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Despite concern over Ohio subsidies, FERC urged to reject '11th hour' change to PJM mitigation rule


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Despite concern over Ohio subsidies, FERC urged to reject '11th hour' change to PJM mitigation rule

Stakeholdersweighing in on a proposal to extend the applicability of the 's buyer-sidemarket-power mitigation measures to existing resources receiving subsidieslargely opposed the idea of implementing such a wide-ranging change before theregion's next base residual auction for capacity is held.

Evenmany of those that support revising PJM's minimum offer price rule to addressnoncompetitive subsidies of existing units urged FERC not to adopt whatExelon Corp. referredto as the complainants' "11th hour MOPR revisions."

Butthat does not mean they advocate inaction.

PJMsaid the complaintshould be dismissed to the extent it asks that the MOPR be revised before theBRA scheduled for May and that the grid operator be directed to submit aproposal, either crafted jointly with or vetted by stakeholders, for tacklingthe subsidy problem before the BRA to be held in 2017. Should FERC neverthelessdecide that the issue needs to be addressed before the next BRA — which willsecure capacity for the 2019/2020 delivery year — begins May 11, PJM submitteda "narrowly drawn" alternative plan it says "can be implementedin short order and without the complexity inherent" in the complainants'solution.

"Withouta remedy, subsidization of existing generation capacity resources couldnegatively impact the very goal of [the capacity market, known as thereliability pricing model, or RPM] to provide an appropriate price signal forthe development of new resources or retention of economic existing resources,"PJM warned.

Thegrid operator's independent market monitor agreed that the threat posed by the subsidies must beaddressed, although it said complainants' proposed solution "is tooambitious for the short-term problem." The IMM accordingly outlined analternative that would apply only to the affiliate power purchase agreements,or PPAs, of the FirstEnergy Corp.and American Electric Power Co.Inc. units that prompted the proposed MOPR changes in the firstplace.

"FirstEnergyand AEP have created this problem by obtaining subsidies for the continuedoperation of units that have been previously offered into PJM capacity markets,without regard to the harmful impacts on PJM's competitive wholesale marketdesign and market outcomes," the IMM, Monitoring Analytics, said. "Itis reasonable to impose a requirement that offers consistent with competitivebehavior are submitted for the subsidized units."

The subsidies and efforts toaddress them

FirstEnergy'sand AEP's affiliate PPAs at issue are part of overall plans designed to provideincome guarantees to the companies' Ohio utilities for their share of theoutput from certain "vital"power plants that face economic challenges. The cost of the eight-year subsidyplans will be recovered through a non-bypassable "rider charge"assessed to all end-use customers in FirstEnergy's and AEP's Ohio serviceterritories, regardless of whether they take retail service from those utilities.

Essentially,the plans require FirstEnergy and AEP to bid the subsidized units into PJM'smarkets and then recover any difference between the market price and the PPAprice from retail customers through the non-bypassable rider charge.

to the PPAs has beenfierce and vocal, but the Public Utilities Commission of Ohio neverthelessunanimously approvedthe subsidy plans March 31 despite concerns about the price distortion thatcould result from the plants' output being bid into PJM's markets. Opponentshave launched two distinct efforts at FERC seeking to minimize any such impacts— one a brace of proceedings(EL16-33, EL16-34) filed by a group led by the Electric Power SupplyAssociation asking FERC to review, and potentially invalidate, the PPAs; theother the instant proceedinginitiated at FERC on March 21 by a group of power suppliers.

Intheir complaint, the suppliers asked FERC to immediately extend PJM's MOPR,which currently applies only to certain new resources, to situations in whichexisting generators "obtain out-of-market subsidization from an affiliatedregulated utility arising via a regulatory action that was not subject to anopen, competitive, arms-length and non-discriminatory process." But ifFERC declines to act before the upcoming capacity auction, the suppliers askedthat PJM be directed to undertake a stakeholder process aimed at developing along-term solution to the problem and file it by Nov. 1 so it can be appliedfor the 2020/2021 BRA.

Some back complainants'proposal as filed …

TheNatural Gas Supply Association urgedFERC to grant the power suppliers' requested relief, insisting that thesubsidies give AEP and FirstEnergy an incentive to submit below-cost offers andensure a revenue stream from the capacity market because to benefit from theriders, the utilities must demonstrate that they took steps to minimize coststo ratepayers.

"Additionally,because Ohio retail ratepayers would bear all the costs of performance risks ofthe existing generation resources … the Ohio utilities will be indifferent toprices established in the RPM auctions," NGSA said.

NGSAalso said the subsidies will distort the resource mix in PJM and undermine thegoals of the grid operator's new capacity performance scheme "before theink has dried" by discriminating against natural gas-fired generation thatwill have difficulty competing against generators supported by out-of-marketsubsidies.

TheAmerican Petroleum Institute likewise assertedthat FERC should be concerned with PUCO's approval of subsidies, since the endresult will be that approximately 6 GW of generation offered into PJM's marketswill be indifferent to the market's actual clearing prices. While API said itis "not wed to any one particular solution" to the problem, itinsisted that the MOPR changes proposed in the complaint are "just andreasonable and worthy of commission approval."

agreed that the MOPRshould be extended to existing resources in time for the May capacity auction,although it recommended that changes be made to the complainants' proposedmethod for calculating the MOPR floor price because an existing resource "isunlikely to have the same cost profile as a new generation capacity resource."Including a "capacity performance" risk premium in the floor also isinappropriate, according to Direct Energy, as it is inconsistent with the newresource MOPR and will have "discriminatory and potentially market distortingeffects."

Additionally,Direct Energy asked that the MOPR changes approved for immediate implementationbe designed to sunset when FERC approves a more permanent solution — a requestechoed by several other commenters.

… while others oppose it

Incontrast, the American Public Power Association, , PJMIndustrial Customer Coalition, the Public Power Association of New Jersey,Dominion Resources Inc.subsidiary Dominion ResourcesServices Inc. and AmericanMunicipal Power Inc. jointly said the complaint should be denied since it wouldcompletely revamp a MOPR that "is the product of years of stakeholderprocess, technical conferences, litigation, and compromise."

"Theconcept of mitigating capacity offers of existing resources is a dramaticdeparture from the rationale for the current MOPR, which was based on a concernthat new entrants could exercise buyer-side market power," the APPA groupsaid. "Mitigating existing units could have far-reaching, detrimentalimplications for PJM capacity suppliers and customers."

Requestingsuch changes on an "emergency" basis also is "disingenuous andunnecessary" since the complainants have been on notice since 2014 thatthe subsidy plans were being proposed and they "could have requested afull vetting of these issues in the appropriate PJM stakeholder process, or atleast filed a complaint well in advance of the now-impending auction,"according to the APPA group.

TheNational Rural Electric Cooperative Association the complaint "a misplacedoverreaction" to the subsidy plans approved by PUCO. The complainantsfailed to show that the existing MOPR is unjust or unreasonable and theirrequest for relief is simply "based on hypothetical concerns" aboutthe potential impact on market prices if the AEP and FirstEnergy units areoffered at or near zero, NRECA said.

"[T]hereis of course neither proof that they will do so nor proof that their offersinto RPM would result in lost revenues for other resource owners of themagnitude posed in the complaint," NRECA said. "The complaint doesnot at all demonstrate intent by AEP and [FirstEnergy] to artificially depressclearing prices, and the extent of their ability to do so is uncertain."

ShouldFERC nevertheless grant the complaint, NRECA asked that it ensure the existingself-supply and competitive entry exemptions remain available for all qualifiedcapacity resources in order to protect legitimate investment by load-servingentities from mitigation.

TheOhio Energy Group, which represents large industrials in the state, the complainants areasking FERC to "collaterally attack the PUCO's carefully-reasoneddecisions by imposing an unduly discriminatory policy under which particularexisting coal and nuclear units in Ohio would be subject to more stringentbidding rules than similar units in other PJM states with cost-basedregulation."

Expandingthe MOPR as complainants request could dramatically reduce the capacity revenuereceived by FirstEnergy and AEP, which would punish the state of Ohio forprotecting its citizens' interests and thereby "send a message to otherstates that are considering membership in [an RTO] to proceed with extremecaution," OEG warned.

PUCOgenerally shared OEG's views, insistingthat the complaint is "wholly unreasonable" because it "wouldsingle out certain Ohio-based units for discriminatory treatment."

Unsurprisingly,FirstEnergy also opposedthe complaint, arguing that it is "based solely on speculation" thatrelies on a "series of false and outdated assumptions used to fabricate analleged market problem." For instance, FirstEnergy said the PUCO orderdoes not, in fact, provide a subsidy for the units in question, noting that thestate regulator determined that retail customers "will receive significantnet benefits from the retail stability rider."

AEPsimilarly said "complainants'contention that the effect of the … PPA will be to dump thousands of MW ofotherwise uneconomic generation into the upcoming capacity auction andmaterially suppress prices is fanciful." The units at issue have clearedin prior auctions and no plans are being made to retire them before the2019/2020 delivery year, AEP said. Moreover, the utility continued, the PUCOdecision "placed the responsibility for PJM's capacity performancepenalties and bonuses squarely on AEP rather than Ohio ratepayers" andmandated oversight through annual prudence reviews that will examine thecompetitiveness of AEP's capacity bid prices.

Many advocate a more measuredapproach

Butmany commenters, including PUCO, supported having PJM work with stakeholders tofind a way to address the perceived problem in a nondiscriminatory way.

Forinstance, while Exelon strongly objected to the "hastily prepared"MOPR proposal, it nevertheless said discriminatory aspects "might beremedied in the give and take of the stakeholder deliberations, yet no suchopportunity for stakeholder review has been afforded." Exelon also saidthe nearer-term problem could be alleviated if FERC grants the EPSA complaintsand reviews the affiliate PPAs to ensure that they are just and reasonable inlight of evidence PUCO disregarded showing that a competitive process would "yielda far more cost-effective hedge for Ohio consumers."

MonitoringAnalytics' short-term answer would be to require FirstEnergy and AEP to submittheir intended offers for the subsidized units immediately so the IMM canreview them and, if necessary, work with each utility to develop a competitiveoffer price. If no agreement on such a price is reached before the auctionbegins and the submitted offers impact the market clearing price, the IMM saidthe matter would be turned over to FERC and the final clearing of the auctionpossibly postponed until the issue is resolved.

Inthe longer-term, the IMM said the MOPR should be expanded to cover all unitsreceiving out of market subsidies, although he would retain the existingself-supply and competitive entry exemptions as well the unit-specificexceptions.

PJMagreed that the MOPR may contain a gap that could allow uncompetitive offersfrom subsidized existing generation to impact prices, but said "a moredeliberative approach" than the one advocated by complainants would beless disruptive to the market and would be adequate because "any corrosiveeffect of such subsidies would occur over time."

Asfor the upcoming BRA, PJM proposed two ways concerns could be addressed if FERCbelieves the matter cannot wait until a long-term solution is in place. Thefirst approach would be for FERC to confirm that PJM's existing authority toreject any sell offer it believes would result in an unjust and unreasonableauction outcome can be used to address offers from the subsidized units atissue; the second would be for FERC to order that PJM implement a price floorapplicable only to those units.

"Thatis, in effect, what the complaint proposes, but rather than address it througha round-about way that requires PJM to implement new MOPR provisions — whichrequires a screening process, as well as certifications and demonstrations bythe capacity market seller, and determinations to be made by the IMM and PJM asto each subject resource prior to finalization — PJM believes a morestraightforward remedy could be put in place," the grid operator said. "Afterall, if the commission makes a determination that something needs to be done 'now,'in so doing, it will have effectively found problems with the particularPPA-related resources."

TheEnvironmental Defense Fund similarly saidthe "uniquely abusive, unjust, and unreasonable action at issue in thiscase should not be used for generalized MOPR extension to all existinggenerating resources." While AEP and FirstEnergy appear to be trying toshift the risks and costs associated with their plants onto ratepayers, the EDFsaid, actions "founded upon genuine state and public interest rationalescould be compromised through sweeping change to the MOPR" and FERCtherefore should expand the rule "only to cases replicating the one athand." (EL16-49)