FERC Accepts Changes to Maintain Higher Capacity Prices in PJM

FERC accepted several changes to the Reliability Pricing Model tariff which will act to raise capacity prices, but ordered hearing and settlement procedures regarding the Cost of New Entry (CONE).

As previously reported (12/2), PJM proposed, among other things, that the numerator of the price equation for point 1 on the Variable Resource Requirement (VRR) curve shall reflect the greater of the Cost of New Entry or 1.5 times (the Cost of New Entry minus the Net Energy and Ancillary Service Revenue Offset). In others words, the highest point on the VRR Curve would be set equal to the greater of gross CONE or 1.5 times Net CONE.

FERC accepted this revision without modification, agreeing with PJM that the action is needed to avoid the "potential collapse" of the Variable Resource Requirement Curve through the operation of original, settlement design of the Energy and Ancillary Services (E&AS) Offset. The original design recognized that capacity payments are meant to supplement energy market revenues, and accordingly, adjusted future capacity prices (through changes to the Net CONE) to reflect high energy prices received by capacity owners in the prior year.

FERC said that application of the E&AS Offset absent the change to the VRR curve, "creates the perverse outcome that capacity prices could drop precipitously following tight capacity conditions." The adopted change will maintain higher capacity prices, even in years following high energy prices.

However, the Maryland PSC noted that it is "illogical" that customers should pay more for capacity after they pay more for energy, since capacity payments are intended to provide "missing money" not otherwise recovered in the energy market, and, if energy prices are sufficiently high, no missing money exists (see 12/23).

In another action to raise capacity prices, FERC accepted PJM's proposal to cease applying the 2.5% "hold-back" to the separate minimum procurement requirements for two distinct resource categories, i.e., Annual Resources and Extended Summer Resources, though the overall 2.5% "hold-back" will remain. The cessation of the 2.5% "hold-back" to the separate minimum procurement requirements is meant to raise capacity prices in the Base Residual Auction.

As to the Gross Cost of New Entry (CONE), FERC said that PJM's proposed updates to the Gross CONE values for the five CONE Areas have not been shown to be just and reasonable, and ordered hearing and settlement procedures. Although FERC did not adjudicate the issue, CONE values were generally being contested by capacity owners (and not load), who argued that additional costs should be reflected in the CONE figures. Accordingly, FERC's statement that there are, "material issues of disputed fact as to the proper calculation of the Gross CONE values," should be seen as setting further examination of whether costs should be added to CONE, rather than removed.

FERC rejected PJM's proposal to establish the region-wide Net CONE based on the median value of the location-specific Net CONE. The current mechanism under which Net CONE is calculated by subtracting region-wide E&AS Revenues from the lowest Gross CONE value of any CONE Area will be retained.