Joshua Macey, Robert Ward
Five years ago, in his piece on capacity markets, Jay Morrison discussed what he then viewed as the anticompetitive and arbitrary aspects of FERC’s shifting Minimum Offer Price Rules (MOPR) and their interference with private ordering and state policymaking. MOPRs allow administrative bodies, rather than market participants, to determine the minimum price per kilowatt that generators can submit as capacity market bids. Since then, energy regulators have extended MOPRs to an increasing number of market participants, and critiques of these rules have reached a fever pitch. To say that the latest permutation of price mitigation promotes a cure worse than the disease suggests that the latest iterations of the MOPR rule is curing anything at all.
Given the controversy MOPRs have generated, it is worth considering what distortions, if any, MOPRs remedy. The standard defense of MOPRs is that they enable perfectly competitive markets that match physical power flows to system needs. At different points in the past fifteen years, FERC has suggested that MOPRs mitigate buyer market power, counteract price suppression, and ensure resource adequacy. Yet on closer inspection, none of these justifications withstands scrutiny. As this Article shows, buyer market power is the only market failure for which MOPRs might be an appropriate remedy. That is because buyer market power creates a market for lemons problem because it threatens to drive independent power producers out of wholesale markets. But even that remains merely a theoretical problem, since FERC has never explained why buyer market power distorts wholesale electricity markets or offered proof that net buyers are exploiting their market power. The reality is thus that MOPRs constitute a step backwards towards the old practice of administrative pricing. In attempting to create ideally competitive markets, FERC has developed a resource procurement process that favors incumbent merchant generators and harms investor-owned utilities, member-owned cooperatives, and state-supported resources.
It is ironic, then, that a market intervention that was designed to support competition is now preventing resources from competing with each other. A superior approach is to break up vertically integrated electric utilities and prohibit the types of contracts that facilitate market power abuses. Alternatively, FERC could bring aggressive enforcement actions against buyers that manipulate electricity markets.