PJM Releases Details of Revised Offer Floor in Capacity Market -- Dares States to Re-regulate

PJM has released details of what has been called a "settlement" regarding changes to the minimum offer price rule (MOPR) -- an offer floor designed to limit competition in the mandatory capacity auction.

The settlement essentially removes the ability of states with restructured electric markets to build their own capacity as a means of reducing their capacity obligations without electing the unfeasible Fixed Resource Requirement.

As a result, the settlement essentially dares restructured states frustrated with the capacity market to return to a vertically integrated model, or a proxy of it, if they desire to take control of capacity prices paid by their customers.

Once again, this leaves the retail market blowing in the wind for the enrichment of the owners of capacity, most of which was originally built by ratepayers.

Whatever else they may be, New Jersey's long-term capacity contracts were competitively neutral to retail suppliers, and if exercising control over its state's capacity requirements through the contracts satisfied state regulators and prevented them from taking more drastic actions to mitigate electric rates -- such as a managed portfolio for default service or a rollback of customer choice -- such capacity contracts should be embraced.

Indeed, it can even be argued that the long-term capacity contracts enhance retail competition by decreasing the subsidization of retail suppliers owning generation by independent retail suppliers via mandated capacity payments.

The major tenets of the MOPR settlement can be found here in a PJM presentation.

The settlement is not supported by state regulators

Notably, to be exempt from the MOPR, generation built by an entity other than a Vertically Integrated Utility, Single Customer Entity, or Public Power Entity must demonstrate that:

• No costs are recovered from customers either directly or indirectly through a non-bypassable charge linked to the construction of or clearing of the new generation in RPM.

• No costs of the new generation are supported through long-term contracts obtained in any state-sponsored or state-mandated procurement processes that are not Competitive and "Non-Discriminatory."

• Seller does not have any formal or informal agreements or arrangements to receive payments, rebates, etc. from any governmental entity connected with the construction or clearing in RPM of the new generation.

Additionally, the exemption from the MOPR for vertically integrated utilities only applies if the LSE's net short position is 20% or less of the load serving entity's reliability requirement.

PJM's presentation is skeletal, and specific tariff language is not included, so it is unclear what precise mechanisms could be used to avoid the MOPR.

For example, the Maryland long-term capacity contracts seemingly meet all of the requirements for exemption from the MOPR listed above (notably, they are supported by a bypassable charge), at least as any reasonable person would interpret them. The exemption does require that the capacity result from a "non-discriminatory" solicitation, which the PSC's capacity contracts did.

However, in the capacity market world, buying only new capacity is somehow viewed as "discriminatory" even though it is a fundamental right inherent in empowering customers with choice.

In any event, history has shown that refined buyer-side mitigation rules do not prevent states from continuing to exercise control over their capacity.

The conclusion is that as the MOPR continues to eliminate capacity procurements that are consistent with the retail market (such as the New Jersey mechanism), the only solution left for states to free themselves from the yoke of the capacity market will be radical changes to the retail electric market, including the reintroduction of vertical integration and the elimination of choice.

Moreover, even if the MOPR successfully prevents states' capacity procurement mechanisms and states balk at full re-regulation, the loss of the ability to control the capacity portion of the customer bill will force regulators to address other parts of the bill in order to "do something" about electric rates. This leaves energy supply, and energy procurement, which is solely within state regulators' purview, as one of the last options for regulators to mitigate prices.

As seen in New Jersey, mitigation of capacity rates can occur without any negative impact on the retail market.

However, the same is not true when it comes energy supply and procurement. If a state like Maryland wishes to mitigate what it considers high electric rates, and lowering capacity prices is not an option, the solution is clear -- mitigate SOS prices by whatever means necessary -- managed portfolio, long-term contracts, block instead of full requirements contracts, switching restrictions, etc.

Limiting state regulators' authority over nonbypassable capacity rates is an invitation for them to mitigate bypassable supply rates, to the destruction of the retail market.