FERC Maintains Inflated Capacity Prices

FERC denied rehearing on all but several minor points regarding its prior decision to inflate capacity prices in PJM by $3 billion by accepting a revised Minimum Offer Price Rule (MOPR), which, among other things, removed the exemption from the MOPR for capacity sellers who were not net short on capacity (EL11-20).

Ignoring its total subjugation of states' role in resource adequacy, FERC said, "We only seek to ensure the reasonableness of the wholesale, inter-state prices determined in the markets PJM administers."

However, such as assertion continues to ring hollow. While it is undeniable that returning the MOPR to its original design prior to FERC's April order would result in lower capacity revenues to asset owners, FERC offers no support for how this outcome is unreasonable.

The only impact from the MOPR is that the marginal generating units in RPM will be displaced. However, the total capacity procured will remain constant, so there will be no reliability impact. While other generators which clear RPM will receive a lower price, since these units were not marginal, such lower capacity pricing is clearly acceptable to them in order to continue operation; otherwise, the units would have been marginal and bid at higher prices.

FERC also declined to grant state-driven procurements an exemption from the MOPR, essentially stating that if states wish to pursue policy goals, the RPM clearing price received by all generators (even those of a type not desired by policymakers) should be inflated to reflect any such goals

Specifically, FERC said:

"RPM itself, however, has no feature to explicitly recognize, for example, environmental or technological goals, nor does it contemplate reliability concerns beyond a three-year forecast. If PJM market participants agree that RPM should account for resource attributes that reflect broader objectives than three-year forward reliability, then PJM and its stakeholders should begin a process to consider how to incorporate these features into RPM's market design. In this way, all capacity resource suppliers will be able to receive a non-discriminatory market clearing price that reflects these values in addition to reliability." [emphasis added]

In terms of the limited items for which FERC did grant rehearing, FERC revised the unit-specific review process assets may pursue to receive an exemption from the MOPR.

FERC originally required assets to show, in a unit-specific review, that a capacity offer is, "consistent with the competitive, cost-based, fixed, nominal levelized, net cost of new entry," to avoid application of the MOPR.

On rehearing, FERC said that this unit-specific review need not utilize a nominal levelized methodology.

"[W]e conclude that the April 12 Order's implication that it would always be irrational for a new entrant to offer at a price based on the real levelized method was not justified," FERC said.

"We agree with PJM that, while the nominal cost recovery method is appropriate for the MOPR screen, requiring that cost recovery method during the unit-specific review process is unnecessary. In making a case to the IMM, PJM, or the Commission, parties should have the opportunity to present a reasonable business case based on their individualized facts and circumstances, including the use of a different depreciation model. The case-by-case nature of the unit-specific exemption process allows for the IMM, PJM, and the Commission to consider more carefully the different circumstances of individual sellers. Thus, we grant rehearing of the April 12 Order's requirement that the standard of review applicable to the unit-specific review process reflect the use of the nominal levelized methodology, without exception," FERC held.

FERC also addressed a PJM compliance filing, and found that the compliance filing inappropriately limited the application of the MOPR offer floor to Planned Generation Capacity Resources. FERC noted that under PJM's tariff, a resource will cease to be a Planned Generation Capacity Resource on the date interconnection service commences.

"Thus, a new resource could permanently escape the MOPR offer floor, for example, by completing construction and beginning to receive interconnection service (thereby ending its status as a Planned Generation Capacity Resource) prior to offering into an RPM auction," FERC said.

FERC also agreed that the compliance filing inappropriately failed to immediately apply the MOPR to new-entry offers in incremental auctions; instead, PJM proposed to apply the MOPR only to incremental auctions beginning with the 2014-15 delivery year.

FERC directed PJM to correct these two deficiencies.