Electricity Markets

Markets don’t exist to protect merchant generators, groups tell FERC

Competitive wholesale electricity markets do not exist to guarantee a return on merchant investments or to protect merchant plant investors from market risks, the American Public Power Association and several other energy-related groups recently told the Federal Energy Regulatory Commission in an ongoing proceeding related to the PJM Interconnection’s capacity market.

The Dec. 21 letter from the Association, the Electricity Consumers Resource Council, the Large Public Power Council, the National Rural Electric Cooperative Association and the Natural Resources Defense Council’s Sustainable FERC Project responds to an early December letter to the Commission from a group of merchant generation owners.

The letter from the merchant generators was filed on December 6 as part of FERC’s ongoing investigation of the PJM capacity market (Docket No. EL18-178, et al.).

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.

FERC proposed that its replacement rate include an expanded minimum offer price rule (MOPR) that covers out-of-market support to all new and existing resources, regardless of resource type.  The Commission also proposed to accommodate state policy goals for generation by allowing state-supported resources to opt-out of participating in the RPM construct, along with a commensurate amount of load.

Generators raise red flag over possible price suppression

The letter from the merchant generators anticipates the potential for an upcoming order from FERC in the proceeding, expected in January, to include some version of FERC’s proposed option for state-sponsored resources to avoid participation in the capacity auctions, along with a commensurate amount of load. Including such an option could avoid the price increases likely to result from a widespread application of the MOPR.

In the letter, the merchant generation owners argue that “any order that explicitly results in price suppression to competitive resources will both 1) significantly undermine the basis for continued unsubsidized investment in the PJM region; and 2) represent a breaking of the regulatory compact that has driven tens of billions of dollars of recent investment into PJM – all based on the investors’ expectation of a level playing field.”

Association, others say generators avoid “fundamental truth” about markets

The letter from the merchant generators “avoids one fundamental truth about markets: they exist to meet consumers’ needs. Markets do not exist to guarantee a return on merchant investments, and certainly do not exist to protect merchant plant investors from market risks,” the Association and the other groups said.

The groups told FERC that they support competitive wholesale electricity markets and also recognize “that this is a time of significant change and reexamination of the role of these markets in a transforming power system.”

While the groups have different positions on certain state policies, they noted that they agree that states and locally governed utilities have the authority to make resource choices, and that it is not the role of the regional transmission organization (RTO) to shield market participants from the effect of those policies.

“The authors of the December 6 letter, on the other hand, request the Commission to mandate ‘markets’ that instead produce prices that pretend certain resources do not exist and require consumers to buy capacity from certain merchant power plants even though that capacity may not be needed given the level of state and local resource procurement,” the Association and the other groups said. “Such efforts to shield suppliers from the effect of state policies only results in additional costs to customers that are not just or reasonable.”

They went on to say that FERC’s series of orders accepting and modifying PJM’s RPM did not create a federal “regulatory compact” that new generators would be able to recover their costs through PJM’s markets regardless of intervening events.

“Instead, the Commission’s policy of relying on wholesale market competition placed investment risk on investors and not on consumers.  Resource procurement through self-supply or pursuant to public policy goals is one of many risks that investors absorb in markets,” the groups noted.

The Association and the other groups also argued that wholesale market rules should respect state and locally governed utility policies and resource choices without making customers pay twice for the same service. “While it is clearly the Commission’s responsibility to determine that the rate for wholesale power sales is just and reasonable, the Commission and the courts have long held that a market-based rate where supply and demand meet can be just and reasonable if market power is absent or mitigated.  No buyer-side market power has been demonstrated by any of the parties in this investigation.”

Bilateral contracts

For true market competition to occur, wholesale customers and suppliers should be able to come together and transact as they choose through bilateral contracts,” the groups also said in their letter to the Commission.

It is not the job of grid operators “to second-guess the resource and contracting decisions of load-serving entities and eligible wholesale electric customers to buy or self-supply the types of resources and services they select, and for their chosen length of time.” Moreover, RTOs and independent system operators should not “continue to shift the rules in a manner that serves only to increase revenues for one set of sellers.”

Long-term bilateral contracts can be beneficial for both wholesale customers and energy suppliers and should be fully accommodated inside and outside regions with RTO-operated markets, the letter said.  “Bilateral contracts are a key part of competitive wholesale electricity markets, as they are in every other competitive sector of the economy.”

It is for these reasons that FERC recommended that the RPM rules incorporate a workable mechanism to accommodate resources that receive out-of-market support and mitigate or avoid the potential for double payment and over procurement, the groups noted.

“Any reform of RPM adopted in this proceeding should provide customers and load-serving entities with a means of choosing the resources they desire, or that they are required by states to procure as a means to pursue policy goals.”

Association has been active participant in PJM proceeding

The Association has been an active participant in the PJM proceeding at FERC.

In response to the June 29 order, the Association on Oct. 2 called for public power’s self-supply resources to be excluded — or carved out as an exemption — from any expanded PJM MOPR.

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