Electricity Markets

Association says FERC order on PJM is flawed

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The Federal Energy Regulatory Commission’s conclusion that PJM Interconnection’s existing capacity market tariff provisions are unjust and unreasonable because PJM’s existing minimum offer price rule (MOPR) is too narrow could make the already-flawed PJM capacity construct “significantly worse,” the American Public Power Association and other public power entities recently argued.

That is just one of several concerns detailed by the Association, American Municipal Power Inc. (AMP) and the Public Power Association of New Jersey (PPANJ) in their joint July 30 request for rehearing of an order issued by FERC in late June (Docket No. EL18-178).

In the June 29 order, FERC said that PJM’s existing capacity market rules are unjust and unreasonable under the Federal Power Act and must be modified.

The Commission also rejected two alternative approaches filed by PJM to address the impact of state subsidies on PJM’s electric generation capacity market. PJM had proposed to amend the provisions of its open access transmission tariff governing the grid operator’s mandatory forward capacity construct, the Reliability Pricing Model (RPM).

FERC concluded that PJM’s tariff does not adequately address the suppressive effect that “out-of-market” state programs have on capacity clearing prices in PJM. FERC found that PJM’s MOPR is inadequate to address the effects of these state programs, as the MOPR is presently limited to new, gas-fired resources. The MOPR is a feature of PJM’s RPM rules under which the capacity bids of certain resources are administratively increased to a minimum level.  The mechanism was originally adopted as a check on the ability of participants to bid resources into the capacity market at artificially low prices with the intent of suppressing overall capacity market prices.

FERC established a paper hearing process to investigate possible replacement tariff provisions. It also made a preliminary finding that modifying two aspects of the PJM tariff may produce a just and reasonable rate.

Specifically, the Commission suggested that an expanded MOPR covering “out-of-market support to all new and existing resources, regardless of resource type,” coupled with adoption of a resource-specific version of PJM’s existing Fixed Resource Requirement (FRR) may produce a just and reasonable replacement rate.  PJM’s current FRR mechanism permits a load-serving entity to opt-out of participating in RPM if it has adequate capacity and removes all the load in its footprint from the capacity market.  FERC’s new proposal would apply the FRR option to individual generating resources

PJM capacity construct could become “significantly worse”

In their request for rehearing of the order, the Association, AMP and PPANJ did not challenge FERC’s rejection of PJM’s two alternative approaches.  However, the public power entities voiced concerns about FERC’s finding under FPA Section 206 that PJM’s tariff is unjust and unreasonable because the existing MOPR is too narrow.

The finding is “unreasonable and unsupported and has the potential to make the already-flawed PJM capacity construct significantly worse,” the Association, AMP and PPANJ said.

The Association, AMP and PPANJ expressed concern regarding the commission’s suggestion that adoption of a blanket MOPR applicable to all new and existing resources receiving state out-of-market support is needed to render the PJM capacity construct rules just and reasonable.

An expanded MOPR “could raise capacity prices in exchange for uncertain benefits, heighten the risk of excess capacity, increase complexity, and interfere with the pursuit of state policy goals. While the RPM framework may have substantial deficiencies, a MOPR with insufficient reach is not among them,” the public power entities said.

“This sweeping expansion of the MOPR is not supported by reasoned analysis; the Commission neither substantiates the factual assertions underlying its ruling, nor adequately explains why expansion of the MOPR as suggested in the June 29 order would be a reasonable response to the growth in state support for new and existing generation,” the public power groups argued.

Exemption for public power self-supply

At the same time, the three public power entities said that they appreciate the Commission’s suggestion in the order that public power self-supply could properly be exempted from the expanded MOPR contemplated by the Commission.

“An exemption for public power self-supply resources might feasibly mitigate some of the most significant concerns for public power that APPA, AMP, and PPANJ have raised with respect to a mandatory capacity construct in PJM,” they went on to say, noting that they intend to participate in the paper hearing process to address this and other questions raised by the order.

APPA and the other public power parties allowed that the paper hearing process “ultimately could result in a workable resource adequacy construct for PJM,” but they observed that the June 29 Order left “only the uncertain possibility that a replacement rate to be litigated in a highly-expedited paper hearing might reasonably accommodate public power self-supply resources and/or facilities receiving state support.”

Rate-changing requirements

The Association, AMP and PPANJ said that FERC’s conclusion about the existing PJM tariff is legally problematic because the commission failed to comply with the rate-changing requirements of FPA section 206. FERC did not provide a conclusive finding as to which “out-of-market” support mechanisms beyond the MOPR’s current reach render the PJM tariff unjust and unreasonable, the public power groups said.

Another problem with FERC’s conclusion is that the federal agency did not offer a reasoned explanation for why certain state support programs -- as opposed to others -- now render the PJM tariff unjust and unreasonable. Moreover, the Commission did not quantify the alleged price-suppressive impact of these state programs, the Association, AMP and PPANJ said.

The rehearing request argued that no showing had been made that state public policies are resulting in capacity prices that fail to incentivize an adequate supply of capacity resources, citing evidence that capacity procured through the PJM auctions has been, and is expected to remain, significantly above the reserve margin through at least 2020.

Compressed time frame for hearing  

As for the paper hearing, the public power groups questioned the logic of requiring participants to address fundamental and complex changes to the PJM capacity market, including changes for which participants had no prior notice, in a “highly compressed time frame.”

The expedited schedule for the hearing -- 90 days – “may hamper the parties’ ability to develop a full and complete record for the Commission, and it will restrict the extent to which the PJM stakeholder process can be utilized to respond to the Commission’s conclusions.”

FERC could instead pursue an approach similar to that suggested by Commissioner Cheryl LaFleur in her dissent from the order, i.e., rejection of PJM’s two alternative approaches, accompanied by preliminary findings and targeted guidance to stakeholders concerning reforms to PJM’s resource adequacy construct, including, potentially, directing consideration of an expanded FRR construct or other alternative frameworks that appropriately accommodate self-supply and state-supported resources, the public power groups said.

Such an approach would allow for a broader re-evaluation of the entire PJM capacity construct, as supported by the Association, AMP and PPANJ.