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FERC order directing PJM to expand MOPR could have huge ramifications

After its members discussed a draft of the decision earlier in the day, the Federal Energy Regulatory Commission released a lengthy order late Dec. 19 directing the PJM Interconnection to revise its capacity market rules to address the price-suppressive effects of state-subsidized clean energy resources.

A deep dive into that order reveals its sweeping scope, which left the only Democrat of FERC's three sitting members warning that it could potentially subject much, if not most, of the PJM capacity market to a minimum offer price rule, or MOPR, and administratively set prices. Commissioner Richard Glick also said it would entrench PJM's existing resource mix.

"From the beginning, this proceeding has been about two things: Dramatically increasing the price of capacity in PJM and slowing the region's transition to a clean energy future. Today's order will do just that. I strongly dissent from today's order as I believe it is illegal, illogical, and truly bad public policy," Glick asserted.

Background

The genesis of the order was a 2016 complaint submitted by a group of competitive power suppliers, including Calpine Corp. The generators said PJM's capacity market MOPR — designed to prevent resources from gaming the system by bidding under their cost of production — needs to apply not just to new natural gas resources but also to existing generating units that receive out-of-market subsidies, such as renewable and nuclear generation.

In response, a divided FERC in June 2018 determined that PJM's capacity market rules indeed needed to be modified because the competitiveness of that market was being threatened by the price-suppressive impacts of out-of-market support provided by states to certain resources.

However, the commission rejected each of PJM's two proposed fixes to the problem. Instead, it ordered the grid operator to eliminate many of the existing exemptions to the MOPR so that it would apply to virtually all new and existing resources, including those that receive out-of-market payments.

The problem was that doing so would leave open the possibility that customers of utilities in states that have decided to subsidize capacity resources could end up paying twice for the same capacity — once through the subsidy and again in the capacity market — if the unsubsidized costs of states' preferred resources are too high to clear the market. To avoid such double payments, FERC said PJM should also allow utilities to acquire the capacity needed to meet some of their customers' needs through bilateral contracts instead of having to do so through PJM's capacity market, dubbed a resource-specific fixed resource requirement, or FRR, alternative option.

PJM in October 2018 then proposed a modified version of FERC's FRR alternative requirement called an extended resource carve-out. Under that approach, PJM still would allow a resource and an associated amount of load to be removed from the market, but the grid operator then would adjust capacity market clearing prices to reflect what they would have been had those resources remained in the market.

In July, FERC ordered PJM to further postpone its already-delayed capacity auction for the 2022/2023 commitment period until new rules were hashed out. Given the lengthy period of inaction, FERC appeared to be divided 2-2 on how to respond to PJM's proposal. But when Democrat Cheryl LaFleur departed FERC at the end of August, the agency was left with two Republicans and Glick, and the Dec. 19 order reflects a partisan divide.

The Dec. 19 order

FERC's lengthy order gives PJM 90 days to file new market rules — dubbed a replacement rate — that extend the MOPR to all new and existing resources, with certain exemptions. However, the majority refused to adopt FERC's own FRR alternative as well as PJM's modified version of that alternative, thereby requiring most state-subsidized resources to bid into the capacity market at their unsubsidized cost level.

Under the order, existing self-supply, demand response, energy efficiency, storage, and renewable resources participating in RPS programs would be exempt from the MOPR. 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.

FERC said its order will allow most existing resources that already have cleared a capacity auction to continue to be exempt from the MOPR, as well as new resources (those that have not cleared an auction) that will not receive out-of-market payments. However, new gas-fired resources, which already were subject to the MOPR, will continue to be so.

"This replacement rate does not purport to solve every practical or theoretical flaw in the PJM capacity market asserted by parties in these consolidated proceedings, or in related proceedings," the order stressed. Rather, it said the new rate is aimed only at preventing subsidized resources "from distorting prices in a capacity market that relies on competitive auctions to set just and reasonable rates."

As for why FERC will not allow PJM to include the agency's own FRR alternative or the grid operator's resource carve-out option in its forthcoming filing, the commission said "the accommodation of state subsidy programs would have unacceptable market-distorting impacts that would inhibit incentives for competitive investment in the PJM market over the long term."

The agency used the same justification to explain why it is requiring PJM to extend the MOPR to offers made by existing resources that do not qualify for exemptions in addition to new entrants. Taking specific aim at subsidized nuclear power, the majority claimed that decisions "by some states to employ out-of-market subsidies to prevent or delay the retirement of state-preferred resources that are unable to compete with more efficient generation" presents an "immediate threat to the competitiveness of the PJM capacity market."

The majority acknowledged that the order may prevent certain existing subsidized resources from clearing PJM's capacity auctions but said the decision by certain states "to support less economic or uneconomic resources in this manner cannot be permitted to prevent the new entry or continued operation of more economic generating capacity."

FERC's order also rejected arguments that the ruling will deprive PJM states of their right to choose their own generation resources, noting that such preferred resources still will be allowed to sell energy and ancillary services in the relevant PJM markets even if they cannot clear PJM's capacity market.

However, the majority said FERC cannot extend the MOPR to resources that receive out-of-market support through subsidies created by federal statute because the agency "may not disregard or nullify the effects of federal legislation."

Glick's dissent

While Republicans routinely tout the need to respect state decisions and rights, Glick noted during the agency's meeting, the majority's order has the exact opposite effect.

"We all know what is going on here: The costs imposed by today's order and the ubiquitous preferences given to existing resources are a transparent attempt to handicap those state actions and slow — or maybe even stop — the transition to a clean energy future," Glick wrote in his dissent. "It is hard to imagine how the commission could much more directly target or aim at state authority over resource decisionmaking."

Moreover, Glick said, while the original intent of the MOPR was to prevent load from exercising market power to directly reduce the capacity market price, the majority now has unjustifiably shifted the focus to target state resource decisionmaking and efforts to address the externalities of electricity generation.

In addition to warning that the order could subject much, if not most, of the PJM capacity market to the MOPR and administratively set prices, Glick bemoaned the ruling's failure to offer guidance on how its "sweeping definition of subsidy will work in practice or how it will interact with the complexities posed by a capacity market spanning 13 very different states and the District of Columbia." And it only gives PJM 90 days to figure that out, he further noted.

Glick called the majority's decision to exclude all federal subsidies from the MOPR completely arbitrary, noting that for more than a century those subsidies have been used to support the nation's fossil fuel industry. "By lowering the marginal cost of fossil fuel-fired units, government policies have allowed these units to operate more frequently and have encouraged the development of more of these units than might otherwise have been built," Glick said.

"If the MOPR disregards or nullifies federal policy, it must have the same effect on state policy," he added. "And if it does not nullify or disregard state policy, then the commission has no reasoned justification for exempting federal subsidies from the MOPR."

Glick also said the order threatens the viability of aggregated demand response providers, public power and resources financed in part through sales of voluntary renewable energy credits. He also predicted that it would raise capacity costs initially in the region by at least $2.4 billion annually and that those costs will only go up.

"The commission began this phase of the proceeding by decrying government efforts to shape the generation mix because they interfere with 'competitive' forces. Today, the commission is solving that 'problem' by creating a byzantine administrative pricing scheme that bears all the hallmarks of cost-of-service regulation, without any of the benefits. That is a truly bizarre way of fostering the market-based competition that my colleagues claim to value so highly," Glick stated.

Finally, Glick said FERC will have no one to blame but itself when the most likely outcome of the order is that many PJM states abandon the region's capacity market and potentially the grid operator altogether. Moreover, Glick suggested that eliminating PJM's mandatory capacity market may be a good thing given that states are increasingly trying to shape their own generation mixes. (FERC dockets EL16-49, EL18-178)