Public utility officials say FERC overstepped its bounds in PJM capacity market order

Source: By Gavin Bade, Utility Dive • Posted: Wednesday, August 1, 2018

  • A broad group of state governments, market participants and environmental advocates on Monday asked the Federal Energy Regulatory Commission to revisit a June order reshaping the PJM Interconnection capacity market, writing that the ruling overstepped the commission’s jurisdiction and would hamper state clean energy policies.
  • Illinois, New Jersey and Maryland, along with nuclear and environmental advocates, wrote that FERC’s order improperly intervenes in state energy policies, such as nuclear subsidies or renewable energy mandates. FERC’s 3-2 ruling found that such policies improperly suppress wholesale electricity prices and suggested changes to limit their impact.
  • Many commenters, including the Organization of PJM States, Inc. (OPSI), argued the Commission misjudged those market impacts and pointed to overcapacity as the cause of low wholesale prices. Calpine Corp., which pushed for changes to the market rules, warned that FERC’s proposed solution could lead to a “purely residual capacity market,” while PJM asked for clarification about how to design changes that will win FERC approval.

FERC’s June order finding PJM’s market rules unjust and unreasonable is the product of years of debate among players in the mid-Atlantic electricity market over the impact of state energy policies.

Gas and coal generators argue policies like nuclear subsidies and renewable energy mandates allow those resources to bid into the capacity market at lower prices than they otherwise would, suppressing the clearing price for the whole market.

In response to those concerns, PJM in March proposed two options to reform its capacity market at FERC — a price floor and a two-part capacity auction that would separate out subsidized resources.

FERC’s decision sided with the generators, finding the state policies improperly altered market prices. But it also rejected both of PJM’s proposed solutions, directing it instead to devise a new market rule that would allow subsidized resources to opt out of the capacity market altogether.

PJM did not challenge FERC’s rejection of its proposals in its rehearing request, but asked for more detail on whether elements of its two-part capacity repricing proposal could be included in its final market fix. FERC approved a similar proposal in May for ISO-NE.

“Elements of, or some variant of, capacity repricing, should remain within the realm of possible just and reasonable solutions,” PJM wrote. “And, if the Commission finds such a new proposal which may borrow elements of capacity repricing just and reasonable, it should confirm in its final order16 that nothing in the June 29 Order bars adoption of such a proposal.”

The decision exerted FERC’s authority over wholesale electricity markets, but critics said it also edged into the territory of state governments, which have jurisdiction over the generation mix within their boundaries. One former FERC aide called it an “unprecedented federal intervention in state policy.”

Three state governments from the PJM market echoed that argument in filed comments.

FERC’s order “crosses the clear jurisdictional boundary between the states” and FERC, the Illinois Commerce Commission wrote. New Jersey regulators, meanwhile, asked FERC to clarify that its order does not preempt state clean energy policies. Both states have nuclear subsidy programs in place.

OPSI, which represents PJM states as a whole, did not make a direct jurisdictional claim in its comments, instead arguing that FERC’s order did not respond to the evidence in the proceeding. Like nuclear and environmental advocates, it blamed low capacity prices on the glut of generation in the PJM market, which currently has a 22% reserve margin.

“The continued development of existing and new capacity resources in PJM stands in clear juxtaposition to the Commission’s conclusion that state policy decisions compromise the market, because investors cannot predict whether their capital will be competing against resources that are offering into the market based on actual costs or on state subsidies,” OPSI wrote.

In FERC’s ruling, regulators suggested that PJM alter its Fixed Resource Requirement (FRR), a rule that allows utilities to opt out of the capacity market, to allow individual resources to exit the market as well. Power sector analysts warned this could lead to a gradual decay of the capacity market, a concern that generator Calpine raised in its comments.

“When a state chooses to intervene, pulling both load and resources out in a simplistic sense can lead to very poor outcomes,” Calpine CEO Thad Hill wrote. “Over time, should state actions continue, the competitive market as a percentage of the whole would continue to shrink.”

This could lead to the creation of a “purely residual capacity market” similar to the situation in California, Hill wrote, with “very high retail rates, very low wholesale rates and no investment that is not part of a state mandate.” He urged the commission to enact a strong price floor in the market, rather than its FRR solution.

FERC has 30 days to respond to the rehearing requests, after which it could open a new comment period on the ruling. If the commission upholds its ruling that the PJM rules are unjust and unreasonable, stakeholders will have to move fast to respond before the market’s next capacity auction in May 2019.

PJM is working on a response to FERC’s order and will file it by early September, CEO Andy Ott told Utility Dive this month.

This post has been updated to reflect comments from the PJM Interconnection.