FERC's Glick Says Generation Competing In Default Service Auctions Would Be Subject To Expanded Minimum Offer Price Rule (MOPR) In PJM's Capacity Market

Glick: "We Should Be Taking A Hard Look At Whether A Mandatory Capacity Market Remains A Just And Reasonable Resource Adequacy Construct"

December 20, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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In a dissent, FERC Commissioner Richard Glick said that a generator's participation in the New Jersey Basic Generation Service (BGS) auctions could trigger such unit being subject to the expanded minimum offer price rule (MOPR) in PJM's capacity market

To begin, as previously reported yesterday, FERC's MOPR order defines state subsidy as, "A direct or indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit that is (1) a result of any action, mandated process, or sponsored process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, and that (2) is derived from or connected to the procurement of (a) electricity or electric generation capacity sold at wholesale in interstate commerce, or (b) an attribute of the generation process for electricity or electric generation capacity sold at wholesale in interstate commerce, or (3) will support the construction, development, or operation of a new or existing capacity resource, or (4) could have the effect of allowing a resource to clear in any PJM capacity auction."

Citing the broadness of the definition, Glick said that, "PJM states have a host of idiosyncratic regulatory regimes that may well trigger the MOPR."

In his dissent, Glick continued, "Case-in-point: The New Jersey Basic Generation Service Electricity Supply Auction (BGS auction)."

"Through this state-mandated process, electric distribution companies solicit offers from resources to serve their load. The plain language of the Commission’s definition of subsidy would treat any resource that serves load through the BGS auction as subsidized and, therefore, subject to the MOPR," Glick said of the BGS auction [emphasis added]

Although the FERC definition of state subsidy does use the term "non-bypassable consumer charge" as one of the defining characteristics of a state subsidy (which would not ensnare the BGS auction), as noted above, the definition also includes any "payment" that results from the action or process of a state agency that is derived from or connected to the procurement of electricity sold at wholesale. With respect to a specific generating resource which may participate in a default service auction (in this case, BGS), Glick's argument is well-taken

Of course, specific units rarely (if ever) participate in default service auctions. Rather, wholesale power marketers, some of which may be affiliated with generation, bid to serve load. In such case, the generator would not receive a direct "payment" from the BGS auction process for the electricity.

However, the FERC definition uses the term "indirect payment," and it remains to be seen if it could be argued that a generator whose marketing affiliate serves load in a default service auction is receiving an indirect "payment" as a result of such state auction in exchange for serving load as directed by its affiliate

Glick said that if units serving BGS load are considered to be receiving a state subsidy (and are not exempt from the MOPR under the exemptions reported yesterday here, "That means that PJM and its Market Monitor will need to look behind the results of every BGS auction to determine which resources are receiving a benefit from this state process, which covers nearly 8,000 MW of load. That could easily mean that the majority resources that serve load in New Jersey will now be subject to mitigation."

"As this example illustrates, even state processes that are open, fair, transparent, and fuel-neutral may be treated as state subsidies, irrespective of the underlying state goals," Glick said

Glick said, "Perhaps the Commission will find a way to wiggle out from under its own definition of subsidy in ruling on PJM’s compliance filing or over the course of what will no doubt be years of section 205 filings, section 206 complaints, and requests for declaratory orders addressing the definition of subsidy. But even under the best case scenario, where the Commission provides PJM and its stakeholders with quick and well-reasoned guidance on the meaning of 'State Subsidy' (and, based on the Commission’s performance to date in this proceeding, I would not get my hopes up), it will likely be years before we have a concrete understanding of how the subsidy definition works in practice or resources know for sure whether they will be subject to mitigation."

More broadly, in his dissent Glick said FERC under the MOPR order is,"creating a byzantine administrative pricing scheme that bears all the hallmarks of cost-of-service regulation, without any of the benefits."

"That is a truly bizarre way of fostering the market-based competition that my colleagues claim to value so highly," Glick said

"Although this administrative pricing regime is likely to be as complex and cumbersome as cost-of-service regulation, it provides none of the benefits that a cost-of-service regime can provide. Most notably, the administrative pricing regime is a one-way ratchet that will only increase the capacity market clearing price. Unlike cost-of-service regulation, there is no mechanism for ensuring that bids reflect true costs. Nor does this pricing regime provide any of the market-power protections provided by a cost-of-service model. Once mitigated, resources are required to offer no lower than their administratively determined offer floor, but there is no similar prohibition on offering above that floor," Glick said

"One final point. I fully recognize that the PJM states are doing far more to shape the generation mix than they were when the original settlement established the PJM Reliability Pricing Model in 2006. It may well be that a mandatory capacity market is no longer a sensible approach to resource adequacy at a time when states are increasingly exercising their authority under the FPA to shape the generation mix. Indeed, the conclusion that I draw from the record in front of us is not that there is an urgent need to mitigate the effects of state public policies, but rather that we should be taking a hard look at whether a mandatory capacity market remains a just and reasonable resource adequacy construct in today’s rapidly evolving electricity sector. It is a shame that we have not spent the last two years addressing that question instead of how best to stymie state public policies," Glick said

EL16-49-000 et al.

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