PJM, stakeholders weigh draft plan to reshape capacity pricing

2010

Staff from the Federal Energy Regulatory Commission joined PJM Interconnection and stakeholders Aug. 2 to answer questions and provide guidance as PJM crafts a proposal in response to a June 29 FERC ruling on PJM’s proposed capacity market reforms.

The session was the first of two special meetings of the Markets & Reliability Committee to discuss FERC’s ruling (PDF) that PJM’s Tariff is unjust and unreasonable because it fails to protect the integrity of competition in the wholesale market against price distortions caused by state subsidies for favored generation sources, such as nuclear and renewables. Feedback from the forums, with the second scheduled for Aug. 15, will inform PJM’s response. (See Working together to reconcile state policies with competitive wholesale electricity markets.)

In its ruling, FERC initiated a 90-day paper hearing to determine a just and reasonable “replacement rate,” or new capacity market rules. PJM must file its initial comments by Aug. 28. FERC said it plans to rule by Jan. 4, in order to give PJM time to implement the new construct for its May capacity auction, for the 2022–23 delivery year.

“That means almost certainly there’s going to have to be another ruling by [FERC] before then to give PJM guidance as to what they want the Tariff to be,” said attorney Matthew Estes, representing FERC’s Office of the General Counsel.

Estes was on hand to answer questions along with Kristopher Fitzpatrick, an energy industry analyst in FERC’s Office of Energy Market Regulation, and Emma Nicholson, an economist in FERC’s Office of Energy Policy and Innovation. The three have been designated as “non-decisional staff” by FERC and assigned to advise PJM and stakeholders in designing proposals that are aligned with FERC precedent and philosophy. Their “non-decisional” status indicates that they will not be involved in approving any proposals. FERC staff also will attend the Aug. 15 meeting of the Markets & Reliability Committee.

The tight FERC compliance filing deadline drew requests from numerous stakeholders for additional time. Estes indicated Thursday that FERC intends to have a ruling in place for the 2019 auction, so the only extension FERC would consider is a push-back of the 2019 auction, not an extension until the 2020 auction.

A delay in the auction would be unusual but is not unprecedented. The auction for the 2018–19 delivery year, held in 2015, was pushed back from May to August to allow for the implementation of the Capacity Performance product. PJM staff did not indicate whether a delay in the 2019 auction would be necessary at this time.

FERC’s June ruling recommended an extension of the Minimum Offer Price Rule (MOPR), a market rule that establishes a minimum-offer screening process to prevent market participants from submitting uncompetitively low offers in capacity auctions to artificially depress auction clearing prices. FERC’s order called for a new MOPR that would apply to both new and existing resources and that would allow for few exceptions. FERC’s order also proposed allowing subsidized units to opt out of the capacity market on a resource-specific basis. FERC called this the Fixed Resource Requirement (FRR) Alternative.

Estes said that while FERC is not wed to a particular path forward, the commission would be unlikely to accept a different proposal without wide backing among stakeholders.

PJM invited comments in advance of the two MRC special sessions; 18 groups provided comments, which are posted with the Aug. 2 meeting materials.

Adam Keech, executive director – Market Operations, presented PJM’s working high-level, conceptual approach.

By default, he said, the MOPR would apply to all participants receiving an actionable subsidy. However, capacity market sellers would have the option of notifying PJM that they are employing a resource-specific FRR plan. All resources and their corresponding load would be considered in clearing the auction, Keech said. Resources opting out of the MOPR would be considered self-scheduled, and no adjustments would be made to the demand curve. These resources would not be paid the auction clearing price, nor would their associated load be charged for capacity.

A resource with an actionable subsidy is generally defined as a resource of at least 20 megawatt capacity that is receiving an out-of-market payment through a state-sponsored process or directly or indirectly from a governmental entity to support the construction, development, operation or clearing of such resource that is greater than 1 percent of actual or anticipated market revenues.

Questions remain about how federal subsidies might be treated, he said. The Department of Energy has been considering action to support coal and nuclear units that might otherwise retire.

Going forward, auction participants would be expected to decide by Sept. 1 prior to the next auction how their resources would be offered. PJM recognizes a transition would be needed for the first year heading into the 2019 auction for the 2022/2023 delivery year.

“Resources that opt out would still be obligated to perform under capacity performance rules,” said Stu Bresler, senior vice president – Operations and Markets.

Joseph Bowring of Monitoring Analytics, the PJM independent market monitor, presented the results of simulations of the last auction under the assumptions that subsidized resources and load were removed.

“We don’t see anything terribly positive about it,” Bowring said of the approach. “It looks to us that it is generally price-suppressive. … We’re highly skeptical of unit-specific FRR.”

According to Bowring, load would pay more in the long run due to a resulting inefficient fleet of resources, and clearing prices would not provide efficient entry and exit signals.

Nicholson responded that FERC was conscious of the potential impacts.

“We are aware that if you procure a smaller quantity that there could be price impacts. The commission does not take the concern about double payments or states’ rights to pursue policy goals lightly,” she said.

Estes left the group with some advice: Make the proposals as specific as possible, even providing Tariff language. “The more specific you can get, the more likely FERC will listen to you. Asking questions is not going to be productive.”

And, he said, don’t rely on arguments that “that’s the way it’s always been.”

“Remember,” he said, “FERC found that the way it’s always been is not just and reasonable.”