PJM IMM Seeks FERC Determination That Capacity Supplier's Sell Offer Is Too Low

The PJM Independent Market Monitor has filed a complaint at FERC seeking a determination that various modeling assumptions, and the resulting sell offer, from an unnamed capacity supplier are invalid, and that the such assumptions must be modified to conform to the Minimum Offer Price Rule.

The IMM did not name the supplier, but indicated that the supplier will receive what the IMM termed "non-market" revenues pursuant to a state procurement process which conditions payment on clearing RPM.

The IMM said that the supplier has indicated its intention to calculate a unit specific offer for its planned project, "using a number of modeling assumptions that do not comply with PJM’s Minimum Offer Price Rule [,] are not based on the specific facts and circumstances of the project and are inconsistent with a competitive market."

"Specifically, Respondent proposes to use, without justification, levelized net revenues, residual value, and exclusion of sunk costs as modeling assumptions. Respondent also proposes to use a weighted average cost of capital ('WACC') lower than the value used to calculate the MOPR reference value. None of these changed approaches for calculating a unit specific MOPR value has been shown consistent with a competitive market and therefore these approaches should be rejected," the IMM said.

In other words, the supplier is seeking to offer a lower capacity price than what an agent of regulation deems appropriate.

More specifically, the supplier proposes to use levelized net energy market and ancillary services revenues as its modeling assumption for calculating a unit specific MOPR value.

The MOPR reference value is instead calculated using first year net revenues. "Use of anticipated first year revenues is a conservative assumption appropriate for investors relying on market revenues to recover their investment," the IMM said.

Without addressing the merits of whether states should be in the business of procuring capacity, the IMM's filing shows yet another fallacy of the capacity "market"

A hallmark of free markets is that free enterprisers will evaluate and assess market conditions differently, because in no market is perfect information available. Some investors will want to take risks, while others will be more conservative, resulting in a range of models for things such as net revenue, residual value, and so forth.

If this is truly a market -- and not an administrative fiat -- how can FERC say one approach is right, and the other is wrong. Indeed, one must wonder why, if FERC can now determine what marks a competitive offer, why there should be competition in the industry at all -- why doesn't FERC simply set the "correct" competitive offer for each unit? Indeed, it would seem the perfect regulation competitive advocates say is impossible, and which is why competition is needed, is not only achievable, but embedded in the application of price floors and other non-market regulations.