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FERC acts to prop up prices in RTO-run capacity markets

From the April 18, 2011 issue of Public Power Daily

Originally published April 18, 2011

In orders issued April 12 and 13, the Federal Energy Regulatory Commission approved changes to the PJM and ISO New England capacity market rules to block low bids by certain generators into the regional transmission organization’s capacity markets. In the April 12 order, the five-member commission approved most of a proposal by PJM Interconnection to revise its minimum offer price rule. The April 13 order directed ISO NE to adopt a similar offer-floor approach. Both orders would scrap the current policy of accepting all capacity market bids by self-supply and state-mandated generation and apply the minimum offer rules to self-supply and state-mandated generation for the first time.

Although PJM has never had to invoke its existing minimum offer price rule, the commission decided that the existing rule was not just and reasonable, citing the possibility of buyers exercising market power. PJM’s proposal and the April 12 order were prompted by efforts by New Jersey and Maryland to procure new generation that would bid into PJM’s "reliability pricing model" capacity market at very low prices. PJM’s proposal was supported by incumbent generators in the region and Pennsylvania regulators but opposed by APPA, consumer advocates, load-side interests and independent power producers, in addition to Maryland and New Jersey.

FERC’s PJM order "does not address the failure of the PJM market to deliver new capacity which is desperately needed to reduce New Jersey’s energy prices, and to replace aging, dirty, and inefficient generation facilities," N.J. Board of Public Utilities President Lee A. Solomon said. "PJM’s pricing model causes New Jersey ratepayers to pay substantially higher prices for electricity than most other states in PJM."

It appears New Jersey will be forced to pursue other remedies that are outside of FERC’s jurisdiction, Solomon said. "I do not believe that New Jersey forfeited its sovereignty when PJM became the regional transmission operator."

APPA opposes rule changes that would adversely impact the ability of public power utilities to self-supply. In a March 4 protest of PJM’s filing, APPA said it "regards such proposals as a frontal attack on the public power business model." APPA urged the commission to reject the PJM filing (and a similar request by the PJM Power Providers coalition of generators) and instead replace the capacity markets "with a construct that better harnesses competitive forces to benefit consumers, treats both load and generation resources fairly, and actually supports the development of the new generation resources that are likely to be needed in the next few years."

The commission asserted that the minimum offer price rule "does not interfere with states or localities that for policy reasons seek to provide assistance for new generation entry if they believe such expenditures are appropriate for their state.  The MOPR ensures only that the wholesale capacity market prices remain at just and reasonable levels."

Under the minimum offer price rule, sellers offering capacity at a price deemed too low by PJM’s market monitor would have their offers repriced to a higher level unless they could justify to the monitor (and then potentially to PJM) why their costs support a low bid, FERC said.

New plants that are determined to be too costly under the minimum offer price rule would appear to be out of luck. "Nevertheless, if a resource’s true cost of new entry is above the price at which the market clears, such a resource is not needed," the commission said. However, certain types of new plants are exempted from the rule and can offer capacity at zero dollars: nuclear, coal, integrated gasification combined cycle and hydro. The April 12 order added wind and solar to that list.


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