Electricity Markets

PJM order will lead to massive rate hike, threat to public power: Glick

The Federal Energy Regulatory Commission’s recent order directing the PJM Interconnection to expand its current minimum offer price rule (MOPR) to address state-subsidized electric generation resources amounts to a multi-billion per year rate hike for PJM customers, marks a clear attack on state generation resource decision making and represents a fundamental threat to the long-term viability of the public power model, FERC Commissioner Richard Glick said in a sweeping set of criticisms of the order.

“From the beginning, this proceeding has been about two things: Dramatically increasing the price of capacity in PJM and slowing the region’s transition to a clean energy future,” Glick wrote in his 28-page dissent. “Today’s order will do just that. I strongly dissent from today’s order as I believe it is illegal, illogical, and truly bad public policy.”

Details on FERC order

At its December 19 open meeting, FERC directed PJM Interconnection to expand its current MOPR to address all state-subsidized electric generation resources, with certain exemptions. This expansion of the MOPR will also apply to all public power, electric cooperative and vertically-integrated investor-owned utility self-supply resources other than currently existing resources.

The order establishes a replacement rate for PJM’s capacity construct, known as the Reliability Pricing Model (RPM). The order was approved by a 2-1 vote, with Glick dissenting.

The order concludes a paper hearing established in the Commission’s June 29, 2018 order that found the RPM tariff provisions to be unjust and unreasonable because the current MOPR does not adequately address the suppressive effect on capacity auction clearing prices from “out-of-market” state payments to certain generating resources, primarily renewable and nuclear power.

In July 2018, the American Public Power Association, American Municipal Power Inc. (AMP), and the Public Power Association of New Jersey filed a request for rehearing of the June order.

PJM’s current MOPR applies only to new natural gas-fired resources.  In the December 19 Order, the Commission orders a sweeping expansion of the MOPR, directing PJM to establish a replacement rate that expands the MOPR’s applicability to all new and future existing resources of all technology types that receive or are entitled to receive a “state subsidy,” a term that the order defines very broadly to include self-supply. The only exemptions are for currently existing resources as of the date of the order.

FERC’s definition of a state subsidy is a direct or indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit that is a direct or indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit that is:

A result of any action, mandated process, or sponsored process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, and  (2) is derived from or connected to the procurement of (a) electricity or electric generation capacity sold at wholesale in interstate commerce, or (b) an attribute of the generation process for electricity or electric generation capacity sold at wholesale in interstate commerce, or (3) will support the construction, development, or operation of a new or existing capacity resource, or (4) could have the effect of allowing a resource to clear in any PJM capacity auction.

Glick says almost all capacity in PJM is a subsidized resource under FERC order

Glick argued that in taking the order at face value, “much—and perhaps the vast majority—of the capacity in PJM will potentially be subject to the MOPR. That is because the Commission’s broad definition of subsidy encompasses almost any aspect of state resource decision making.”

Although the Commission’s various exemptions and carve-outs will blunt some of the resulting impact, the definition of subsidy “will nevertheless apply to a vast swathe of resources and create enormous uncertainty, even for those resources that eventually manage to escape mitigation,” Glick said.

In addition, resources that do not escape mitigation will no longer be competing based on their offers to supply capacity, but rather based on a complex system of administrative pricing whose entire purpose is to increase capacity prices, he went on to say.

Glick pointed out that the biggest categories of capacity resources newly subject to the MOPR will be resources relied upon by vertically integrated utilities and public power (including municipal utilities and electric cooperatives). Vertically integrated utilities and public power represent nearly a fifth of the capacity in PJM. All these entities recover their costs through non-bypassable consumer charges that are the result of a process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, which are encompassed by the order’s definition of a state subsidy.

The PJM states provide dozens of different subsidies and benefits tied to particular generation resources or generation types and those “ubiquitous subsidies expose a vast number of resources to potential mitigation,” the Commissioner wrote.

Glick said that the Commission’s definition of a subsidy will also ensnare a variety of state actions that have little in common with any ordinary use of the word subsidy.

“For example, any resource that benefits from a state carbon tax, cap-and-trade program, or clean energy standard would be subject to mitigation because, as a result of state action, it receives financial benefit (whether direct or indirect) that is connected to electricity generation or an attribute of the generating process,” he said.

“Putting aside the affront to state jurisdiction, consider the mess that would create. Every relatively clean resource would ‘benefit’ from a carbon tax or cap-and-trade system by virtue of becoming more cost-competitive. That benefit would not be limited to zero-emissions resources. Instead, taking the Commission’s definition at face value, every relatively efficient natural gas-fired resource—including existing ones—would be subject to mitigation because they are relatively less carbon-intensive.”

A literal application of the subsidy definition includes the Regional Greenhouse Gas Initiative (RGGI) because it provides a financial benefit as a result of state action or state-mandated process, Glick said. “This means that every relatively low-emitting generator in Delaware and Maryland will be subject to mitigation. And the same fate may shortly befall relatively clean generators in Virginia, Pennsylvania, and New Jersey—all of which are considering or have announced their intention to join RGGI in the near future.”

Glick also said that the PJM states have a host of idiosyncratic regulatory regimes that may well trigger the MOPR, pointing to the New Jersey Basic Generation Service Electricity Supply Auction as an example.

Order likely to initially cost consumers $2.4 bil per year annually

“The order amounts to a multi-billion-dollar-per-year rate hike for PJM customers, which will grow with each passing year,” Glick wrote in his dissent. “It will increase both the capacity price in the Base Residual Auction as well as the already extensive quantity of redundant capacity in PJM. It is a bailout, plain and simple.”

More specifically, Glick said that the order will likely cost consumers $2.4 billion per year initially, even under conservative assumptions.

“The Commission, however, does not even pretend to consider those costs when establishing the replacement rate. It is hard for me to imagine a more careless agency action than one that foists a multi-billion-dollar rate hike on customers without even considering, much less justifying, that financial burden,” he wrote in the dissent.

And those costs will continue to grow with each passing year, Glick said. Although the order “aims to hamper state efforts to shape the generation mix, it will not snuff them out entirely.”

As a resource adequacy construct, the PJM capacity market “will increasingly operate in an alternate reality, ignoring more and more capacity just because it receives some form of state support. It also means that customers will increasingly be forced to pay twice for capacity or, in different terms, to buy ever more unneeded capacity with each passing year. I cannot fathom how the costs imposed by a resource adequacy regime that is premised on ignoring actual capacity can ever be just and reasonable.”

Moreover, Glick believes these are just the first-order consequences of FERC’s order. “The record before us provides every reason to believe that this approach will lead to many other cost increases.”

State generation resource decision making

Turning to the issue of state and federal jurisdiction, Glick said that the Federal Power Act is clear. “The states, not the Commission, are the entities responsible for shaping the generation mix.”

Glick argues that FERC’s order unlawfully targets a matter under state jurisdiction. The Commissioner said that FERC “comes right out and acknowledges that its goal is to ‘send price signals on which investors and consumers can rely to guide the orderly entry and exit of economically efficient capacity resources.’ That means the Commission is attempting to establish a set of price signals for determining resource entry and exit that will supersede state resource decision making and better reflect the Commission’s policy priorities,” he wrote.

“It is hard to imagine how the Commission could much more directly target or aim at state authority over resource decision making. Although the Commission insists that it is not impinging on state authority, it concedes elsewhere in today’s order that the MOPR disregards and nullifies the policies to which it applies.”

Moreover, the Commission “compounds its intrusion on state authority by substituting its own policy preferences—a peculiar mix of reverence for “competition” and reliance on administrative pricing—to entrench the existing resource mix and trample states’ concerns about the environmental externalities of electricity generation.”

He said that FERC’s observation that it is not literally precluding states from building new resources is beside the point. “That’s the equivalent of saying that a grounded kid is not being punished because he can still play in his room—it deliberately mischaracterizes both the intent and the effect of the action in question.”

Public power

The Commissioner also argues that in its rush to block the impacts of state policies, the Commission ignores the consequences its actions will have on well-established business models.

In particular, Glick believes the order threatens the viability, as currently constituted, of (1) aggregated demand response providers; (2) public power; and (3) resources financed in part through sales of voluntary renewable energy credits.

With respect to public power, Glick points out that the public power model predates the capacity market by several decades and is premised on securing a reliable supply of power for each utility’s citizen-owners at a reasonable and stable cost, which often includes an element of long-term supply.

But FERC’s order “declares the entire public power model to be an impermissible state subsidy,” Glick said. “That is a stark departure from past precedent, which recognized that ‘the purpose and function of the MOPR is not to unreasonably impede the efforts of resources choosing to procure or build capacity under longstanding business models.’”

Moreover, Glick believes it is a fundamental threat to the long-term viability of the public power model. “Although today’s order exempts existing public power resources from the MOPR, it provides that all new public power development will be subject to mitigation. That means that public power’s selection and development of new capacity resources will now be dependent on the capacity market outcomes, not the self-supply model on which it has traditionally relied. That fundamentally upends the public power model because it limits the ability of public power entities to choose how to develop and procure resources over a long time horizon.”

Federal subsidies

Glick said that no single determination in the order is more arbitrary than the Commission’s exclusion of all federal subsidies, which he said remain pervasive in PJM.

Since 1950, the federal government has provided roughly a trillion dollars in energy subsidies, of which 65 percent has gone to fossil fuel technologies, he noted.

“These policies have ‘artificially’ reduced the price of natural gas, oil, and coal, which in turn has allowed resources that burn these fuels — including many of the so-called ‘competitive’ resources that stand to benefit from today’s order — to submit ‘uncompetitive’ bids into PJM’s markets for capacity, energy, and ancillary services. By lowering the marginal cost of fossil fuel-fired units, government policies have allowed these units to operate more frequently and have encouraged the development of more of these units than might otherwise have been built.”

Glick said that FERC’s exclusion of all federal subsidies from the MOPR on the theory that it lacks the authority to disregard or nullify the effect of federal legislation “is contradictory at best.”

“If, for the sake of argument, we accept the Commission’s characterization of the MOPR’s impact on state policies, then its justification for exempting federal subsidies from the MOPR immediately falls apart,” he wrote.

Glick argued that if the MOPR disregards or nullifies federal policy, it must have the same effect on state policy. “And if it does not nullify or disregard state policy, then the Commission has no reasoned justification for exempting federal subsidies from the MOPR.”

Association disappointed in order

The Association on Dec. 20 said it was disappointed in FERC’s December 19 order. “The use of a MOPR greatly increases prices and harms all consumers, with the only beneficiaries being a small group of incumbent merchant generation owners,” the Association said.

“This order stands in sharp contrast to any definition of competitive markets, and represents the worst type of government interference in the markets — not to protect consumers but instead to support a selected group of sellers,” said Association President and CEO Sue Kelly.

“It is the ultimate irony that the public power business model has been deemed a subsidy and a threat to competitive markets. Our approach to new resources is closer to a true market than PJM’s Reliability Pricing Model has ever been,” stated Marc Gerken, PE, AMP President and CEO. “This order leaves no question that RPM [reliability pricing model] is nothing more than an administrative construct with prices set in Valley Forge, PA with no enduring features of a competitive market.”