New York—The Federal Energy Regulatory Commission March 18 ordered PJM Interconnection to revise its capacity market rules to better protect consumers from the exercise of market power by power sellers, in a move that commissioners stressed would not disrupt plans for the region's upcoming capacity auction.
The order (EL19-47, EL19-63) grants complaints brought by PJM's independent market monitor, state consumer advocate agencies and consumer groups in 2019 alleging that PJM's methodology for calculating the default market seller offer cap used in capacity auction bidding was producing unreviewable, noncompetitive offers that inflated capacity prices.A key component to calculating the default offer cap are performance assessment intervals (PAI), a measure of emergency declarations used by PJM in determining whether capacity resources have met their obligations to deliver electricity when it is needed most.
The complainants argued that PJM was using an unreasonable and unsupported number of expected PAIs in a given year, resulting in overstated offer caps that only subjected a small number of very high offers to unit-specific cost review for market power. The IMM asserted that uncompetitive offers resulted in a 15.3%, or approximately $1.2 billion, increase in capacity market revenues for PJM's May 2018 auction covering the 2021-22 delivery year.
'No longer a reasonable estimate'FERC's March 18 order found that "360 is no longer a reasonable estimate of expected PAI and therefore the default offer cap resulting from 360 expected PAI is also unjust and unreasonable."
The order noted that the record demonstrated consistently low PAI each year, and that the "incorrectly calibrated" default offer cap "may unjustly and unreasonably prevent the appropriate review of offers, thereby allowing potential exercises of market power, and reducing the capacity market's overall competitiveness."
Parties to the complaints have 45 days to submit briefs with their views on the appropriate remedy and a replacement rate. Reply briefs will be due 30 days thereafter.
"Although revising the expected PAI used to establish the default offer cap may ultimately represent the just and reasonable replacement rate, we find it is necessary to direct briefing that would enable the commission to further consider the appropriate replacement rate, including alternative approaches to market power mitigation in the capacity market," the order said.
FERC Chairman Richard Glick, at the commission's March 18 open meeting, said the agency had a responsibility to protect consumers from excessive prices spurred by the abuse of market power, "and today's order is a good step in that direction."
He contended that FERC's past actions in PJM needlessly homed in on buyer-side market mitigation "against entities that were neither buyers nor had market power." Those actions subsequently forced PJM to put its three-year-forward capacity auctions on hold while it crafted plans for implementing an expanded minimum offer price rule (MOPR).
No auction delayThough the March 18 order found PJM's existing market rules to be unjust and unreasonable, Glick said the commission was "specifically directing that this determination should not further delay PJM's next capacity auction, which is scheduled for May" for the 2022-23 delivery period.
Commissioner Neil Chatterjee, who was a fervent supporter of the MOPR, said that assurance against auction delays allowed him to support the order as the commission "took pains to be 100% clear that as a result of this action, there should be no delays or impacts to the upcoming auction, which will run under the existing rules."
The order specifies, however, that the commission will "continue to exercise its oversight of the upcoming auction," and any anticompetitive conduct observed may be referred to the Office of Enforcement.
Chatterjee said he agreed that "the offer cap, as currently configured, is not serving its intended purposes." He applauded the commission for avoiding "a rush to judgment on the path forward," and instead seeking "more input from parties on the appropriate replacement rate."
Commissioner Allison Clements, who like Glick has been a critic of the commission majority's support for MOPRs and similar market mechanisms, also supported the order, noting during the meeting that "given the size of PJM's market, the exercise of market power can lead to consumers bearing billions of dollars in unjustified costs."
She said once the commission has up-to-date information from PJM and other parties, she would work with the other commissioners "to promptly install revised mitigation rules that address potential market power problems."
