FERC Vacates Footnote That Suggested NJ Default Service Auction Constituted State Subsidy To Generators, Would Be Subject To Minimum Offer Price Rule

February 19, 2021

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Reporting by Paul Ring • ring@energychoicematters.com

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FERC has vacated a prior footnote, in an order on the Minimum Offer Price Rule in the PJM capacity market, which had suggested that New Jersey's basic generation service (BGS) default service auction did not meet the PJM tariff exemption that holds that fuel-neutral SOS auctions do not trigger the Minimum Offer Price Rule in the capacity market for SOS auction participants

As previously reported, FERC's footnote from an October 2020 order had stated, "While this order accepts the exemption that PJM has proposed, it does not constitute a ruling that any particular state-directed default service auction actually meets these requirements. For example, we note that the New Jersey Basic Generation Service (BGS) auction appears to give guidance that conflicts with the proposition it is 'non-discriminatory' or 'fuel neutral.' Specifically, in the section on frequently asked questions (FAQs), FAQ-24 addresses the question whether Supplier Master Agreements (SMAs) submitted to the state BGS must comply with renewable portfolio requirements. See Frequently Asked Questions # 24, New Jersey Statewide Basic Generation Service Electricity Supply Auction, http://www.bgs-auction.com/bgs.faq.item.asp?faqId=1100 (last visited Sept. 26, 2020). FAQ-24 instructs that '[t]here is no exemption under the SMAs from future increases in RPS requirements.' Id. Further, while FAQ-24 acknowledges that 'in the past, the Legislature, when increasing solar requirements, exempted existing BGS Suppliers from the increase,' it continues by stating that 'there is no guarantee that future legislation, Board Orders, or other changes would continue to provide such an exemption for BGS Suppliers.' Id. This guidance appears to conflict with the notion that the BGS auctions are either non-discriminatory or fuel neutral and may indicate that such auctions may be 'for the purpose of supporting the entry . . . of preferred generation resources.'"

As previously reported, FERC's footnote fundamentally misunderstands how default service auctions work and specifically misconstrued the relevant FAQ that it cited in the footnote (see a discussion of the footnote here)

As previously reported, the New Jersey BPU sought rehearing of FERC's order and requested that FERC clarify that, in the footnote, FERC did not intend to prejudge whether specific state programs trigger the Minimum Offer Price Rule (MOPR), but instead expects to rely on a detailed, fact-specific analysis by independent auction managers, with guidance and review from PJM and the Independent Market Monitor (IMM), to determine whether the New Jersey BGS program triggers mitigation; and to vacate the footnote

In response, FERC vacated the footnote (footnote 134).

FERC stated, "The Compliance Order accepted PJM’s proposed Tariff language, which describes the process and criteria necessary to determine whether revenue related to state-directed default service auctions qualifies for exclusion from the definition of State Subsidy. That language provides that 'state-mandated renewable portfolio standards for which Capacity Resources are separately subject to the minimum offer price rule or eligible for an exemption' do not preclude a default service auction from being non-discriminatory and competitive. We agree with the New Jersey Board that aspects of footnote 134 are inconsistent with that language, which is now the filed rate."

Commissioner James Danly dissented, stating that the footnote had appropriately explained how SOS would be treated with respect to the MOPR if the auctions were being used, "for the purpose of supporting the entry . . . of preferred generation resources."

Danly stated, "If a state procurement auction authorizes or requires payments for default service to new, non-grandfathered renewable resources that are not otherwise exempt from mitigation, then such payments constitute a State Subsidy. Further, it was within the Commission’s authority to interpret the language of PJM’s tariff and explain the limitation on the scope of the Commission’s decision to permit an exception from the definition of a State Subsidy."

However, as noted in our prior commentary, while Danly's vision may have been the intent of the footnote and otherwise consistent with FERC's approach, the footnote's language did not reflect this focus on new resources, as the reference to the FAQ only references potential change in RPS levels, which could be met by existing resources, not necessarily new resources

Docket Nos. EL16-49-006 et al.

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