones was less than $4.00/MW-day, but the clearing price for Zone 4 was $150/MW-day.

Following the conduct of the 2015/16 Auction, Public Citizen, Inc., the Attorney General of Illinois, and the Southwestern Electric Cooperative, Inc. (the Complainants) filed complaints alleging the capacity price in Zone 4 was, in part, the result of illegal market manipulation and exercise of market power by Dynegy. The Complainants asserted that Dynegy’s generation plant acquisition made it a pivotal supplier in Zone 4 during the 2015/16 Auction, thereby giving it leverage to exercise market power.

The Complainants went on to allege that Dynegy had financial incentives to engage in intentional capacity withholding to drive up the prices in the 2015/16 Auction, thereby increasing revenue to its cleared generating units. The Complainants observed that the bids submitted by Dynegy during the 2015/16 Auction were well above its internal cost of providing capacity, and that Dynegy had been penalized for manipulating energy markets several times in the past.

Additionally, the Complainants expressed concern that Dynegy’s Director of Regulatory Affairs was vice-chair of the MISO stakeholder committee when MISO developed its Auction rules. They believed that “Dynegy used the threat of leaving MISO for PJM [PJM Interconnection LLC] as a lever to influence the development of market rules that protect its profitability (or to prevent changes in the rules that would limit its ability to exercise market power).”

Office of Enforcement Investigates

Shortly after the conclusion of the 2015/16 Auction, FERC’s Office of Enforcement began a non-public informal investigation into whether market manipulation or other potential violations of Commission orders, rules, and regulations occurred. FERC subsequently authorized the Office of Enforcement to conduct a non-public formal investigation, with subpoena authority, regarding alleged violations of FERC’s regulations in connection with or related to the 2015/16 Auction.

The investigation lasted more than three years, during which time the Office of Enforcement reviewed more than 500,000 pages of documents and took testimony from 11 witnesses over a time period adding up to 17 days. However, that non-public investigation was closed by FERC Chairman Chatterjee without further action.
In its order denying the complaints, FERC found the auction had been conducted in compliance with the MISO Tariff, including its provisions designed to mitigate the exercise of market power. FERC further found that the MISO Tariff permitted generators to submit bids up to the Cost of New Entry for the Zone where the capacity being offered is represented, and that all of Dynegy’s offers in the 2015/16 Auction were below the Cost of New Entry for Zone 4.

Dynegy’s offers also were considered competitive bids because they fell below a conduct threshold established in the MISO Tariff, any offers above which might have constituted evidence of economic withholding. However, FERC did not discuss the results of the non-public formal investigation into allegations of market manipulation or set the allegations filed by the Complainants for an evidentiary hearing.

Commissioner Glick Dissents

Although the order resolved the complaints before FERC, Commissioner Glick wrote a dissent which invited supplemental discussion of certain issues that had been addressed only implicitly in the order.

In his view:

  • Compliance with tariff language does not and should not create a safe harbor for market manipulation.
  • The non-public formal investigation was authorized by a vote of the full Commission and, therefore, should not have been terminated by the Chairman before he had consulted with the other Commissioners. Commissioner Glick said that if he had been consulted, he would have argued against terminating the enforcement proceeding.
  • Because the results of the non-public formal investigation were not disclosed, the assertion that the conduct examined in the truncated enforcement process did not violate the Commission’s regulations regarding market manipulation is unsupported.

Compliance with Tariff Rules Provides Strong Defense against Manipulation Claims

FERC observed in the order that “in the market-based rate context, the rate on file with the Commission is the Tariff describing the Auction procedures.” Therefore, notwithstanding the concerns raised by Commissioner Glick about a safe harbor, the order shows that compliance with FERC-approved rules for the conduct of competitive solicitations is a strong defense against allegations that the rate resulting from such solicitations may be the unjust or unreasonable consequence of market manipulation.

It is significant that FERC acted on the complaints only after termination of a lengthy investigation by the Office of Enforcement into allegations of market manipulation. FERC’s action is a reminder that market participants are well advised to establish policies and practices to protect against the potential exercise of market power or unfair market manipulation that might result in imposition of penalties by FERC.