FERC approves PJM plan to mitigate up to $2B in winter storm penalties

The Federal Energy Regulatory Commission on April 3 approved a PJM Interconnection LLC plan to mitigate up to $2 billion in penalties for generators that failed to perform as expected during a December 2022 severe cold weather event.

In a unanimous order, the commission found that PJM's proposal to ease the impact of nonperformance charges incurred during the winter storm strikes a reasonable balance as the grid operator seeks to reduce the risk of defaults.

PJM unexpectedly lost approximately 23% of its generation capacity over the Christmas 2022 holiday weekend due to widespread cold across its 13-state footprint, with gas-fired generators accounting for most of the unplanned outages.

In a February filing (ER23-1038), PJM warned FERC that its existing process for handling nonperformance charges creates "a high likelihood of member defaults."

At least one owner of gas-fired generation has already filed for Chapter 11 bankruptcy protection after PJM assessed its units $39 million in nonperformance penalties. Several other owners are asking FERC for relief, citing difficulty procuring gas supplies due to high demand and scheduling constraints.

PJM's proposal

Under PJM's capacity market construct, nonperformance charges flow into a bonus pool that is distributed to overperforming generators.

In its FERC filing, PJM said its rules require nonperformance charges to be invoiced and divided by the number of months remaining in a delivery year, which runs from June through May of the following year.

The rules were conceived under the assumption that most nonperformance charges would coincide with peak demand in the summer months, giving generators roughly nine months to pay the charges.

But generators affected by the December 2022 winter storm, also referred to as Winter Storm Elliott, faced the prospect of a compressed repayment timeline. The existing tariff would require PJM to invoice the nonperformance charges in three monthly installments starting in April.

To address the problem, PJM proposed a transitional solution in which nonperformance penalties tied to the December 2022 storm would be invoiced across nine monthly bills. The charges would be subject to interest for the months beyond May 2023 to compensate generators that performed beyond their capacity supply obligations and expected to receive full bonus payouts by June.

PJM also proposed to revise its tariff so that it can extend repayment periods by up to six months if five or fewer months remain in a delivery year. Those extended repayment periods would not be subject to interest charges.

FERC's order

FERC accepted PJM's plan in its April 3 order, agreeing that it will reduce the immediate risk of generator defaults.

"Although overperformers during Winter Storm Elliott may have their bonus payments delayed, we find reasonable PJM's assessment that the transitional rule will maximize the total bonus pool by reducing the probability of defaults," FERC said. "We are also persuaded by PJM's argument that the transitional rule addresses any settled expectations of overperformers by paying them interest for the time value of the delayed bonuses."

FERC was unpersuaded by an Invenergy LLC protest that argued PJM's proposal is unreasonable because it would not require interest charges in future repayment periods.

"As PJM explains, it proposes to charge interest under the transitional rule to address the settled expectations of overperformers who may have made decisions based on the tariff requirements in place at the time of Winter Storm Elliott," FERC reasoned.

FERC also rejected Invenergy's request to allow penalized generators to pay off nonperformance charges early to avoid interest.

"PJM would be required to recalculate the total bonus performance payment for all bonus recipients each time a member decided to pay off the nonperformance charges early, disrupting all bonus recipients' expectations," the commission explained.

FERC noted that PJM's proposed tariff revisions will give it limited discretion to extend repayment periods when five or fewer months remain in a delivery year. "PJMs discretion is not unfettered," the commission said.

The commission conditioned its approval on PJM making a subsequent filing within 30 days clarifying that if it does extend repayment periods, the extension would apply to all generators rather than on a unit-by-unit basis.

"We find that, without such clarifying language, the tariff does not reflect PJM's position that the extensions will apply on a nondiscriminatory basis to all resources that are subject to nonperformance charges," FERC said.

In a separate April 3 notice, FERC announced a June 15 forum to explore the future of PJM's capacity market construct.

"This important and timely forum is focused on increasing reliability and affordability concerns regarding PJM's capacity market," FERC Chairman Willie Phillips said in a statement. "I want to hear directly from PJM leadership, industry stakeholders and state regulators about these issues and potential solutions."

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