The PJM Interconnection vowed to quickly get to work refining its power capacity market construct after the Federal Energy Regulatory Commission rejected two proposals from the grid operator aimed at mitigating the effects of state-subsidized energy resources on the region's capacity market.
But some stakeholders and the two Democratic FERC commissioners opposing the order worry that PJM was given too little time to follow through on the commission's instructions, which may require sweeping changes to the grid operator's market rules.
At issue is how to keep PJM's capacity market competitive while respecting state policies such as renewable portfolio standards and zero-emissions credit programs that subsidize certain technologies. Within PJM's 13-state footprint, at least four states — Illinois, Pennsylvania, New Jersey and Ohio — have adopted or considered zero-emissions credit policies to subsidize existing nuclear plants.
FERC's five members broke along party lines June 29 when they voted 3-2 to reject two proposals that PJM staff filed to redesign the grid operator's capacity market. In their place, the agency offered its own solution and established a separate proceeding (FERC docket EL18-178) to flesh out the details of that plan.
The agency's proposal would require PJM to modify its minimum offer price rule, or MOPR, so it applies to new and existing resources that receive out-of-market payments, regardless of resource type, with few or no exemptions.
In addition, the commission said PJM should give resources receiving out-of-market support the ability to remain on the system despite their inability to compete in the capacity market based on their costs, meaning those resources would be allowed to exit the capacity market but continue to participate in the energy and ancillary services market. Or if they prefer, they can participate in the capacity market but would be subject to the expanded MOPR.
FERC now will a hold a paper hearing on the issue, and it gave parties 60 days to submit their initial rounds of testimony, evidence and/or argument, with replies due 30 days thereafter. FERC said it will make every effort to issue an order establishing the just and reasonable replacement rate no later than Jan. 4, 2019.
The timeline means PJM's capacity rules faces another element of uncertainty. Republican FERC Commissioner Robert Powelson, who supported the FERC order, announced June 28 that he will resign from the agency in mid-August. If his replacement is not seated before early January 2019 and the agency's two Democrats continue to oppose the majority's solution, the agency could be deadlocked on a final order.
In a lengthy dissent, Commissioner Richard Glick expressed concern that the majority is interfering with the exclusive jurisdiction over electric generation facilities that federal lawmakers expressly granted the states in passing the Federal Power Act. Although he acknowledged that the FPA's division of jurisdiction over the electricity sector between FERC and state regulators inevitably results in one side's exercise of its authority impacting that of the other, Glick said, "[T]he existence of such cross-jurisdictional effects is not necessarily a 'problem' for the purposes of the FPA."
"Rather, these cross-jurisdictional effects are the product of the 'congressionally designed interplay between state and federal regulation,' at least so long as neither the states nor the commission exercise their authority in a manner that 'targets' or 'aims at' the other sovereign's exclusive jurisdiction," Glick said.
But here, the majority directly targets states' efforts to shape the generation mix in pursuit of their public policy goals, Glick said. "Make no mistake, although the commission frames [its] order in terms of the effect of certain state-sponsored resources on wholesale rates, the order's rationale is clear that the commission's real aim is to support certain resources that do not benefit from state efforts to address environmental externalities."
Making matters worse is that FERC is selectively interfering with policies that benefit some types of generation while ignoring those that benefit others, Glick said. He noted that the resource mix already is being shaped by subsidies supporting domestic fossil fuel exploration, drilling and production activities, and a law imposing indemnity limits for nuclear power generators enables those resources "to secure financing and insurance at rates far below what would reflect their true cost."
"If the commission really wants to protect what it calls the 'integrity' of the capacity market, it would need to mitigate each and every federal, state, and local subsidy that allows a resource to lower its capacity market offer as well as the offers of vertically integrated utilities with guaranteed cost recovery," Glick said. "I suspect that we would soon find that there are few, if any, resources that would qualify to participate in PJM's capacity market without being subject to an offer floor."
He continued, "Although that may not be an appealing option, that is no reason to isolate a few disfavored state policies for mitigation and claim, without any support, that they are the only subsidies that threaten the integrity of the market."
Similarly calling the majority's decision "a troubling act of regulatory hubris," Commissioner Cheryl LaFleur in a separate dissent said the order could "ultimately hasten, rather than halt, the re-regulation of the PJM market."
"This is too important a decision to be made this quickly, and with this little stakeholder engagement," she said.
In finding that PJM's existing tariff is unjust and unreasonable, the majority triggered ex parte restrictions and thereby essentially "hamstrung [the agency's] ability to openly and honestly engage with the states about whether this proposal will meet their needs, and how they might operate under this construct," LaFleur said. She also said the order creates "a timing crisis" because it "presents resource owners and states with choices that could be difficult to make in advance of the May 2019 [capacity auction], particularly given that some of the state programs are statutory in nature and could require legislative action to reform."
Acknowledging that she may end up supporting a construct that builds on the rough concept outlined in the order, LaFleur nevertheless stressed that she does not "share the majority's confidence that this proposal is the obvious solution to the challenge."
"I am concerned that the desire for action has led the commission to pursue a flawed and rushed process that could do more harm than good," she said. "I would instead follow the 'regulatory Hippocratic oath' to first, do no harm, and give PJM and its stakeholders time and direction to address these difficult issues in a sustainable manner."
PJM vows quick action
In a July 2 statement, PJM said it is "pleased" that FERC is taking action to address the "price-suppressive impacts" of subsidized resources. "The order appears to be a positive step to change competitive electric market design while recognizing the important role states play in influencing the resource mix through retail energy policies. We will begin work immediately to develop the kind of bifurcated capacity construct envisioned by the commission."
Monitoring Analytics President Joseph Bowring could not be reached immediately for comment.
The Electric Power Supply Association, which represent the competitive generator sector, said it is still reviewing the order. But John Shelk, the group's president and CEO, said July 2 that he "is encouraged by the FERC majority's determination that subsidized resources pose a threat to PJM's capacity market, as EPSA has argued for years."
"EPSA appreciates that FERC rejected PJM's preferred capacity repricing proposal, expressed support for a minimum office price rule with few or no exemptions, and opted for a new Section 206 proceeding, all as EPSA had recommended," Shelk said.
Conversely, Tyson Slocum, director of consumer advocacy group Public Citizen, said FERC's order declares a war on state renewable energy mandates. "Devoid of adequate evidence, FERC's [June 29] order imposes a radical and truncated timetable simply to accommodate the greed of generation owners that are on the losing side of today's disruptive changes."
Former FERC Commissioner Tony Clark said it was too early to determine possible outcomes from the order. Removing subsidized resources from PJM's capacity market could shift more costs to consumers in states requiring the subsidies and "may get expensive very fast," Clark said. But FERC's proposal to create an alternative fixed resource requirement — which would not require a load-serving entity to remove its entire footprint from the PJM capacity market, just the specific subsidized resource and accompanying load — could provide "some type of path forward to allow these resources to compete out of the market."