A federal appeals court on Aug. 15 affirmed the Federal Energy Regulatory Commission's approval of changes designed to protect the PJM Interconnection LLC's capacity market against the exercise of market power.
The US Court of Appeals for the District of Columbia Circuit also broached an issue with broader potential ramifications when it backed FERC's position that offers submitted in capacity auctions serve as "inputs" for marketwide clearing prices. As such, they do not constitute filed rates under Section 205 of the Federal Power Act, the court determined.
Long-running market power concerns
At issue before the court was the offer caps PJM uses to review bids submitted by capacity sellers in the mid-Atlantic grid operator's forward capacity auctions. Held three years in advance of when supplies are needed, PJM's capacity auctions are aimed at keeping the lights on at all times for the 65 million power customers in its region.
In 2015, FERC approved rule changes for PJM that established default offer caps, as well as penalties and bonuses for generators that either fail to perform as expected or overperform. Capacity resources in PJM become subject to penalties and bonus payments during periods known as performance assessment intervals (PAIs). PJM declares PAIs when capacity supplies are scarce.
In setting the default offer caps, PJM sought to account for suppliers' marginal costs, opportunity costs, and risks associated with receiving a capacity performance commitment by assuming an average of 360 PAIs each year. Together, those factors make up a resource's net avoidable cost rate.
At the time, PJM assumed that resources with high avoidable cost rates, or the marginal units that set auction clearing prices, would submit bids above the default offer cap. Those resources would then be subject to unit-specific reviews by the independent market monitor.
In 2019, however, the market monitor and a coalition of state consumer advocates complained to FERC that PJM's assumed number of PAIs produced default offer caps that were too high, leading to unjust and unreasonable rates. PJM declared zero PAIs in 2015, 2016 and 2017, and in 2018 the grid operator declared only 24 PAIs, according to the market monitor.
The market monitor estimated that PJM's existing method of calculating default offer caps had inflated capacity prices by as much as 15.3%. "The additional protection that the commission expected from reviewing the offers most likely to set clearing prices was not provided," the market monitor said in its complaint.
To address the issue, the market monitor proposed a solution: Eliminate the default offer caps entirely and make all capacity sellers subject to unit-specific review.
FERC ordered further briefing, where competitive power producers such as Vistra Corp. argued that simply recalibrating the default offer cap with realistic PAI assumptions would be a better option.
In 2021, FERC sided with the market monitor by accepting its proposal. The commission agreed that eliminating default offer caps and strengthening the unit-specific review process was the best solution for countering the exercise of market power.
DC Circuit's ruling
Vistra Corp. and Garrison Energy Center LLC, the operator of a 323-MW gas-fired power plant in Delaware, subsequently challenged FERC's order at the DC Circuit.
The petitioners argued that the order was arbitrary and capricious because FERC failed to explain its reasoning behind accepting the elimination of the offer caps. They also argued that FERC failed to account for market risks taken by capacity suppliers and claimed that FERC's action infringed on their ability to set their own rates under Section 205 of the Federal Power Act.
The DC Circuit was unpersuaded by all three arguments.
A three-judge panel found that "the logic behind the commission's action is underscored by the fact that the recalibrated default offer cap proposed by petitioners reshuffled some numbers but maintained the then-existing default offer cap."
"These specific proposals did not lower the default offer cap and would have still led to an inappropriately high number of offers avoiding review," Judge Michelle Childs wrote for the court.
Turning to the petitioners' second argument, the panel cited previous FERC orders expressing apprehension that allowing suppliers to "price every possible adverse outcome" would unreasonably shift risk from suppliers to consumers, "effectively holding sellers harmless at the expense of ratepayers."
The panel also noted that costs associated with capacity supply obligations, including risk management strategies, may be included in offers as long as a supplier "reasonably supports and quantifies such costs."
Finally, the court concluded that the petitioner's interpretation of Section 205 of the Federal Power Act was incorrect.
"Petitioners ... misperceive the nature of their submissions into the capacity market," Childs said.
"Offers into capacity market auctions are confidential and submitted to PJM, not the commission. Moreover, the commission does not need to review offers submitted into the auction for justness and reasonableness," the judge noted. "Thus, unlike petitioners' view, the commission's reading that offers are not rates within the meaning of Section 205 is entirely consistent with the statute."
The Electric Power Supply Association, a trade group representing competitive power producers in PJM, expressed dismay with the court's Aug. 15 ruling.
"The changes approved by the court to PJM capacity offers undermine the ability of private investors and developers to assume risk and earn an adequate return — jeopardizing PJM's ability to procure sufficient generation to meet anticipated demand in today's challenging landscape," CEO Todd Snitchler said in a statement.
Snitchler said the decision "adds urgency" to an ongoing PJM stakeholder effort to overhaul its capacity market rules as PJM struggles to add new capacity resources at the same rate it is retiring older thermal generators.
Joining Childs in the decision were Judges Patricia Millett and Judith Rogers. Vistra Corp. v. FERC (No. 21-1214)
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