By a vote of 3-2, the Federal Energy Regulatory Commission on June 29 rejected two alternative approaches filed by PJM Interconnection to address the impact of state subsidies on PJM’s electric generation capacity market. At the same time, the Commission found that PJM’s existing capacity market rules are unjust and unreasonable under the Federal Power Act and must be modified. While rejecting PJM’s proposed changes, FERC made a preliminary finding that certain other changes to the current PJM capacity market rules may result in just and reasonable replacement PJM tariff provisions.
Commissioners Cheryl LaFleur and Richard Glick dissented from the order.
PJM capacity market
In its order, the Commission said that over the last few years, the integrity and effectiveness of the capacity market administered by PJM “have become untenably threatened by out-of-market payments provided or required by certain states for the purpose of supporting the entry or continued operation of preferred generation resources that may not otherwise be able to succeed in a competitive wholesale capacity market.”
The amount and type of generation resources receiving such out-of-market support has increased substantially, FERC noted. “What started as limited support primarily for relatively small renewable resources has evolved into support for thousands of megawatts of resources ranging from small solar and wind facilities to large nuclear plants. As existing state programs providing out-of-market payments continue to grow, more states in the PJM region are considering providing more support to even more resources, based on an ever-widening scope of justifications.”
These subsidies, FERC said, enable subsidized resources to have a suppressive effect on the price of capacity procured by PJM through its capacity market, known as the Reliability Pricing Model, or RPM.
“We find, based on the record before us, that it has become necessary to address the price suppressive impact of resources receiving out-of-market support,” adding that PJM’s existing Minimum Offer Price Rule (MOPR) “does not do so, because it applies only to new, natural gas-fired resources,” FERC said.
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 MOPR was originally adopted as a check on the ability of participants to bid resources into the capacity market at low prices with the intent of suppressing overall capacity market prices. Because the current MOPR applies only to new natural gas-fired resources, “it fails to mitigate price distortions caused by out-of-market support granted to other types of new entrants or to existing capacity resources of any type,” FERC said.
Commission order addresses two proceedings
The order addressed two proceedings initiated in response to increasing state support for certain generation resources.
The first is a complaint against PJM pursuant to section 206 of the Federal Power Act that was filed by Calpine Corporation, along with additional generation entities (Docket No. EL16-49-000). The complaint was made in 2016.
The crux of the complaint is that PJM’s tariff and more specifically, the tariff’s MOPR, is unjust and unreasonable because it does not address the impact of subsidized existing resources on the capacity market. Calpine proposed interim tariff revisions for immediate implementation that would extend the MOPR to a limited set of existing resources and it asked the Commission to direct PJM to conduct a stakeholder process to develop and submit a long-term solution.
The second proceeding addressed in the June 29 order is PJM’s recent filing of proposed revisions to its tariff (Docket No. ER18-1314-000). PJM’s filing consisted of two mutually exclusive, alternate proposals designed to address the price suppressing effects of state out-of-market support for certain resources.
In February, the PJM Board directed the regional transmission organization to file both proposals, which PJM submitted to FERC on April 9. The American Public Power Association subsequently urged the Commission to reject the alternative approaches on the grounds that they would create significant price increases with no discernible benefit and would continue to create risks for public power self-supply capability.
PJM’s first, preferred approach is comprised of a two-stage annual auction, with capacity commitments first determined in stage one of the auction and the clearing price set separately in stage two (referred to as Capacity Repricing).
PJM’s second, alternative approach, to be considered only in the event the Commission determines that Capacity Repricing is unjust and unreasonable, called for the revision of PJM’s MOPR to mitigate capacity offers from both new and existing resources, subject to certain proposed exemptions (MOPR-Ex).
In its June 29 order, FERC rejected both the Capacity Repricing proposal, as well as the MOPR-Ex proposal.
FERC rejects PJM Capacity Repricing proposal
FERC said that Capacity Repricing would allow resources receiving out-of-market support to submit offers into PJM’s capacity market as price-takers, acquiring capacity obligations without mitigation. “All other things being equal, this, in turn, would suppress the capacity market clearing price,” FERC said.
If certain thresholds for capacity receiving “material subsidies” are reached, Capacity Repricing would then adjust the clearing price paid to all resources with a capacity commitment, including resources receiving material subsidies, while excluding other competitive resources (i.e., resources not receiving out-of-market support) that offered below the adjusted clearing price but above the stage one price. The order detailed what PJM proposed to include and exclude in the definition of a “material subsidy.”
FERC said that it is “unjust and unreasonable to separate the determination of price and quantity for the sole purpose of facilitating the market participation of resources that receive out-of-market support.”
The Commission said that the Capacity Repricing proposal artificially inflates the capacity market clearing price to compensate for the participation of resources receiving out-of-market support in the PJM capacity market. “PJM’s Capacity Repricing proposal would allow such resources to impact the market, and disconnect the determination of price and quantity – a vital market fundamental.”
FERC said it agreed with intervenors in the proceeding that, by setting a clearing price that is disconnected from the price used to determine which resources receive capacity commitments, the market clearing price under Capacity Repricing will send incorrect signals, leading to greater uncertainty with respect to entry and exit decisions.
The Commission went on to say that Capacity Repricing “appears to start from the premise that resources receiving out-of-market support should obtain a capacity commitment at the expense of other resources that, despite offering competitively, are not selected in the first stage of the auction. We reject that premise.”
FERC said unlike competitive resources, a resource receiving out-of-market support can submit an offer below its true going-forward costs and rely on the material subsidy it receives to make up the difference between the auction clearing price and its going-forward costs.
Commission rejects MOPR-Ex proposal
With respect to the MOPR-Ex proposal, FERC said that in contrast to the Capacity Repricing proposal, the MOPR-Ex proposal would prevent some (but not all) resources that receive material subsidies from obtaining capacity commitments at the expense of competitive resources. It would also prevent some resources that receive material subsidies from suppressing capacity market prices, the Commission said.
But FERC nevertheless ruled that PJM did not provide a valid reason for the disparity among resources that receive out-of-market support through renewable portfolio standard programs, which are exempt from the MOPR-Ex proposal, and other state-sponsored resources, which are not.
“Although PJM contends that MOPR-Ex targets the impact of state resource decisions on PJM’s capacity market, PJM has not shown that the exempted resources have a different impact on its capacity market than those which are not exempted,” the order stated.
Moreover, PJM’s assertion that the RPS exemption was based on deference to public policies favoring renewable generation resources is inconsistent with the well-established desire of some states in PJM to support other resources, such as nuclear plants, FERC went on to say.
Response to Calpine complaint and consolidation of cases
As for the Calpine complaint, the Commission granted the complaint, in part, but rejected Calpine’s proposed tariff revisions, “even as an interim remedy.”
At the same time, FERC said it was launching a new FPA Section 206 proceeding that incorporates the record of Docket Nos. ER18-1314-000, et al., consolidating this new proceeding with the Calpine complaint and establishing “paper hearing” procedures for the consolidated proceedings.
Replacement rate
The Commission said that based on the evidence in the Calpine docket, and the more recent PJM filings, it has determined that PJM’s existing tariff is unjust and unreasonable and unduly discriminatory. “It fails to protect the integrity of competition in the wholesale capacity market against unreasonable price distortions and cost shifts caused by out-of-market support to keep existing uneconomic resources in operation, or to support the uneconomic entry of new resources, regardless of the generation type or quantity of the resources supported by such out-of-market support,” FERC said. “The resulting price distortions compromise the capacity market’s integrity.”
In addition, these “price distortions create significant uncertainty, which may further compromise the market, because investors cannot predict whether their capital will be competing against resources that are offering into the market based on actual costs or on state subsidies. Ultimately, these problems with PJM’s existing tariff result in unjust and unreasonable rates, terms, and conditions of service.”
At the same time, the Commission said that based on the existing record, it is unable to make a final determination regarding the just and reasonable replacement rate for the PJM tariff.
However, FERC also said that it has preliminarily determined that modifying two aspects of the PJM tariff may produce a just and reasonable rate.
First, FERC proposed that its replacement rate include an expanded MOPR that covers out-of-market support to all new and existing resources, regardless of resource type.
In addition to expanding PJM’s MOPR, the Commission also preliminarily found that it may be just and reasonable to accommodate resources that receive out-of-market support, and mitigate or avoid the potential for double payment and over procurement, by implementing a resource-specific Fixed Resource Requirement (FRR) alternative option. PJM’s current tariff includes an FRR option, under which a load-serving entity can opt not to participate 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.
“We therefore propose that PJM adapt its current FRR option to allow, on a resource-specific basis, resources receiving out-of-market support to choose to be removed from the PJM capacity market, along with a commensurate amount of load, for some period of time,” FERC said in its order.
It said the resource-specific FRR alternative would accommodate such resources by allowing them to remain on the system, “despite their inability to compete in the capacity market based on their costs, by permitting them to exit the capacity market with a commensurate amount of load and operating reserves.” FERC notes that is seeks comment in the order on the best method of accounting for both the load and reserves.
Unlike the current FRR construct, the resource-specific version would not require a load-serving entity to remove its entire footprint from the capacity market; rather it would remove a specific resource -- and accompanying load. “However, we note that we are not proposing that PJM remove the existing FRR construct, which allows load-serving entities to exit the capacity market on a utility-wide basis,” FERC said.
The order does not propose that public power self-supply be granted an exemption from the MOPR, nor does it specify that the FRR option would be available to public power self-supply.
Under the paper hearing schedule adopted by FERC, the initial round of testimony, evidence, and/or argument is due within 60 days of the June 29 order, or by Aug. 28, 2018. Reply testimony, evidence, and/or argument is due 30 days thereafter, or by Sept. 27, 2018.
FERC said that it “will make every effort to issue an order establishing the just and reasonable replacement rate no later than January 4, 2019.”
Glick, LaFleur dissent, Powelson offers concurrence
In her dissent, Commissioner LaFleur said that rather than reject the PJM MOPR-Ex proposal, she favored offering guidance to PJM and its stakeholders to further refine that concept as a workable market reform.
“Addressing the tension between relying on wholesale capacity markets to attract investment and state policies to support specific resources has been a longstanding priority of mine,” she wrote. “As I have stated many times, I believe tailored regional solutions are likely to provide the best path forward in each region, and I have actively worked with regions where possible to help guide and develop those solutions,” said LaFleur.
FERC’s recent approval of ISO New England’s Competitive Auctions with Sponsored Policy Resources (CASPR) proposal “is, in my mind, a prime example of how a region can craft a targeted market reform to address this tension and preserve the benefits of the wholesale markets for customers while also facilitating state policies.”
LaFleur said she agreed with the majority’s decision to reject PJM’s capacity repricing proposal, “as I am concerned that it would allow subsidized resources to both cause and benefit from higher capacity market clearing prices.”
With respect to MOPR-Ex, however, she disagrees with the majority’s rejection of that proposal, as well as its reasoning. LaFleur said that state renewable portfolio standards “are generally longstanding state programs that often pre-date the capacity market, and are not intended to prop up specific uneconomic units that would otherwise leave the market, but rather to help shape a state’s resource mix over time through competitive procurements. As such, I believe that current state RPS programs in PJM are distinguishable from other state support programs that might pose a threat to the viability of the PJM capacity market.”
Therefore, she would have accepted and suspended the MOPR-Ex proposal, and directed further proceedings, including possible settlement discussions, on potential refinements to ensure that MOPR-Ex would not unduly interfere with the operation of existing state RPS programs. “Alternatively, I would have suggested that PJM consider an expanded CASPR-like construct that could include opportunities for new and existing subsidized resources to buy out the capacity obligations of other resources in the market. I think either approach could yield a just and reasonable result.”
LaFleur said she was “particularly troubled” that, as a result of the order, the Commission will be “hamstrung in its ability to openly and honestly engage with the states about whether this proposal will meet their needs, and how they might operate under this construct.”
She said that the proposed resource-specific FRR alternative option presents resource owners and states with choices that could be difficult to make in advance of the May 2019 Base Residual Auction, “particularly given that some of the state programs are statutory in nature and could require legislative action to reform. This is too important a decision to be made this quickly, and with this little stakeholder engagement.”
In his dissent, Commissioner Glick said that in its order, the Commission finds that PJM’s tariff violates the FPA because it fails to “mitigate” state efforts to shape the generation mix.
“I strongly disagree,” wrote Glick. “The state programs of which the Commission disapproves are precisely the sort of actions that Congress reserved to the states when it enacted the FPA. The Commission’s role is not—and should not be—to exercise its authority over wholesale rates in a manner that aims to mitigate, frustrate, or otherwise limit the states’ exercise of their exclusive authority over electric generation facilities,” Glick argued.
He also said that FERC “entirely fails to meet its burden to show that PJM’s tariff is unjust and unreasonable.” Glick said the record is “devoid of evidence that the states’ exercise of their authority is actually interfering with the Commission’s responsibility to ensure resource adequacy at just and reasonable rates. To the contrary, PJM’s capacity market has resulted in a capacity surplus that is well in excess of the level required to reliably meet the region’s electricity demands, suggesting that, if anything, the prices in PJM’s capacity market are too high, not too low.”
Glick said that rather than interfering with state policies “that address externalities associated with electric generation, such as greenhouse gas emissions that contribute to the existential threat of climate change, the Commission should be striving to accommodate and give effect to those state initiatives.”
In his separate concurrence, Powelson said that he strongly supported the order.
“Let me be clear: there is a problem,” he wrote. The FPA “compels this Commission to ensure just and reasonable rates. The record before us clearly indicates that unfettered access to wholesale energy markets by state-supported resources leads to unjust and unreasonable rates. If the Commission did not find today that the existing PJM tariff is unjust and unreasonable, it would be ignoring the duties prescribed to it under the Federal Power Act.”
