FERC market order to cost consumers billions — report

Source: BY Arianna Skibell, E&E News reporter • Posted: Tuesday, May 19, 2020

House at night. Photo credit: Steven Tom/Flickr

Some energy analysts warn that a controversial Federal Energy Regulatory Commission order late last year to expand the so-called minimum offer price rule could cost electricity consumers billions of dollars. Steven Tom/Flickr

A contentious order issued last year by the Federal Energy Regulatory Commission has rankled renewable power proponents, posed hurdles for regional clean energy objectives and driven states to consider exiting the nation’s largest energy capacity market.

But the real loser in the expanded minimum offer price rule, or MOPR, debacle is the consumer. That’s according to an updated analysis by Rob Gramlich and Michael Goggin, founder and vice president, respectively, of policy analysis firm Grid Strategies LLC.

“The consumer costs of MOPR are significant, likely in the billions of dollars,” the duo wrote. “These costs will only grow over time if states continue to pursue clean energy objectives and FERC does not change its MOPR policy.”

FERC’s 2019 decision to expand MOPR in the PJM Interconnection LLC capacity market — which spans 13 Midwestern and Mid-Atlantic states and the District of Columbia — raises floor prices for state-subsidized generation.

Capacity markets offer a way for PJM to ensure there will be enough power generation to meet demand well into the future, typically three years out. Generation resources like a coal plant or wind farm bid into PJM’s periodic auctions to qualify to provide electricity in later years.

Proponents of the rule, including Republican FERC Chairman Neil Chatterjee, say it levels the energy playing field for power producers. FERC has also granted exemptions, which have eased concerns among solar and nuclear developers that worried that the rule would prevent them from competing with fossil fuel plants. Still, analysts say offshore wind will likely be priced out of the market entirely (Energywire, May 13).

In Democratic FERC Commissioner Richard Glick’s dissent on the original order, he said that under conservative assumptions, the order will cost consumers $2.4 billion per year at first and only go up from there.

“It is hard for me to imagine a more careless agency action than one that foists a multi-billion-dollar rate hike on customers without even considering, much less justifying, that financial burden,” Glick wrote.

Gramlich, who served as adviser to former FERC Chairman Pat Wood III, initially found that the price rule could increase costs by $5.7 billion a year.

He said that although PJM has since made changes that will lessen the rule’s immediate impact, costs to ratepayers will still increase.

“PJM’s compliance filing did tend to moderate the cost impact as much as they could within the constraints FERC provided,” he said. “But that’s not enough because FERC made its own decisions that were quite different from what PJM proposed. PJM only has so many degrees of freedom.”

Given all the variables associated with the many versions of the price rule, Gramlich said, it’s not possible to conclude MOPR will have limited cost impacts. Under most scenarios, the rule change will result in billions of dollars — if not tens of billions — in increased costs to electricity consumers, he said.

A spokesperson for FERC declined to comment given pending litigation. But in an April 16 order denying rehearing of the price rule, FERC touched on potential rate hikes.

The agency said costs are important and not to be taken “lightly” but that it does not need to examine specific numbers.

“In determining whether rates are just and reasonable, while the Commission is required to consider all relevant factors and make a ‘common-sense assessment’ that the costs that will be incurred are in accordance with the customers’ overall needs and interest, the Commission’s findings need not be accompanied by a quantitative cost-benefit analysis,” FERC concluded.

In response to the order, officials in Maryland, New Jersey and Illinois have expressed interest in exiting PJM’s capacity market. The only FERC-sanctioned alternative to the PJM capacity market is a provision called fixed resource requirements (FRR), which would allow states to determine their power needs outside the market.

But the FRR option could mean increased power prices for customers, according to Joseph Bowring, who heads Monitoring Analytics, PJM’s independent market monitor. Bowring, who has voiced support for FERC’s controversial rule expansion, has analyzed what leaving PJM could mean for a number of states, including Illinois, Maryland and most recently New Jersey (Energywire, May 15).

Gramlich, however, said there were some “methodological problems for those three reports.” He said the fundamental issue is that the “MOPR regime” is a “moving target” without an underlying legal or economic basis.

“It doesn’t rely on any common theory or foundation of economic policy,” he said. “Decisions that lack a foundation are by their very nature contributing to regulatory uncertainty. Clearly there’s going to be further discussion and court review of all these policy calls.”