Monday, June 15, 2015

The reforms come alongside corresponding changes within PJM’s energy markets.

On June 9, the Federal Energy Regulatory Commission (FERC or the Commission) issued an order (the Order[1]) accepting PJM Interconnection L.L.C.’s (PJM’s) proposal to replace the existing capacity products in its 13-state grid with a new product called a “Capacity Performance Resource” that must meet stronger performance-based and availability requirements than the existing capacity requirements. The Commission also approved changes to the PJM capacity market to address concerns surrounding the nonperformance of capacity resources. The proposals are intended to ensure that PJM’s capacity market provides adequate incentives for capacity providers to increase reliability, avoid shutdowns and surging prices (like those associated with the winter of 2014 “Polar Vortex”), and ensure that a generator or other power supplier that is a PJM Capacity Performance Resource exhibits “sustained, predictable operation.”

The new capacity product was proposed in revisions to PJM’s Open Access Transmission Tariff (the Tariff) and PJM’s Reliability Assurance Agreement Among Load Serving Entities (the Capacity Performance Filing).[2] The capacity resource performance issues were addressed in proposed changes to the Tariff’s Amended and Restated Operating Agreement (the Energy Market Filing).[3]

Both PJM’s Capacity Performance Filing and Energy Market Filing were generally accepted, subject to various revisions ordered by the Commission. PJM must submit a compliance filing within 30 days of June 9, 2015 to incorporate those revisions in their amended Tariff filing.

FERC’s Order confers substantial discretion upon PJM. For example, PJM is not required to treat a resource as a Capacity Performance Resource if it determines that the resource will not perform as required during emergency conditions or is being offered into the PJM capacity market as a purely speculative resource. The Order also allows for capacity prices (measured per megawatt day) in the PJM market to increase but subjects capacity providers to substantially higher penalties for resource nonperformance.

Capacity Performance Filing Tariff Revisions

The Commission agreed that PJM’s existing capacity market rules that address capacity performance need to be revised because they do not provide adequate incentives for resource performance and may negatively affect reliability. PJM’s existing capacity market penalizes a capacity resource owner based on its real-time performance by imposing a charge on the resource owner if the resource is not fully available during peak hours. PJM stated that, in practice, the rules provided little incentive for owners or operators to make capital improvements or increase operating expenses to enhance resource availability during emergency conditions. Another disincentive that PJM identified was that its rules do not allow sellers to include the costs attributable to natural gas firm transportation arrangements in their sell offers.

PJM proposed to replace its existing capacity products with a new capacity product—the Capacity Performance Resource—that would be capable of sustained, predictable operation such that the resource would reliably provide energy and reserves in emergency conditions.

The key Capacity Performance Resource eligibility, incentive, and penalty features include the following:

Performance Requirements—PJM’s proposal is performance-based; it does not include a comprehensive list of particular qualifying physical features that must exist for a resource to be deemed a Capacity Performance Resource. To qualify as a Capacity Performance Resource, a capacity market seller’s offer must contain a representation that it has made, or will make, necessary investments to ensure that its potential Capacity Performance Resource has the capability to provide energy when called upon by PJM. The Commission agreed that PJM may reject capacity offers that propose resources that cannot reasonably be relied upon to meet their capacity obligations during emergency conditions, are purely speculative, or otherwise are not consistent with PJM’s expectations. However, PJM’s rejection authority only arises when the proposed resource cannot meet its obligation by the start of the associated delivery year—a long-lead rejection far in advance of delivery might not be permitted. In addition, the Commission conditionally approved PJM’s proposal to allow demand, energy efficiency, capacity, and intermittent resources to aggregate offers to meet the Capacity Performance Resource standard, as long as the resources are located in the same locational deliverability area. The Commission also agreed that certain generation capacity resources external to the PJM grid could be deemed eligible to qualify as a Capacity Performance Resource.

Non-Performance Charges—A Non-Performance Charge rate was implemented subject to the Commission’s modifications, which would be based on the expected performance of each Capacity Performance Resource as compared to its actual performance during an “Emergency Action” declared by PJM. The Capacity Performance Filing includes both penalty formula and stop-loss provisions.

Market Power Mitigation Rules—The Commission accepted PJM’s revised offer cap methodology pursuant to its “Market Power Mitigation” rules, which sought to create incentives for resource owners and operators to enhance capacity resources by allowing sell offers that cover a seller’s expected new costs of improving the performance of its resources and the perceived risks of nonperformance. Accordingly, PJM’s revised Market Power Mitigation rules provide for a default offer cap available to all resources, but also allow each resource provider to seek a unit-specific offer cap if it can provide data demonstrating that its costs exceed the default cap.

The Capacity Performance Resource product is slated to be phased in to the PJM market by introducing a lower performance expectation—referred to as a “Base Capacity Resource”—for the 2018–19 and 2019–20 delivery years. For the 2020–21 delivery year and beyond, PJM would procure the region’s entire capacity requirement in the form of the Capacity Performance Resource product.

Energy Market Filing Tariff Revisions

Subject to certain revisions, the Commission approved a significant portion of PJM’s proposed Energy Market Filing. The Commission accepted PJM’s revision to the Tariff’s force majeure provisions, agreeing that the effective scope of PJM’s existing force majeure provisions was too narrow. It also accepted revisions to PJM’s rules involving generator outages on the basis that the current rules impede PJM’s ability to ensure reliability and maintain adequate reserves at a reasonable cost.

However, the Commission rejected changes to the PJM rule that allows resource capacity to be designated as a “Maximum Emergency Offer” (making the designated capacity available to PJM only when PJM declares a “Maximum Generation Emergency”). It concluded that the existing provisions had not been shown to be unjust and unreasonable.

Finally, the Commission only partially accepted PJM’s proposed revisions to rules relating to sellers’ operating parameters, directing PJM to further modify its operating parameters rules. Currently, PJM’s energy market rules allow market sellers, in certain circumstances, to condition their day-ahead energy market offers on acceptance of system limitations that extend beyond the operating design characteristics of their specific resources; these parameter limitations may include economic or budgetary concerns. The Commission deemed PJM’s proposed revisions overly restrictive because an offer would no longer be allowed to include contractual limitations as an element of a seller’s overall parameter limitations.

Chairman Norman Bay Dissenting

Chairman Bay dissented to the June 9 Order, stating that the proposal will continue to allow capacity resource owners and operators to profit from poor performance while potentially burdening ratepayers with billions in excessive capacity costs annually. He noted that PJM’s current capacity market has its shortcomings but that it has been in operation for almost a decade and allowed PJM to maintain reliability. Chairman Bay’s dissent suggests that he does not believe PJM’s proposal will incentivize capacity development or enhance generator performance. Finally, Chairman Bay noted that no cost-benefit analysis of the proposal was performed, as was necessary, given the burden consumers will be asked to bear in light of the majority opinion.

Conclusion

Because the underlying FERC proceedings attracted substantially more than 200 interventions, comments, and other filings, it is possible that parties may seek rehearing or otherwise seek revisions to the PJM proposals.

Overall, this Order represents a substantial overhaul to the capacity market operated in PJM’s 13-state grid. The Commission anticipates that its Order will appropriately ensure that resources needed to perform during extreme events in the PJM region can recover the costs of doing so. PJM must submit a compliance filing within 30 days of the Order’s June 9 issuance. The Order’s Appendix C contains references to the conditions that PJM must satisfy for the Commission’s Order to be fully effective.

[1] PJM Interconnection, L.L.C., Order on Proposed Tariff Revisions, 151 FERC ¶ 61,208 (June 9, 2015).

[2] PJM Interconnection, L.L.C., Reforms to the RPM and Related Rules in the PJM Tariff and RAA, Docket No. ER15-623-000 (Dec. 12, 2014).

[3] PJM Interconnection, L.L.C., Revisions to the Operating Agreement and Tariff re Capacity Performance, Docket No. EL15-29-000 (Dec. 12, 2014).