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Commissioner Tony Clark Statement
April 21, 2016
Docket No. EL14-20-000
Item No. E-5

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Partial Dissent on PJM Independent Market Monitor Complaint

“Today's order responds to a complaint filed by PJM's Independent Market Monitor (IMM) over two years ago. In its complaint, the IMM makes two arguments: first, demand resources that receive capacity supply obligations should be treated as economic resources required to offer into the day-ahead energy market (must-offer requirement argument),1 and second, those day-ahead energy market offers should be subject to the same offer cap applicable to generation resources (offer cap argument).2

“I dissent in part from today's order because I believe the IMM has more than met its FPA section 206 burden with regard to the must-offer requirement argument, showing PJM’s current exemption of demand resources from a must-offer obligation in the day-ahead market is unjust, unreasonable, or unduly discriminatory or preferential. Further, I believe it is a matter of good public policy and market design to treat resources that compete as full substitutes (such as demand resources and generation in PJM’s capacity market) on a comparable basis.3

“PJM's current regime holds one resource class (generators) to a must-offer requirement paid at system wide marginal cost, while simultaneously exempting a second resource class (demand resources) from that must-offer requirement and then paying that class at the higher of a pre-determined strike price or system wide marginal cost. This is, on its face, discrimination. The question becomes, “is the discrimination undue?”

“In today’s order, as the basis for finding that demand resources should remain exempt from a must-offer requirement, the majority takes the position that unlike generation resources, demand resources are not primarily in the business of providing energy and ancillary services.4 I find this justification for discrimination unpersuasive.

“A resource's primary business function is irrelevant after that same resource makes the voluntary decision to compete and receives a stream of funding from the wholesale market for capacity services. No matter what a resource's “primary business” line consists of, it has voluntarily agreed to enter PJM's capacity construct and provide load reduction when called. Despite the arguments of protestors in this docket, all capacity procured by PJM through its capacity market is obtained on an equal basis for the purpose of providing system reliability.

“There is no carve out in PJM's methodology saying capacity from generation resources is procured for economic goals while capacity from demand resources is procured for emergency-only capacity needs. Rather, the capacity from all resources is procured on the basis of full (locational) substitution. It is only after the procurement is completed that PJM layers on operational and must-offer distinctions. I find the IMM provides adequate justification showing this policy to be unjust, unreasonable, and a threat to grid reliability. If that alone were not enough, the IMM persuasively argues the present construct impedes the proper functioning of markets and increases the potential for improper market power to be wielded.5

“I believe the Commission is too quickly dismissing the concerns that have been raised by PJM's neutral and independent market expert on matters related to how demand resources participate in the wholesale market.6 I cannot help but feel that the subsidies and preferences that have been granted to certain demand-side products are coming at the expense of always available supply-side resources that we need, now more than ever. To this point, we have been fortunate to avoid the worst of the potential negative outcomes that are highlighted by the IMM. Yet hoping for good fortune to continue is a risky long-term strategy. The grid is changing rapidly and, speaking broadly, I am concerned that eventually one or another region of the country will pay the price for a chronic underappreciation of utility-scale energy delivery and generation assets.

“Demand resources, energy efficiency, intermittent distribution-side renewables and the like should have every opportunity to participate in the grid of the future. The Commission has an important role to play to make sure that can happen. Yet their participation in the market should always be based on sound fundamentals, not a devotion to pushing a particular resource or business model. To do otherwise risks an unsustainable bubble. Here and in other contexts, the IMM and other market experts have given fair notice that they believe the Commission's compensation and market rules are suboptimal. I sincerely hope this does not eventually cause reliability or affordability problems, but none of us should be surprised if it does.

“As to the second leg of the IMM complaint related to the offer cap, I find this to be a close call, but ultimately I concur with today’s order on this point. While the IMM raises a worthy topic for consideration, I do not believe it met its burden under section 206 of the FPA. PJM adequately responded to the complaint by describing its rationale for deploying different offer cap mechanisms to differing technologies based on the short run marginal costs for those resources.7 I make no claim of finding that the current offer caps are ideal, but that is not the standard to be met in assessing this type of complaint. The issue may not be ripe in this particular docket, but I do hope it will be further explored not only in PJM, but other organized wholesale power markets through forums such as the Commission's price formation efforts.8

“For these reasons, I respectfully dissent in part from this order.”


    1 Independent Market Monitor Complaint at PP 2-5.
    2 Id. PP 5-7.
    3 See e.g., ISO New England, Inc., 142 FERC ¶ 61,027, at P 27 (2013) (“The Commission finds that establishing a must-offer requirement for demand response resources with capacity supply obligations helps ensure just and reasonable and not unduly discriminatory or preferential rates by providing for more efficient, economic dispatch of all supply resources.”)
    4 Order at P 33.
    5 Independent Market Monitor Answer at P 10.
    7 PJM Answer at 7-10.
    8 Offer Caps in Markets Operated by Regional Transmission Organizations and Independent System Operators, 154 FERC ¶ 61,289 (2016).