FERC Slaps Down Pennsylvania PUC Concerns Over Shortage Pricing in PJM

FERC has again dismissed concerns raised by the Pennsylvania PUC regarding shortage pricing in PJM, in denying a request for rehearing of an earlier FERC order.

The rehearing request concerns the previously reported FERC approval of a combined $2,700/MWh energy and reserves price cap in PJM. As Matters previously noted, this higher price cap was instituted to address "shortage" conditions despite the presences of a capacity market insisted to "assure" resource adequacy.

The PaPUC supported the pricing of operating reserve shortage events, but stressed that, "it should be clearly stated that this is a novel and untested market construct that is sensitive to unforeseen market failure and physical infrastructure disruptions."

Accordingly, the PUC had proposed a tariffed "circuit breaker" provision that would suspend shortage pricing during such non-market events to protect customers.

In its initial order, FERC, "chose to disregard that recommendation, asserting that PJM has the legal right to file a FPA Section 205 tariff filing proposing relief in such an unfortunate event," the PaPUC said.

However, the PaPUC noted in a rehearing request that, "[a]s past experience indicates, that 'remedy' may take weeks or months to become effective, even in the most pressing and obvious market failure event."

"In the event of runaway Shortage Pricing, refunds would be very difficult, if not impossible to determine or accurately distribute," the PaPUC added.

"Whatever its theoretical merits, 'shortage pricing' is an untested major modification to PJM's existing energy market that has the potential to do enormous harm in a short period of time in the event of market failure, mishap, or catastrophe," the PaPUC said.

Moreover, the PaPUC noted that in times of market failure or natural disaster, "shortage pricing does not provide any meaningful or useful economic investment signals – it would merely result in extremely high flows of money from electricity customers to generators without any corresponding public benefit."

"That would be the essence of an 'unjust and unreasonable rate,'" the PaPUC said.

The PaPUC's concern is notable because the PaPUC has been a supporter of what PJM considers to be an "efficient" capacity market design, and the PaPUC has opposed out-of-market interventions by other states to depress capacity prices, which the PaPUC believes risks its ability to procure adequate supply for its state's ratepayers. The PaPUC notably endorsed a stricter Minimum Offer Price Rule in the capacity market.

In other words, the PaPUC's concern carries weight because of its discrete and unique nature, rather than, if it were another PJM state, being par for the course from a state regulator opposed to any changes sought by asset owners.

The specific circuit breaker provision that the PaPUC requested would prescribe that all purchases of energy or ancillary services above a price threshold (such as $1,000/MWh) would temporarily be compensated on an out-of-market basis (cost plus an adder), rather than establishing market-clearing prices above the threshold. The circuit breaker provisions would only go into effect upon an order by FERC, and FERC would also determine the circumstances under which normal pricing would be resumed.

The rules sought by the PaPUC would also specify that if the cumulative hours of shortage pricing exceed a threshold of 30 hours over a 10 day period, or if PJM prospectively expects that hours of shortage pricing may exceed a threshold (for instance, due to a common mode failure affecting multiple capacity or generation resources, such as the loss of a major electric or natural gas transmission facility, multiple generation facilities or a legislative or judicial action that would shut down multiple generating plants), PJM must immediately file with FERC a description of the recent and/or anticipated circumstances and the impact on prices and consumers as well as any additional information useful to FERC in order to determine whether it would be in the public interest to activate the circuit breaker provisions.

Nevertheless, despite the PaPUC's clear articulation of how the lack of the circuit breaker provision can lead to unjust rates in times of natural disasters or market failures, FERC in an order denying rehearing summarily found that the PaPUC, "has failed to identify circumstances unique to PJM's Filing that would make PJM's compliance filing unjust and unreasonable for failing to include an additional 'circuit breaker' or safety cap."

Docket: ER09-1063