Working together to reconcile state policies with competitive wholesale electricity markets

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By Vince Duane, senior vice president – Law, Compliance and External Relations

The Federal Energy Regulatory Commission for the past five years has been wrestling with a difficult and critical question: How do you account for state policies promoting certain sources of electricity – such as nuclear, wind or solar – while maintaining the free-market competition that has brought a reliable, affordable electrical grid to the 65 million people served by PJM Interconnection?

The question is a critical one because it involves the convergence of sometimes conflicting forces – the desire of the 13 states and District of Columbia served by PJM to determine how their electricity is produced to meet environmental, economic or political goals, and the working of a wholesale electricity market that has delivered enormous benefits for customers and businesses for 20 years.

Last year PJM set out to develop solutions. For more than 12 months, PJM and stakeholders discussed how to address state public policy programs that promote state-specific environmental, social or political objectives through some form of subsidy for generation that participates in PJM’s competitive electricity markets. In April, PJM submitted two separate proposals to FERC to address that conflict.

On June 29 in a 3-2 decision, FERC acknowledged that states have the right to promote certain types of generators through subsidies, but found that the subsidies have reached a point where they are damaging to the market. FERC, which is tasked with protecting the wholesale market, is therefore required to find a workable solution.

In its order, FERC rejected the two proposals submitted by PJM. One proposal, dubbed MOPR-Ex because of its expanded use of our minimum offer price rule construct, was regarded by FERC as discriminatory and, in isolation, did not accommodate state subsidies. The minimum offer price rule prevents the exercise of market power by participants to artificially depress clearing prices in the capacity auction.

FERC declared PJM’s alternate proposal, which we called capacity repricing, as too accommodating to state policies in a way that would result in unjust and unreasonable prices.

Instead, FERC introduced its own proposal for further review and development. The Commission directed PJM to create rule changes applying a minimum offer price rule with limited-to-no exceptions, while also providing states and subsidized resources an alternative to MOPR.

In particular, FERC stated that PJM’s existing fixed-resource requirement (FRR) rules could serve as a pathway for states to carve out subsidized generation resources – such as a nuclear plant, for example – and associated demand from the capacity market.

Current FRR rules allow utilities to remove a zone of electricity demand and generating resources from the capacity market.

FERC initiated a 90-day “paper hearing,” in which arguments will be made solely in filings to the Commission, after which FERC will issue an order directing changes to PJM’s capacity market rules, as appropriate.

The Commission is calling its plan the resource-specific FRR alternative. It is not clear yet what rules need to be included with FRR rules in order to preserve the efficacy of the price signal established by the market and ensure it is just and reasonable.

We will be working intently over the coming weeks and months with PJM members, states, interested stakeholders and the independent market monitor to flesh out the FRR and expanded MOPR concepts introduced by the FERC order.

Stakeholder input is vital as PJM prepares its initial response, due within 60 days of the ruling (Aug. 28). Members are invited to submit their written comments from July 9–27 via email to Suzanne.Daugherty@pjm.com or David.Anders@pjm.com; all comments received will be posted on PJM.com.

A special meeting of the Markets and Reliability Committee will be held Aug. 2 to discuss the comments received, as well as PJM’s initial anticipated filing content. A second special meeting of the MRC is set for Aug. 15, when PJM will present a refined version of its intended filing.

FERC has adopted PJM’s proposed target ruling date of Jan. 4, 2019, so that the revised capacity market rules may go into effect for the May 2019 Base Residual Auction for the 2022/23 Delivery Year.

PJM’s competitive markets remain the best mechanism for maintaining a reliable, cost-effective system and ensuring a resilient grid into the future. We are pleased that FERC is taking action to address the wholesale market impacts of subsidized resources while acknowledging the important role states play in influencing the resource mix through retail energy policies.

We are confident that together we can refine market rules to accommodate the policy initiatives of our states while preserving the integrity of the wholesale market.