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PJM board to send 2 capacity market design options for FERC's pick

The PJM Interconnection will ask the Federal Energy Regulatory Commission to consider competing proposals for redesigning the regional transmission organization's capacity market to address state subsidies, including those for nuclear power.

Like other regional grid operators, PJM is being challenged to find a way to ensure that generators receiving out-of-market subsidies can participate in its market without artificially lowering clearing prices or driving out competitive generation. Two possible solutions remain on the table: a capacity repricing proposal backed by PJM staff and an extended minimum offer price rule, called "MOPR-ex," proposed by PJM's independent market monitor, Monitoring Analytics.

Rather than pick one, the grid operator's board "directed PJM to file both ... with the FERC under Section 205 of the Federal Power Act," according to a letter PJM President and CEO Andy Ott sent to members and stakeholders on Feb. 16. Ott is one of 10 members on the board.

While PJM's staff and members have disagreed significantly on how to proceed, Ott said the board decided that "reform is necessary." He suggested that state policies are part of growing pressures "threatening competitive outcomes" in PJM's market.

The meeting at which the board made its decision caps more than a year of stakeholder debate on how the capacity market, which selects future power supply based on economics, can accommodate state policies like renewable portfolio standards that prefer a certain resource type. The concern of some members is that state payments could allow subsidized plants to offer their capacity below their costs to operate.

Stakeholders brought up the issue in late 2016 after Illinois, one of the 13 states in PJM's footprint, adopted a policy that allows existing nuclear plants, which are struggling to compete with natural gas plants, to receive state payments in the form of zero emission credits, or ZECs. Since then, other PJM states, including Pennsylvania, Ohio and New Jersey, have been considering implementing similar ZEC programs.

PJM's repricing solution would convert the capacity auction from a single-stage process to a two-stage process. The first stage would select supply, while the second would adjust the prices offered by certain subsidized resources to undo the market distortion that could occur if those resources offered at below their costs.

Monitoring Analytics' MOPR-ex proposal would address the fear of price distortion by requiring certain resources to offer at or above a floor price that represents their operating costs before subsidies are factored in.

In its filing with FERC, PJM will note that the repricing solution is the more "accommodating path forward" but the MOPR-ex proposal still would be "effective" at preserving competition, Ott said. The filing also will request more time for stakeholders to refine the design change and build more consensus.

Once FERC makes a decision, the commission "should then direct the respective rule changes (either capacity repricing or MOPR-ex) to a time-bound settlement judge proceeding, with expectation that such a process will bring refinement, compromise and more consensus support for what ultimately will be presented to the commission later this year as a package of proposed rule changes," Ott said.

Ott clarified that the May 2018 auction will proceed under the current market rules while FERC makes its decision.

Having both proposals filed under FPA Section 205 rather than Section 206 is important because Section 205 requires a lower burden of proof in order to gain FERC approval, a stakeholder told S&P Global. Section 205 requires only that the applicant demonstrate that the proposed changes are just and reasonable, while Section 206, which also deals with tariff changes, further requires a showing that existing provisions are unjust and unreasonable, according to PJM's website.