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PJM Tosses Up A Jump Ball On Market Reforms, And A Sharply Divided FERC Cries Foul

July 10, 2018

When PJM submitted a pair of competing capacity market reform proposals to the Federal Energy Regulatory Commission, it was termed (in basketball parlance) a “jump ball” filing. That is, the hope was that FERC would tip the policy in the direction of one of the two plans.

But in a divisive 3-2 vote on Friday night, June 29 – Republicans for, Democrats against – the commission didn’t do that. Instead, it just swatted both plans out of bounds, cried foul, and ordered PJM to rewrite its current market rules – which FERC called “unjust and unreasonably and unduly discriminatory” because they don’t protect the market from state policies that subsidize renewables and nuclear.

And now, according to some experts, things could get really interesting – and not in a good way.

Basically, FERC opined that the grid operator’s minimum offer price rule (MOPR), which presently covers only new natural-gas fired facilities, should be broadened to all capacity resources – new or existing – that get out-of-market payments “with few or no exceptions.” The MOPR was originally intended to protect the PJM capacity market by setting a “floor” price for capacity market bids similar to the bidding caps that set a “ceiling” – both necessary to ensure rational bidding behavior and market integrity.   With several states having approved or still considering subsidies for nuclear resources, concerns have grown that prices bid into PJM’s capacity market would be lower-than otherwise would have been without State subsidies.  Since PJM’s capacity market clearing price is the single price paid to all PJM generators, a low clearing price based on the impact of subsidized generator bidding could result in “below-market” and insufficient revenue to sustain PJM resources that did not receive state-subsidies. 

It also called on PJM to consider a mechanism similar to the grid operator’s fixed resource requirement that would allow resources receiving out-of-market support and commensurate end-use customer load to withdraw from the capacity market though remain in the ancillary services and energy markets.

The commission majority, Law360 summarized, “recommended that state-subsidized electricity resources either stay out of PJM’s capacity markets or be subject to” the expanded MOPR. Those who watch FERC closely, it added, said the order was designed to “blunt the effects of state clean energy policies” and will “further inflame state-federal tensions over electricity policy and threaten the future of the very markets the commission aims to protect.”

University of Richmond energy law Professor Joel Eisen put it this way: “FERC's aim is clear: force subsidized resources to compete without the subsidies, or leave the markets altogether.”

Rob Gramich, an energy consultant and onetime economic adviser to former FERC chair Pat Wood III, told Utility Dive, “This is unprecedented federal intervention in state policy. We’ve never seen this kind of federal intrusions in the energy industries.”

FERC member Richard Glick agreed, saying the June 29 order was “interfering with the states’ exclusive jurisdiction.” Furthermore, he wrote in a bordering-on-blistering dissent:

The state programs of which the Commission disapproves are precisely the sort of actions that Congress reserved to the states when it enacted the (Federal Power Act). 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.

As contemplated, the Commission’s proposal would effectively force state-sponsored resources out of the capacity market, depriving them of a payment for capacity that they will actually provide and leaving it to the states to pick up that tab.

Glick’s colleague Cheryl LaFleur was equally critical.

“The majority is proceeding to overhaul the PJM capacity market based on a thinly sketched concept, a troubling act of regulatory hubris that could ultimately hasten, rather than halt, the re-regulation of the PJM market,” she wrote.

GreenTech Media reported that the “real push” behind FERC’s ruling came from complaints by Calpine and other generators about zero emission credits being given to struggling nuclear plants in states like Illinois and New Jersey. Those facilities, it explained, “come in gigawatt size ranges, making their ability to bid capacity prices backed by state subsidies a more significant threat to fossil fuel generators.”

“FERC took up Calpine’s argument that such payments allow these plants to bid capacity at lower than operating costs,” the publication continued, “‘undercutting opportunities for more competitive resources.’

“But its (decision) extended the same critique to state renewable portfolio standard-supported wind and solar power, stating that the share of renewables receiving out-of-market support ‘has increased significantly and raises price suppression concerns similar to other resources receiving out-of-market support.’”

FERC’s ruling further states that the price distortions from these resources “compromise the capacity market’s integrity” and “create significant uncertainty, which may further compromise the market.” 

The commission’s order stemmed from the two reform plans PJM submitted in April – the “jump ball” strategy – asking the agency to determine how the wholesale capacity market should handle state subsidies of generators. 

One, put forth by the grid operator, proposed a two-stage capacity auction that allowed a state-subsidized resource to clear the first stage and get a capacity commitment from PJM based on its submission. In the second stage, the resource would be repriced to remove the effects of the subsidy.

The second proposal, developed by PJM’s independent market monitor, would have extended the MOPR by requiring a subsidized generating resource to remove the effect of the subsidy from its offer into the capacity market.

The grid operator said that the former would result in a “competitive price for all resources,” but that the latter could deprive failing units of a capacity commitment.

FERC conceded that state-mandated subsidies for certain generation resources have “untenably threatened” the PJM market. “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,” the majority said in the order.

Still, they were unimpressed with the grid operator’s proposed corrections. 

“We…reject both of PJM’s proposals because we find that they have not been shown to be just and reasonable, and not unduly discriminatory or preferential,” the commission said. Then, crucially, it added, “However, we are unable to determine…the just and reasonable rate to replace the rate in PJM’s tariff.”

So was it back to square one for PJM? Well, not exactly.

In its ruling, the agency detailed a plan to change the capacity market in order to completely remove some degree of subsidized resources. As Utility Dive pointed out:

That plan is a novel recasting of the Fixed Resource Requirement (FRR), a rule in PJM that allows utilities to opt out of the capacity market if they can serve power demand with their own generation resources. Under FERC's proposed Alternative FRR, specific resources like a wind generator or a nuclear plant could also opt out, removing them and their subsidies from the market.

Robbie Davis, vice president of Energy Innovation, said that potential alone “could fundamentally alter capacity markets in PJM.” Gramich, the energy consultant, was more dire in his comments, warning that FERC’s decision “could be the beginning of the end for capacity markets.”

Energy lawyer and veteran “FERC watcher” Mark Kalpin added, “This has the potential to hasten state re-regulation efforts, whether they’re direct or more subtle. And it is shrinking, or doing nothing to preserve, fully integrated competitive markets.”

The commission also imposed 90-day timetable to repair the capacity market, a decision that came under fire as well. LaFleur warned that the agency was pursuing a “flawed and rushed process that could do more harm than good.”

She questioned whether 90 days was sufficient to adopt "the most sweeping changes to the PJM capacity construct since the market's inception more than a decade ago.” If the FERC-directed plan is ultimately adopted, she added, it would “fundamentally rebalance the resource adequacy responsibilities of the states, the commission, and PJM. 

The issue now goes to what is known as a “paper hearing” to consider alternative solutions. Interested parties will have 60 days to file comments, and 30 days to respond to the comments of others. In that the process takes place only on paper, there will be no opportunities for stakeholders to negotiate or discuss the matter.

Even when that period closes, however, there’s no guarantee the issue will be settled.

At the end of June, FERC’s Robert Powelson announced his intention to leave the commission in mid-August. That leaves the very real potential that the agency could deadlock 2-2 unless the revised PJM plan addresses the concerns of Glick and LaFleur.

Which means, to continue the basketball metaphor, this debate could go into overtime. But for how long – and who wins when the final buzzer goes off – is still anyone’s guess.