After Seven Years, FERC Eliminates "Windfall" Adder Payments to Mitigated Units (Adder Reflects Costs Already Paid in Capacity Market)

FERC approved without modification a series of tariff revisions filed by PJM to revise PJM's rules related to offer price adders ("FMU adders") for generation units that are frequently offer capped, referred to as Frequently Mitigated Units.

PJM noted that the FMU adders allowed double recovery of costs, since going forward costs are now designed to be recovered in the Reliability Pricing Model capacity market.

It should be noted that the RPM capacity market has been in place, and has allowed for such windfall double recovery, since 2007, but only now -- some seven years later -- is FERC correcting the problem.

FERC said that the existing Offer Price Adders for generation units making price-based offers that are Frequently Mitigated Units, "have been rendered unjust and unreasonable due to evolving market mechanisms, including PJM's implementation of its capacity market auctions."

"As the Market Monitor has found in its 2013 State of the Market Report, these market mechanisms have allowed a large percentage of sellers with Frequently Mitigated Units to cover their Avoidable Cost Rates, i.e., their going-forward costs, such that additional revenues, as provided via an Offer Price Adder, operate as windfalls," FERC said.

"The intention of the PJM 2005 Order [original FMU order] was to allow units to recover their going-forward costs through Offer Price Adders; however, many units are now recovering their going-forward costs through participation in PJM's markets, including PJM's capacity markets. As a result, Offer Price Adders represent windfall revenue to such units," FERC said.

"Additionally, as PJM explains in its filing, Offer Price Adders were originally designed and used to compensate a peaking combustion turbine unit operating for only a small number of run hours per year, as needed to relieve a constraint – not a continuously running, uneconomic automatic load rejection unit. PJM states that as a result of new operation and market trends, Offer Price Adders have been increasingly applied to base load units running thousands of hours per year, which was not the original intent of the adders," FERC said.

The key feature of the tariff changes adopted to correct this problem, and to ensure market sellers are compensated at just and reasonable levels, is that the IMM will examine every Frequently Mitigated Unit on an individual basis every month in order to ascertain whether the market seller of the unit is receiving adequate revenues to cover its going forward costs for the unit, and therefore whether or not the market seller should be eligible to receive a FMU adder. PJM's tariff revisions establish this paradigm by specifying that if a Frequently Mitigated Unit receives adequate revenue from all of PJM's markets during the previous twelve calendar months to cover its going forward costs, the market seller for that unit will not be eligible to include a FMU adder for that unit the following month

Docket EL14-95