Electricity Markets

Public power groups challenge PJM minimum offer price rule expansion order

A Federal Energy Regulatory Commission order directing PJM Interconnection to implement a sweeping expansion of its current minimum offer price rule (MOPR) will expose public power utilities and their customers to the risk of having to pay twice for new capacity resources, without providing them any effective way to mitigate that risk, the American Public Power Association, American Municipal Power and the Public Power Association of New Jersey said in seeking rehearing of the decision.

Details on FERC order

FERC’s Dec. 19, 2019 order directed PJM to expand its current MOPR to address state-subsidized electric generation resources, with certain exemptions. FERC said that the action reaffirms and builds on FERC’s June 29, 2018, order, which found that out-of-market payments provided, or required to be provided, by states in the PJM region to support operation of certain generation resources threaten the competitiveness of PJM’s capacity market. That order ruled PJM’s open access transmission tariff is unjust and unreasonable because the MOPR failed to address the price-distorting impact of resources receiving out-of-market support.

FERC’s order issued last month requires PJM to apply the MOPR to any new or existing resource that receives, or is entitled to receive, a “state subsidy,” unless the resource is subject to one of the exemptions described in the order.  The order defines “state subsidy” very broadly, meaning that resources owned by public power utilities and many programs that states have used to support certain types of generation would be impacted by the order. 

The Commission establishes exemptions for: (1) existing renewable resources that are participating in state renewable portfolio standard programs; (2) existing demand response, energy efficiency, and storage resources; (3) existing self-supply resources; and (4) competitive resources that do not receive state subsidies.

All non-exempt resources will be subject to the MOPR, with Net Cost of New Entry for the resource class used as the default offer price floor for new resources and the Net Avoidable Cost Rate for the resource class used as the default offer price floor for existing resources.

Definition of state subsidies

In their filing seeking rehearing of the order, the Association, AMP and the Public Power Association of New Jersey said that the Commission’s adoption of a very broad definition of the state subsidies will encompass public power utilities, including individual municipal utilities and joint action agencies, engaged in self-supply pursuant to their traditional business model.

The three public power groups pointed out that public power utilities generally 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 the FERC order includes in its definition of state subsidies.

Thus, FERC’s definition of state subsidy effectively deems self-supply resources built or supported by public power utilities as “subsidized” based on the organizational structure of the utility, the Association, AMP and the Public Power Association of New Jersey said.

“While the Commission appropriately adopted an exemption to grandfather existing self-supply resources from the MOPR’s application, the December 2019 order will expose public power utilities and their customers to the risk of having to pay twice for any new capacity resources, without providing them any effective way to mitigate that risk.”

FERC should reconsider replacement rate

FERC should grant rehearing to reconsider the replacement rate adopted in the order, AMP, the Public Power Association of New Jersey and the Association said.

“The vast expansion of the MOPR directed by the Commission disregards principles of cooperative federalism and unlawfully intrudes on state and local authority in contravention of the jurisdictional lines drawn by Congress in the FPA [Federal Power Act], including the right of municipalities to utilize the public power business model in providing electric service to their customer-owners,” they said.

The order “imposes risks and burdens on the implementation of state and local electric generation policies, programs, and business models that would effectively countermand state and local action without offering state and local officials a reasonable alternative.”

Although the Commission failed in general to justify the broad expansion of the MOPR to resources receiving state subsidies, the Commission’s treatment of public power supply is characterized by a number of particular deficiencies, the three public power groups said in their request for rehearing.

If the Commission retains anything like the expanded MOPR framework adopted in the order, FERC should reconsider its decision to treat the public power business model as a form of “state subsidy” that should be subject to the expanded MOPR, they argued.

The groups went on to say that Commissioner Richard Glick was not being hyperbolic when he observed that the order constitutes a fundamental threat to the long-term viability of the public power model in PJM. (In his dissent of the order, Glick also said the decision amounts to a multi-billion dollar per year rate hike for PJM customers and marks a clear attack on state generation resource decision making).

“The decision could adversely impact the willingness and ability of public power utilities to effectively participate in PJM markets,” the public power groups said.

While the order appropriately adopted a MOPR exemption for existing public power self-supply resources, “the application of the MOPR to new self-supply resources is likely to severely hinder the future ability of public power utilities in PJM to meet the resource needs of their customers in a manner that is cost-effective and responsive to the values and policy preferences of the community.” 

AMP, the Public Power Association of New Jersey and the Association said that if FERC chooses not to revisit its conclusion that the public power business model is a form of state subsidy (or its decision to apply the MOPR to “state subsidized” resources in general), it should extend a MOPR exemption to new public power self-supply resources. Such a move will “strike a more reasonable balance between addressing any potential for price ‘suppression’ and the legitimate interests of public power utilities.”

Neither the existing fixed resource requirement (FRR) or the unit-specific review process offers a reasonable accommodation for the problems that application of the MOPR to public power self-supply resources would cause, they went on to say.

FERC’s December MOPR order declined to adopt a resource-specific FRR alternative, which the Commission proposed in its June 29, 2018 order in this proceeding as a way to accommodate state policy decisions and allow resources that receive out-of-market support to remain online. 

The Commission said, “with almost no elaboration, that it finds the expanded MOPR approach adopted in the December 2019 order superior to the FRR alternative,” the three public power groups noted.

“This order is detrimental to public power’s principle of local decision-making in providing reliable, affordable, and environmentally responsible power,” said American Public Power Association President and CEO Joy Ditto. “It’s essential that our members have the ability to supply their own power without being pulled into a broken market construct that threatens to make them double-pay for their own resources.”

“We urge the Commission to reconsider the extensive record before it and reverse its determination that the public power business model is a subsidy and a threat to competitive markets," stated Marc Gerken, PE, AMP President and CEO.

"The public power business model existed long before PJM’s RPM, has co-existed without negatively impacting pricing outcomes, and our approach to new resources is closer to a true market than RPM has ever been,” Gerken said. “The Commission should allow public power to supply power to their customer-owners without the risk of paying twice for capacity based on an administrative construct with prices set in Valley Forge, PA with no enduring features of a competitive market.”