Electricity Markets

FERC urged to reject calls to apply minimum bid rule to public power self-supply

The Federal Energy Regulatory Commission should reject arguments made by merchant generators and other parties that public power self-supply resources should be subject to an expanded PJM Interconnection minimum offer price rule (MOPR), the American Public Power Association said.

Parties calling for application of the MOPR to public power self-supply resources don’t offer any reasonable basis for such mitigation, the Association said in a Nov. 6 filing at the Commission. Moreover, filings made by other parties at FERC buttress a finding that public power self-supply resources should not be subject to the MOPR, the public power trade group said (Docket No. EL18-178).

FERC issued order in late June

By a vote of 3-2, FERC in a June 29 order rejected two alternative approaches filed by PJM to address the impact of state subsidies on PJM’s electric generation capacity market, known as the Reliability Pricing Model or “RPM.” 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 (Docket No. EL18-178). 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.

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 to prevent market participants from developing and bidding new resources into the capacity market at low or zero prices for the purpose of suppressing overall capacity market prices.  The original rules only applied to new natural-gas resources, but FERC’s June 29 Order proposed to apply the MOPR to all types of resources regardless of whether there is any actual intent to suppress prices.

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, as has been increasingly provided by states within PJM to procure or retain specific resource types, and avoid the potential for double payment and over procurement. To provide such an accommodation, the Commission recommended a resource-specific Fixed Resource Requirement (FRR) alternative option that would allow individual resources and an associated amount of load to opt not to participate in RPM. 

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.

The order did not propose that public power self-supply be granted an exemption from the MOPR, nor did it specify that the resource-specific FRR option would be available to public power self-supply. The order established paper hearing proceedings to investigate a replacement rate under Federal Power Act section 206.

Association’s initial comments

In initial comments submitted to FERC on Oct. 2, the Association called for public power’s self-supply resources to be excluded — or carved out as an exemption — from any expanded PJM MOPR.

The Association said it agreed with FERC that the RPM provisions of PJM’s tariff are unjust, unreasonable, and discriminatory, and has concluded that the benefits of the RPM are not commensurate with the costs to customers. But the starting point for reforming RPM “should not be an expanded MOPR that encompasses all new and existing resources, regardless of technology, that receive state ‘out-of-market’ support,” the Association said in its filing.

FERC urged to reject arguments made by merchant generators, others

In its November submission replying to the arguments of other parties in the proceeding, the Association said that the Commission should reject calls by merchant generators and other commenters to apply the MOPR to public power self-supply resources. 

“The arguments raised by these parties generally mischaracterize self-supply resources as similarly-situated to recipients of the kinds of ‘out-of-market’ state support cited in the June 29 order or otherwise incorrectly portray self supply resources as incompatible with a competitive capacity construct in PJM,” the Association said.

Such arguments are based on the mistaken idea that all resource entry and exit must be coordinated solely by the regional transmission organization-administered market to be deemed economic, the trade group went on to say.

A number of parties suggested that self-supply resources should be subject to the MOPR because the participation of these resources in RPM can “suppress” prices just like the kinds of generation support programs cited in the June 29 order.

But such arguments “improperly seek to extend the Commission’s rationale for an expanded MOPR – i.e., increasing state support programs for certain resources or resource types – to resources built or contracted-for under the long-standing public power business model,” the Association argued.

The public power trade group underscored the point that it does not believe the Commission should apply the MOPR to mitigate the impact of state programs that support particular resources or resource technologies.

But, having cited the expansion of such programs as the specific grounds for its finding that RPM is unjust and unreasonable, the Commission “cannot simply extend that rationale to other, fundamentally different types of generation resource funding models,” the Association argued.

“And because public power self-supply resources are not similarly-situated to the resources that receive out-of-market support under the kinds of state programs cited in the June 29 order, exempting public power self-supply from the MOPR would not be unduly discriminatory, as some commenters suggest.”

It also said that it is fundamentally incorrect to regard public power self-supply resources as “uneconomic,” or to view the influence that these self-supply resources may have on auction outcomes as “price suppression.”

Record supports conclusion that public power self-supply resources should be excluded

Meanwhile, the Association told FERC that initial submissions made in the proceeding support a finding that public power self-supply resources should not be subject to the MOPR.

The Association pointed to comments filed by PJM acknowledging that the MOPR should strike an appropriate balance between protecting against price suppression while avoiding interference with long-standing capacity procurement business models.  PJM proposes a categorical MOPR exemption for self-supply, the trade group pointed out.

Specifically, certain self-supply entities – including public power utilities and other vertically-integrated utilities – generally would be excluded from PJM’s proposed definition of a “Capacity Resource with Actionable Subsidy,” and, thus, exempt from the MOPR under the revised rules proposed by PJM.  The exclusion would be subject to “net-short” and “net-long” criteria for new resources to address any potential for anti-competitive behavior.

PJM reasoned that as a general matter, public power utilities and other vertically-integrated utilities are appropriately excluded from the MOPR, because their traditional business models for capacity procurement do not give rise to concerns related to artificial price suppression.

“Outright exclusion of public power self-supply from the MOPR would be appropriate, but, if the Commission deems necessary, the net-short/net-long thresholds for planned resources that PJM proposes should be workable,” the Association said.

It noted that numerous other submissions support a finding that the MOPR should not encompass the self-supply resources of public power and other vertically-integrated utilities.

The Organization of PJM States Inc. (OPSI) specifically supports a MOPR exemption for vertically-integrated utilities engaging in self supply.

Public power entity American Municipal Power (AMP) demonstrated that it has neither the incentive nor the ability to economically benefit from artificially lowering market prices.” More broadly, AMP and the Public Power Association of New Jersey (PPANJ) distinguished deregulated retail markets from the vertically-integrated business model of public power utilities, which emphasizes long-term resource investments for the benefit of their retail customers.

“Thus, in response to the Commission’s inquiries in the June 29 order, the record fully supports a finding that public power self-supply resources do not receive out-of-market support that should be encompassed within any expanded MOPR.  At a minimum, such resources should be subject to a broad general exemption from the MOPR,” the Association argued.

Resource-specific FRR Alternative

The Association’s reply submission also addressed issues relating to the Commission’s proposal for an expanded MOPR and the resource-specific FRR Alternative: the “FRR-RS.”

The Association supports adoption of a mechanism to accommodate state resource policies, including programs that provide support for certain resources or technologies.  Therefore, even if public power self-supply resources are exempt from the MOPR, a well-designed resource-specific FRR-RS is important to the overall structure of the PJM resource adequacy framework and the achievement of just and reasonable rates, according to the Association.

“Provided that the replacement capacity construct incorporates appropriate MOPR exemptions for the self-supply resources of public power utilities, a properly-designed FRR-RS could potentially be a workable framework for addressing the Commission’s concerns about the impact of state programs that provide out-of-market support to certain generation resources or technologies.”

As a way of implementing the Commission’s FRR-RS concept, PJM offered a Resource Carve-Out (RCO) proposal in its initial submission.  If the Commission adheres to the specific FRR-RS concept described in the June 29 order, PJM’s RCO could be a workable approach to implementing it, provided the Commission also accepts PJM’s self-supply MOPR exemption, the Association said in reply.

PJM also proposed an Extended RCO under which the grid operator would add a second stage to the capacity auction that would not determine capacity commitments, but would be used solely to determine a competitive price.  That higher price would be paid to resources that did not receive a capacity obligation in the first stage.

The Association urged FERC to reject the Extended RCO concept described in PJM’s initial submission. Among other things, it argued that Extended RCO would unjustifiably raise costs to consumers and would be a fundamental departure from the resource-specific FRR described in the June 29 order, and, if adopted, could undermine the Commission’s objectives in proposing the FRR-RS concept.

In addition to the Association, public power entities AMP and Illinois Municipal Electric Agency (IMEA) made reply filings in the PJM proceeding.  Among other comments, AMP and IMEA both also endorsed an exemption for public power self-supply resources from any MOPR adopted by FERC.