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FERC Rules That State Default Service Auctions Are "State Subsidies" For Purposes Of PJM Capacity Market Minimum Offer Price Rule (MOPR)

Finding On SOS Contracts Has, "Sweeping Consequences For The Retail-Choice States," FERC's Glick Says

FERC Says Voluntary RECs Are Not A State Subsidy, But Makes No Finding On Potential Broader Capacity Market "Distortions"

FERC Also Says Voluntary REC Generators Must Ensure Purchasers Do Not Resell RECs For RPS Compliance, In Order To Receive MOPR Exemption

April 17, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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FERC issued an order on rehearing and clarification concerning its December 2019 order broadly expanding the PJM capacity market Minimum Offer Price Rule (MOPR) to various resources which FERC found to be receiving what FERC considers state subsidies

See background on the expanded MOPR adopted by FERC here

As previously reported, stakeholders expressed concern that FERC's broad language defining state subsidies would include any entities which are awarded default service load obligations under procurements run by state retail utility regulators. Various PUCs asked that default service contracts should not be considered state subsidies, or should be considered under a competitive exemption.

While individual generating units largely do not compete in SOS auctions, various PUCs expressed concern that considering the SOS auctions to be state subsidies may chill bidder participation by wholesale suppliers owning various capacity who may also participate in the capacity market, due to the SOS contract being defined as an "indirect" state-mandated payment to their capacity resources, and triggering MOPR for the suppliers' various capacity resources. Reduced bidder participation would make the SOS auction and its pricing less competitive, the PUC said

FERC denied rehearing and clarification requests regarding state default service auctions, and found that state default service auctions are a state subsidy

"We deny rehearing and clarification requests regarding state default service auctions. State default service auctions meet the definition of State Subsidy to the extent they are a payment or other financial benefit that is a result of a state-sponsored or state-mandated process and the payment or financial benefit is derived from or connected to the procurement of electricity or electric generation capacity sold at wholesale, or an attribute of the generation process for electricity or electric generation capacity sold at wholesale, or will support the construction, development, or operation of a capacity resource, or could have the effect of allowing a resource to clear in any PJM auction," FERC said

"If these auctions are truly competitive, as parties assert, and a winning resource wishes to offer below the default offer price floor for its resource type, the resource may demonstrate that its costs are competitive through the Unit-Specific Exemption, or qualify for another exemption elaborated on in the December 2019 Order. Nor do we find it meaningful that the New Jersey Basic Generation Service auction is voluntary or used by power marketers because a state default service auction qualifies as a State Subsidy because it is a state-sponsored process and includes indirect payments to the resource," FERC said

In a dissent, Commissioner Richard Glick notes that, "It quickly becomes clear that state default auctions are a commonplace in retail choice states and can often be used to meet the needs of upwards of 50% of retail load. The Commission’s decision to label these auctions—which sometimes cover more than half a state’s retail load—state subsidies could have sweeping consequences for the retail-choice states that make up the majority of PJM states."

Glick further notes, "[T]he Commission makes no effort to wrestle with the practical challenges of its edicts. As the New Jersey Board explained in its rehearing request, the 'suppliers' in New Jersey’s default service auction are generally power marketers that rely on either financial or physical hedging and are not necessarily backed by particular physical generators. Do the Commission’s statements in today’s orders mean that PJM, the Market Monitor, or someone else will have to chase down every resource power marketers use to satisfy a default service auction contract? In addition, default service auctions generally do not align with PJM’s annual single delivery-year capacity auctions. For example, in New Jersey the auction runs annually and covers only one-third of load at time, but with three year contracts. In the District of Columbia the auctions are held annually. And in Pennsylvania they are run 'quarterly, or every 6 months.' How will PJM, the Market Monitor, or the Commission sort out which resources are to be mitigated in PJM’s Base Residual Auction based on those differing state calendars?"

Voluntary RECs

FERC granted clarification that voluntary REC contracts, not used to meet a state RPS, are not a state subsidy, but emphasized that its determination was limited to whether voluntary REC contracts are a state subsidy, as FERC stressed that it made no finding on potential "distortions" to the capacity market from voluntary RECs

Furthermore, to qualify from an exemption from the MOPR, a generator claiming its RECs are only used for voluntary purposes must ensure that no broker or direct buyer will resell voluntary RECs to state compliance purchasers

"We grant clarification that purely voluntary transactions for RECs are not considered State Subsidies," FERC said

"This determination relates to the State Subsidy definition and we are not opining on the effect of voluntary RECs on capacity market outcomes," FERC said

"New and existing resources, other than new gas-fired resources, that apply for the Competitive Exemption may, as part of that process, certify that they will only sell their RECs through voluntary REC arrangements, meaning those which are not associated with state-mandated or state-sponsored procurement. Such new and existing resources (other than new gas-fired resources) must likewise ensure that no broker or direct buyer will resell voluntary RECs to state compliance purchasers," FERC said

"The treatment of voluntary RECs in this order is not a determination regarding whether the revenue from voluntary REC transactions results or could result in capacity market distortions; this proceeding, and the evidence presented herein, was limited to the effect of State Subsidies," FERC said

Generally, FERC largely upheld the MOPR in the rehearing order

Docket No. EL16-49-002 et al.

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