FERC's Democrats say PJM is back on course with latest capacity market overhaul

Three out of four Federal Energy Regulatory Commission members — Chairman Richard Glick and Commissioners Allison Clements and Mark Christie — issued Oct. 19 statements agreeing that the PJM Interconnection LLC must abandon a previous capacity market overhaul aimed at blunting the effect of state-level clean energy subsidies.

The commissioners issued the statements, required under a special section of the Federal Power Act, after a PJM replacement proposal (ER21-2582) to accommodate state-subsidized clean energy resources went into effect by operation of law Sept. 28 following a 2-2 commission deadlock.

Christie, however, said he would have moved to reject PJM's proposal and launch an investigation into a just and reasonable replacement if FERC, which is evenly divided along partisan lines, had been able to reach a vote.

Commissioner James Danly had not issued a statement as of press time and his office did not respond to multiple inquiries. FERC commissioners are required to issue statements in proceedings where rate filings under the Federal Power Act become automatically effective, but they do not have a specific deadline for doing so.

Long-running dispute

At issue is a long-running dispute, initiated in 2016 by a group of power suppliers, over alleged price-suppression in PJM's capacity market caused by state subsidies for ailing coal and nuclear plants in Ohio.

Under PJM's three-year forward capacity market construct, power generators bid into auctions that clear at the price of the last marginal unit needed to ensure available power supplies at all times.

Siding with merchant generators, FERC's Republican majority in December 2019 directed PJM to expand its minimum offer price rule, or MOPR, to set an administrative price floor on bids from all new and some existing generators receiving material state subsidies.

Glick, the agency's lone Democrat at the time, blasted the order as a thinly veiled attempt to prop up uneconomic thermal generators at the expense of consumers, who could be forced to procure unneeded capacity as state-subsidized resources such as offshore wind fail to clear in PJM's capacity auctions.

The order also prompted several states within PJM's 13-state footprint to consider leaving PJM's capacity market. And Dominion Energy Inc. left the market completely, citing a Virginia law that requires 100% clean energy by 2050.

With Glick as chairman, PJM filed a replacement proposal, dubbed the "focused MOPR," that would allow state-subsidized resources to avoid market mitigation so long as they do not participate in a state program aimed at influencing capacity market prices.

The proposal received overwhelming support from PJM stakeholders, but some critics argued that it will "crater" PJM's capacity market.

'Back on course'

In an 89-page joint statement, Glick and Clements rejected virtually all of the concerns raised in the proceeding, noting that PJM's MOPR was originally designed to protect against the exercise of buyer-side market power.

Buyer-side market power occurs when a net buyer of electricity — which can include capacity providers themselves — depresses capacity market prices by submitting uncompetitive bids in the same capacity auction.

PJM's focused MOPR, which would require capacity market participants to certify that they do not intend to exercise buyer-side market power, is an appropriate return to the rule's intended use, Glick and Clements said.

The Democrats also noted that PJM or its independent market monitor can conduct fact-specific reviews if certain generators are suspected of market manipulation, with further potential action coming from FERC's Office of Enforcement.

"PJM's proposal appropriately targets the actual exercise of buyer-side market power, that is the anti-competitive behavior of a capacity market seller with a load interest to suppress capacity prices through an uneconomically low capacity offer," Glick and Clements said.

They also found no basis to conclude that the focused MOPR will produce investment uncertainty in the region and further agreed with MOPR exemptions for merchant generators and self-supply entities, such as publicly owned utilities.

"For more than a decade, the commission's MOPR precedent has been all over the map, espousing the language of buyer-side market power and yet routinely requiring the mitigation of resources that were not buyers, much less ones with market power," Glick and Clements said. "The focused MOPR puts PJM back on course."

'Slay the MOPR dragon'

While calling PJM's expanded MOPR "simply unsustainable" given the varying policies across the grid operator's territory, Christie nevertheless described the focused MOPR as a "grossly inadequate proposal."

Christie repeatedly cited the PJM independent market monitor's assertion that having no MOPR at all would be preferable to instating the focused MOPR. Glick and Clements seemed to disregard the market monitor in their "headlong rush to slay the MOPR dragon as soon as possible," the commissioner said.

Christie acknowledged the challenge of developing a replacement MOPR that creates a competitive capacity market to benefit consumers while accommodating various states' policies but also laid out his own recommendations. Among them, the commissioner would have proposed a replacement that allowed states to designate certain resources as "public policy resources" funded outside the capacity market without requiring a full capacity market exit.

"PJM's present proposal simply fails to meet the challenge, and, as the pleadings filed by intervenors to this docket demonstrate, the proposal fails to meet the [Federal Power Act] section 205 standard of being just and reasonable and not unduly discriminatory or preferential," Christie said. "I cannot help but note that the PJM MOPR proposal, now in effect by operation of law, forfeits any remaining credibility to the claim that the PJM capacity market is based on actual competition or is run for the benefit of consumers."

The Republican commissioner said he would have rejected the proposal and initiated a section 206 Federal Power Act proceeding with a "procedural schedule designed to meet the goal of putting in place an acceptable replacement for the incumbent MOPR regime" by a PJM capacity auction scheduled for June 2022.

Some PJM states, such as Ohio and Pennsylvania, may seek to "chart their own course" to reach their ideal resource mix, Christie said, citing comments he made during a March technical conference.

"What is still archaically called the 'PJM capacity market' no longer bears any resemblance to a credible market," Christie said.

Ellie Potter is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.