FERC Finds Part of PJM Capacity Market Mitigation Measures Unreasonable; IMM Had Warned Tariff Allowed Excessive Compensation

FERC has found part of the market mitigation measures for PJM's capacity market to be unjust and unreasonable since the tariff allows the cost-based energy offer cap to be used as the sole measure of short-run marginal cost in calculating capacity market offer caps.

Capacity market offer caps are dependent in part on Projected PJM Market Revenues. Lower Projected PJM Market Revenues result in higher capacity market offers caps

In turn, Projected PJM Market Revenues were established under the tariff by cost-based energy offers. Accordingly, higher costs for a unit decreases net Projected PJM Market Revenues, and results in a higher capacity market offers cap

The Independent Market Monitor noted that the use of only cost-based offers in setting Projected PJM Market Revenues could result in an under-estimate of Projected PJM Market Revenues (and an erroneously higher capacity market offer cap) in situations where a unit's market-based energy offer was lower than a cost-based offer for the same unit.

For example, in establishing a cost-based offer, a unit may use the higher-priced fuel of its dual fuel types, in order to inflate its resulting capacity market offer cap. However, in actually bidding behavior, the same unit may reflect its lower-priced fuel in its market-based energy offer.

The IMM sought to address the problem by determining marginal costs for the purposes of Projected PJM Market Revenues as the lower of a unit’s cost-based offer or market-based offer, if the market-based offer exceeds marginal costs based on fuel and emission costs, while providing the seller the opportunity to support the assertion that its lower market-based offer is less than its marginal costs

FERC agreed that the current tariff is unjust and unreasonable because it allows the cost-based energy offer cap to be used as the sole measure of short-run marginal cost in calculating capacity market offer caps

"We ... conclude that PJM’s current tariff using cost-based offers in all circumstances to reflect marginal cost is at odds with the rest of PJM’s market design and is unjust and unreasonable ... [I]n the energy market, when a generation resource fails the three pivotal supplier test and submits a non-zero market-based offer less than its cost-based offer cap, PJM uses the lower, market-based offer, not the cost-based offer, as the basis for determining the resource’s commitment and dispatch. When a resource is not subject to market power mitigation, PJM uses its offer as the basis for the resource’s commitment and dispatch. In both cases, PJM’s energy market relies on the offer, not the cap, as reflecting the resource’s short-run marginal cost," FERC noted

FERC said that PJM should apply the following procedure in determining marginal cost estimates.

"[W]hen the resource is not exercising market power, reliance on the market-based offer, not the cost-based cap, is an accurate measure of the resource’s short-run marginal cost in calculating its Market Seller Offer Cap. Thus, PJM should use the resource’s non-zero market-based offer to reflect marginal costs except in two circumstances, in which the cost-based offer should be used: 1) when the resource is mitigated and its market-based offer is above the cost-based offer cap under PJM’s Tariff, as the market-based offer in this circumstance may reflect the exercise of market power; and 2) when the market-based offer is less than its fuel and environmental costs, since the generator is losing money for each MW produced, a reasonable projection of its energy and ancillary services revenue should reflect such a reduction," FERC said

Docket No. EL14-94