Dive Brief:
- The PJM Interconnection will be able to change a capacity market parameter that led to anomalous, high capacity prices in one part of its footprint in its recently-held auction under a Federal Energy Regulatory Commission decision issued Tuesday. The grid operator expects to release the auction results Monday.
- The PJM’s proposed rule change will help ensure that load-serving entities are charged for capacity based on a reliability requirement that reflects actual reliability needs in a manner consistent with supply and demand fundamentals, FERC said in the 3-1 decision.
- FERC decided to hold a forum on a date to be announced to examine PJM’s capacity market, saying “the continuing disputes and frequent complaints about how PJM operates its capacity markets from an array of stakeholders throughout the region merit a general review outside the constraints of a particular proceeding.”
Dive Insight:
When PJM staff reviewed the preliminary results of its early December capacity auction, they found that a “confluence of events” produced exceptionally high capacity prices in Delmarva Power South, which covers part of Delaware, Maryland and Virginia, according to the grid operator.
Before releasing the results for the “base residual auction,” or BRA, PJM proposed a rule change that would allow it to lower a locational deliverability area’s reliability requirement during the auction process if generators don’t bid into the auction as expected.
The proposal was opposed by power plant companies such as Constellation Energy Generation, NRG Energy and Vistra. PJM’s market monitor, state regulators and American Municipal Power were among its supporters.
The Electric Power Supply Association will likely appeal the decision, the trade group said Wednesday.
“If FERC is really interested in focusing on reliability, it could start by respecting precedent and stop issuing orders that fundamentally undermine investor confidence in the markets it oversees,” EPSA President and CEO Todd Snitchler said in a statement.
FERC disagreed with NRG that the proposal will prevent the market from sending a price signal when additional capacity is needed.
“As the market monitor notes, the prices resulting from PJM’s proposal will accurately reflect supply and demand and, if the prices are accurate, the market incentives will be correct and consistent with reliability needs,” FERC said.
FERC said PJM’s plan doesn’t violate the filed-rate doctrine, which bars retroactive rate changes.
When PJM made its proposal, “no capacity commitments had yet been secured, no transaction had yet been consummated, meaning that neither PJM nor any supplier had the attendant rights or obligations, no capacity had been delivered pursuant to such commitments, and no charges had been billed or collected,” FERC said.
FERC rejected arguments that approving the proposal would upset bidders “settled expectations” in PJM, which operates the grid and wholesale electricity markets in 13 Mid-Atlantic and Midwestern states, plus the District of Columbia.
“We are not persuaded that market participants’ purported reliance on a single input, with no knowledge of the final capacity price, in making commercial transactions results in a detrimental reliance concern,” FERC said.
Further, the average customer in the Delmarva area faced a $24 per month bill hike in the 2024/25 delivery year without any reliability benefit, according to FERC.
“The benefits associated with accepting the tariff revisions for the 2024/2025 BRA outweigh any disruption to settled expectations,” FERC said.
In a concurrence, FERC Commissioner Mark Christie said, besides supporting the arguments in the decision, the auction results were “so blatantly unjust and unreasonable that voting to allow those results to stand is unacceptable to me.”
But FERC Commissioner James Danly, who voted against the decision, said it was an attempt to protect consumers that would backfire.
“Consumers reap the benefits of market efficiency and competitive pricing,” Danly said. “Those benefits become costs when the markets cease functioning because market participants — and investors — have lost confidence in them.”
The decision violates the filed rate doctrine and is akin to playing blackjack at the “Federal Energy Regulatory Casino,” according to Danly.
At that casino, in the middle of a hand, the house draws a 17. “Even though 17 is a predictable — and even likely — hand, the dealer announces it is ‘anomalous’ and makes up a new rule on the spot: 17 is the new blackjack,” Danly said. “No one is allowed to draw again or change their bets … The house saves a bit of money on one hand, but no one ever plays blackjack at the Federal Energy Regulatory Casino again.”
FERC’s majority distorted the filed rate by finding it can be changed up until an obligation is incurred.
“Until today the filed rate was all the rules in the tariffs that stakeholders in each region spent thousands of hours negotiating and that the commission previously approved in lengthy orders, often after several rounds of litigation, compliance, and extensive settlement proceedings. Nope,” Danly said. “None of those provisions are the filed rate until PJM or another regional transmission organization ... or independent system operator ... decides it has poked around the ‘preliminary’ auction results and found a price it likes enough to conclude the auction and declare the winners.”
