FERC gets around: PJM super MOPR — an around-market solution for the around-market solutions

Source: By Raymond L. Gifford and Matthew S. Larson, Utility Dive • Posted: Tuesday, January 21, 2020

The following is a contributed article by Ray Gifford, managing partner, and Matt Larson, partner, in the Denver office of Wilkinson Barker Knauer.

FERC closed out the decade with a bang, issuing its long-awaited PJM Capacity Market Order. Large swaths of the regulatory policy community have criticized FERC’s decision as an overtly partisan anathema and a ploy to disadvantage clean generation resources and give a leg up to coal and gas.

The reality is simpler — it is not an attack on clean energy. It is an indictment of a regulatory construct that is crumbling.

Rather than adopting a policy path of accommodation of state policy preferences — a path that may have been one of less resistance — FERC crafted an approach swallowing the state ‘around market’ solutions. Those very state ‘around market’ actions 18 months ago led to FERC’s decision finding PJM’s tariff unjust, unreasonable, and unduly discriminatory due to price distortions from state ‘around market’ actions.

After several years of proliferating state ‘around market’ actions, FERC decided it was its turn to get around: It made the Minimum Offer Price Rule (MOPR) into the Super MOPR, expanding its applicability from new natural-gas fired resources to all new and existing resources of all technology types that receive or are entitled to receive a broadly defined “state subsidy,” with exemptions only granted for limited categories of existing resources.

For those keeping score at home, that means FERC’s remedy for price distortions in the market is a price distortion in the market.

While the goal was to blunt the impact of state ‘around market’ solutions, the PJM Capacity Market Order will have the opposite effect. It will serve as a performance-enhancing drug for energy-minded state legislators anxious to put their mark on a state’s energy mix and enact the policy preferences they were voted into office to advance.

The political economy temptations of energy policy — for the environmental policy, for the jobs, for the capital investment, for the taxes — are irresistible.

States now must find new work-around ‘around market’ solutions that meet the ends of their energy stakeholders. Nothing suggests states are prepared to abide a continuation of the outcomes seen in PJM, and the commencing state legislative sessions around the country will be — yet again — policy laboratories to correct for unfavored ‘market’ outcomes in administrative market constructs like PJM.

We expect states will tire quickly of FERC getting around, and the expanded MOPR enacted through the PJM Capacity Market Order will be — like the 2016 Supreme Court case Hughes v. Talen Energy Marketing decision before it — the variable that state legislation solves for, resulting in the next generation of ‘around market’ solutions.

To be sure, we do not begrudge, judge, or cast aspersions about FERC getting around. The agency found itself faced with a conundrum with no easy solution after its findings regarding PJM’s tariff in June 2018.

  • Behind door number one was accommodation of state ‘around market’ solutions — a likely untenable choice that would merely increase the numbers of interventions already at play in the PJM regulatory construct. To quote a wise market monitor, “subsidies are contagious.”
  • Door number two involved the approach snakes and frogs have used since well before the advent of the PJM regulatory construct: Swallow every state ‘around market’ solution whole through a single action.

FERC took door number two with the expanded MOPR to preserve the PJM capacity market construct, likely seeing this option as the only way to do so.

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FERC concluded that the price-depressing effects of states’ around market efforts in the PJM capacity market affected the competitiveness of these markets. To remedy this, FERC’s new Order requires that generation resources receiving state support must offer their capacity at a minimum price in capacity auctions. It is the undisputed Super MOPR.

But while PJM may have received a life preserver, the air in the expanded super MOPR cannot keep it afloat forever.

Setting FERC’s intentions, the heated rhetoric from carefully worded legal pleadings, and spontaneous Energy Twitter outbursts aside, this is the beginning of the end of PJM. It is time for market enthusiasts — the policy faction committed to the notion of a ‘market’ no matter what the construct has devolved into — to either engage in meaningful capacity market reform efforts or morph the worthy but failed experiment of the restructured administrative market model into tried and true rate-based joint dispatch market structures.

The regulated model, with its planned utilities, voluntary residual markets, and other staid architecture, offers the pathway to what we think the energy policy community writ large is chasing with its slew of acronym laden ‘around market’ solutions and in-market band-aids and patches — deep decarbonization with affordable rates, reliable service, and competitive resource procurement.

FERC’s Super MOPR is only the latest in a long line of attempts to make overly complex regulatory mechanisms like PJM reach ‘competitive’ outcomes, and it will not be the last until either the regulatory construct crumbles under ‘around market’ pressure or there is real reform.

The restructured administrative markets long ago lost the thread of competitive ‘market’ outcomes. Divergent policy preferences, real world economic consequences, local political realities, and the sheer amount of capital involved to generate electricity create political demand for the price system to give way or be distorted to serve other values.

Of course, it was the legendary Tupac who originally proudly proclaimed I Get Around. No one would dare say it to Tupac, but it is time to stop getting around.