Week Ending July 26, 2019

Uncertainty Continues as FERC Tells PJM Not to Hold Capacity Auction

This Article Appears as Published in Foster Report No 3259
Uncertainty Continues as FERC Tells PJM Not to Hold Capacity Auction

With no solution in sight and some disharmony among commissioners, FERC directed PJM Interconnection to hold off running its base residual auction in August as the grid operator had planned. The July 25 order (EL16-49) did not give direction on how or when PJM should hold the auction for forward power supplies for the 2022-2023 delivery year, which one market participant deemed stunning.

The order denied PJM’s motion to hold the auction under terms that any rate would be applied prospectively, not subject to refund, and would not require PJM to rerun the auction based on guidance from the Commission.

That guidance has been eagerly anticipated for quite a while, and FERC acknowledged that its struggles put PJM, generation owners, and market participants in a bind. “We recognize the importance of sending price signals sufficiently in advance of delivery to allow for resource investment decisions. However, we believe that in the circumstances presented here, on balance, delaying the auction until the Commission establishes a replacement rate will provide greater certainty to the market than conducting the auction under the existing rules,” FERC said.

The existing rules were deemed to produce rates that are not just and reasonable in a June 2018 order from FERC, in which Commissioners Cheryl LaFleur and Richard Glick dissented. Three commissioners issued concurring statements on the July 25 order, with LaFleur and Glick noting that the predicament is not the fault of PJM but FERC, for failing to address the issues associated with PJM’s capacity market and out-of-market subsidies from state resource decisions.

“More than a year after the Commission upended the PJM capacity market with no clear path to repairing it, we have still not acted to resolve the foreseeable and avoidable uncertainty created by our own actions,” LaFleur said. In her 2018 dissent, LaFleur deemed the decision to try and hold a paper hearing and come up with a replacement market design and auction terms an act of regulatory hubris. “Given the passage of time, the uncertainty created by the Commission might better be labeled an act of regulatory malpractice,” she said in her concurring statement, expressing hope that FERC can provide PJM and market participants some clarity of direction soon.

“The Commission has shown an absence of leadership that has caused us to drift rudderless into the position in which we find ourselves today,” Glick said. PJM market participants and the 65 million electric utility customers in the region deserve better treatment from FERC, he said. “At a time when leadership and decisiveness are necessary, indecision and inaction are all they have received.”

Glick said FERC is facing the consequences of its own action – meaning the 2018 decision — and not the fault of PJM, in referencing “the Pottery Barn Rule,” of you break it, you own it. It has been FERC, and not any party to the PJM proceeding, that has failed to act, more than six months after the date promised in the June 2018 order, Glick said.

Commissioner Bernard McNamee wrote separately and took issue with Glick’s characterization that FERC is responsible for the current predicament. While invoking the “Pottery Barn Rule” may be rhetorically satisfying, “this statement is misleading. To suggest the Commission is the source of the problems presently facing PJM is to ignore nearly a decade of proceedings attempting to address the interaction between competitive markets and out-of-market subsidies,” McNamee said.

He noted that he was not at the Commission when the June 2018 order was issued and the deliberations that led up to it, including PJM’s desire to address state support for out-of-market subsidies for specific generation resources, which have been brewing for some time.

McNamee said he is sympathetic to the large degree of uncertainty the proceeding has brought to the PJM market. The June 2018 decision considered the matters and determined that PJM’s tariff was unjust and unreasonable by failing to mitigate price distortions caused by out-of-market subsidies, he said, vowing to work diligently to address the matter.

When that will be is anyone’s guess.

In a brief statement, PJM said “we look forward to additional guidance from FERC on the design of PJM’s capacity market.” The grid operator said FERC recognized that confidence in the auction and its results is vitally important to all stakeholders and the integrity of the capacity market.

PJM earlier this year, after not receiving guidance from FERC, said it would hold the auction in August under the tariff that was found unjust and unreasonable. Several market participants advocated for not taking that step, based on the principle that auction results could be deemed unjust and unreasonable and subject to refund or scrapped in favor of a different market design.

Some generation owners filed a motion in the proceeding to have the auction held in April of 2020, to be followed in May 2020 with an auction for the 2023-2024 delivery year. That “cross-motion” to the motion of PJM that was rejected was filed by Exelon, Dominion, FirstEnergy, and some large utility owners, noted Christine Tezak of ClearView Energy Partners.

While that cross-motion did not specify a date for a FERC order, ClearView deems an order in the September/early October time frame would make April and May auctions feasible, but the absence of a FERC order into November or December may not leave enough time for PJM to file tariff changes and set auction components for generation owners, Tezak said.

She added that if FERC is deadlocked in a 2-2 split vote on a partisan basis on how to proceed, that would be resolved by the end of August when LaFleur leaves.

“However, if the issue is not partisan, but of a more technical nature – given the broad opposition to a minimal exception Minimum Offer Price Rule originally offered by PJM, and the strongly divided feedback on PJM’s reconfigured Resource Carve Out with a “Repricing” round – the Commission may still be struggling with having to craft its own solution from the proposals and comments submitted in response to the paper hearing last fall,” Tezak said.

By Tom Tiernan ttiernan@fosterreport.com

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