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Parties raise wide range of issues in asking FERC to revisit PJM order

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Parties raise wide range of issues in asking FERC to revisit PJM order

The PJM Interconnection, public power groups, nuclear power interests and other stakeholders raised a long list of concerns in asking the Federal Energy Regulatory Commission to reconsider its recent order that would make competing in the PJM wholesale capacity market more difficult for state-subsidized renewables and nuclear power.

Many of the requests for rehearing, which were due Jan. 21, argued the order compromises the integrity of the wholesale capacity market, a mechanism that PJM uses to pay resources to be available when called upon to supply power three years after the auction is run.

FERC's order "disrupts the balance that has successfully worked to accommodate the interests of states and integrated utilities, with appropriate guardrails, while maintaining the integrity of the market and ensuring a wholesale rate in the zone of reasonableness," PJM said in its rehearing request.

The commission in late December 2019 issued an order aimed at countering the price-suppressive effects of state-subsidized clean energy resources in the PJM market. The order gave PJM 90 days to submit a filing expanding its minimum offer price rule, or MOPR, which set an administratively determined price floor for certain generators bidding into the grid operator's capacity market that spans 13 states and the District of Columbia.

Under the order, the MOPR would apply to all new and existing resources, with certain exemptions. The order also describes a "competitive" exemption for unsubsidized new and existing resources and allows new and existing suppliers that otherwise do not qualify for an exemption to justify a competitive offer below the applicable default offer price floor through a unit-specific exemption.

But the increased difficulty for subsidized plants to compete in the region's capacity market could prompt some states to help utilities withdraw those resources from PJM so those states can procure that capacity themselves from their preferred generation resources.

PJM sees plenty of flaws

Critical of the order, PJM said the "commission's pursuit of greater market efficiency as communicated in the order may have paradoxically unintended consequences over time and may result in less economic efficiency."

States and utilities can still pursue their public policy objectives or maintain their traditional methods of resource procurement under the FERC order, PJM noted. However, doing so would mean those resources would not count in the capacity auctions toward satisfying reliability requirements and that PJM would be required to procure alternative capacity, it explained.

"Such a result would clearly be inefficient and be detrimental to consumers and, further, is not necessary to ensure an efficient price signal nor a just and reasonable rate," PJM said.

Moreover, if large swaths of PJM's load were to use the full self-supply option, "some of the efficiencies of a regional capacity market may be lost," the grid operator said. "Therefore, PJM strongly urges the commission to recognize that there needs to be a balancing of state policy objectives and federal interests in an efficient market design in order to provide the greatest overall economic efficiency to consumers."

PJM also argued FERC erred in rejecting the market operator's proposal to exempt new energy efficiency resources from the MOPR. Energy efficiency resources are unique in that they focus on reducing electricity consumption on the demand-side of the market and "therefore they do not raise concerns regarding efficient price formation."

Along those lines, PJM said the commission also should have exempted facilities that have a primary purpose other than to generate power such as those that focus on reusing waste products. "Sweeping these resources into MOPR is an unnecessary complication," PJM said.

The market operator also argued FERC lacked sufficient support in the record for rejecting PJM's proposal to exempt smaller resources, such as those with up to 20 MW of capacity or where the value of the state subsidy is less than 1% of the resource's annual revenues. "In particular, the presumption that all resource offers must be reviewed and mitigated regardless of size or impact, or else auction prices will become unreasonable, is imposed with no record support and without adequate consideration of the administrative burdens to either PJM" or market participants, PJM said.

The commission should also create a safe harbor option regarding the sales of renewable energy credits, or RECs, from state-subsidized resources rather than holding that REC purchases should be treated as subsidies in the capacity market, PJM said. Under the safe harbor, resources could certify that they will only sell RECs to purchasers who are not required by a state program to buy those credits and that the purchaser did not receive any state financial inducement or credit for buying those credits, the market operator said.

PJM also asked FERC to clarify that a resource that already has an interconnection service agreement of any type, not just those with PJM, should be exempt from the changes to MOPR and said the commission should clarify that the definition of state subsidy does not include the Regional Greenhouse Gas Initiative. The December order also did not provide guidance on how to treat resources that receive a mix of federal and state subsidies, PJM said. It asked the commission to confirm that PJM should apply MOPR to any resource that receives both a state and federal subsidy.

States, public power assail lack of cooperative federalism

Several state agencies, public power advocates and clean energy groups told FERC that the order encroached too far into the states' exclusive jurisdiction over the generation mix within their borders and erred by discriminating between new and existing resources.

The Public Utilities Commission of Ohio said the December 2019 order imposed a "bidding handicap on some state-supported capacity resources" that, through economic regulation, would effectively "nullify … the results lawfully pursued by those states."

The Ohio PUC added that it feared that "the forces set in motion by the order [would] promote long-lived uncertainty" and "strongly motivate states and market participants to take flight from the consequences attributed to the order."

Public utilities and electric cooperatives made similar arguments, with new self-supply resources now subject to the MOPR. The expanded MOPR "unlawfully intrudes on state and local authority in contravention of the [Federal Power Act] and principles of cooperative federalism," the American Public Power Association, American Municipal Power, Inc. and the Public Power Association of New Jersey said in a joint request for rehearing.

The American Public Power Association also said that FERC "erred in finding that characteristics inherent to the public power business model constitute 'state subsidies' that should subject new public power self-supply resources to the application of an expanded MOPR." As such, FERC's order was unjust, unreasonable and unduly discriminatory, as well as arbitrary and capricious, because public power self-supply "was not part of the 'problem' that the replacement rate purports to remedy," the association claimed.

The National Rural Electric Cooperative Association asked FERC to clarify that the MOPR does not apply to electric cooperatives' existing or new voluntary agreements that do not receive or require state financial benefits for new entry or continued operation of generating capacity in PJM. The association also asked FERC to direct PJM to adopt a categorical self-supply exemption from the MOPR for new and existing capacity resources of public power entities.

Some target removal of resource-specific FRR

Rehearing requests from state agencies expressed dismay with FERC's decision to drop a resource-specific carve out that the commission in a June 2018 order said would have allowed resources to remain on the system but not compete in the capacity market.

"By inexplicably withdrawing the resource-specific [fixed resource requirement, or FRR] alternative and rejecting consideration of any other 'accommodative' state preferred resource approach, it appears that the commission no longer believes any approach other than the MOPR could be just and reasonable," the Maryland Public Service Commission said.

As a result, the order "all but states that entities that are not satisfied with the replacement rate should exit the capacity market completely and use only the existing FRR alternative — a limited and flawed option," according to the Maryland PSC.

The Nuclear Energy Institute said FERC's exclusion of a resource-specific FRR was arbitrary and capricious and went against the commission's preliminary finding that such a mechanism was just and reasonable. The institute also said FERC "completely ignored" concerns that ratepayers will be forced to pay for capacity twice under the new order, both through the PJM capacity market and through state programs providing out-of-market support to specific resources.

If FERC does not reverse course, the New Jersey Board of Public Utilities predicted, customers in the PJM region will see higher prices and worse environmental outcomes, "state clean energy efforts will be frustrated, and the PJM market will be at risk for dissolution."

State agencies also sought clarification on the definition of a state subsidy, the scope of the exemption granted to certain existing renewable resources, the application of the MOPR to state demand response and energy efficiency programs, and the treatment of voluntary renewable purchases and bilateral self-supply contracts under the new rules, among other things.

Exelon Corp., which has fought to obtain state subsidies for its nuclear plants in PJM to counter rising competition from gas-fired generation, said FERC acted arbitrarily and capriciously in concluding the rule changes were needed "without addressing evidence that the market continues to attract plentiful supply and significant new entry."

Other complaints from Exelon included that FERC failed to respond to evidence that efficient markets should reflect environmental externalities associated with air pollution and imposed the MOPR on existing nuclear resources receiving state subsidies while exempting existing self-supply resources, thereby "treating like resources as unlike."

Independent power producers seek rehearing on federal subsidy issue

The Electric Power Supply Association and the PJM Power Providers Group praised the order but sought rehearing on the single issue of FERC's holding that it lacks the authority to address the effects of any federal subsidy on PJM's capacity auctions.

Stressing that they are not arguing that the commission must expand the MOPR to address all federal subsidies, the two groups argued that given that FERC agrees that "federal subsidies, like state subsidies, will distort competitive markets," the agency has a statutory responsibility to protect those markets.

"Had Congress intended to transfer responsibility for the justness and reasonableness of wholesale rates to another federal agency … it would have done so expressly," the groups insisted.

Moreover, the groups argued that FERC "got it right when it found that the MOPR 'does not prevent states from making decisions about preferred generation resources' and got it wrong when it reached a contrary conclusion with respect to federal subsidy decisions." Thus, they maintained that the agency failed to engage in reasoned decisionmaking.

The groups also sought clarification on a number of issues, including that the definition of "state subsidy" does not include benefits from programs like the Regional Greenhouse Gas Initiative; PJM can propose a process for determining which voluntary, bilateral transactions for renewable energy credits should not be subject to the MOPR; and that the Dec. 19 order did not conclude that the existing FRR rules are just, reasonable and not unduly discriminatory.

Finally, a group of clean energy groups — the American Wind Energy Association, the Solar Energy Industries Association, Advanced Energy Economy, the American Council on Renewable Energy and the Solar Council — asserted that FERC has ordered a replacement rate that “arbitrarily and capriciously” expanded the scope of PJM’s MOPR in a “drastic and unwarranted manner.”

In particular, they argued FERC’s definition of state subsidy is so broad it has “eviscerated” the line between federal and state authority in contravention of the Federal Power Act. The order nullifies lawful state policies, is designed to supersede those policies and mitigates non-jurisdictional state subsidies that do not directly impact capacity prices, they maintained. (FERC dockets EL16-49, EL18-178)