Docket Nos. ER24-98-000, ER24-98-001
Today’s order rejects PJM’s proposed capacity market revisions on several bases and offers PJM guidance should it choose to re-file a modified version of the proposal. I agree that PJM has not demonstrated its overall proposal is just and reasonable, and therefore I support much of the order. However, I believe two of the majority’s stated bases for rejection are without merit, so I dissent in part on those elements of the order. Specifically, I believe PJM has met its Federal Power Act (FPA) section 205[1] burden on proposed tariff revisions governing (1) penalty application to Fixed Resource Requirement (FRR) resources and (2) PJM’s role in administering its market power mitigation rules. I discuss these two elements in turn below.
PJM’s existing tariff provides that an FRR entity must choose between two options to govern how the resources in its FRR plan will be penalized if one or more fail to deliver capacity during a Performance Assessment Interval: a financial non-performance assessment or a physical non-performance assessment.[2] The financial option subjects non-performing resources to the same penalties to which resources participating in PJM’s capacity market are subject. This option also allows an FRR resource to earn bonus payments should it over-perform during an assessment interval. Because bonus payments are a redistribution of collected penalties,[3] the financial options allows an FRR entity to offset under-performance by some of its resources with over-performance by others. That is, so long as its FRR plan portfolio on net delivers its expected performance, the FRR entity will incur little or no penalty.
The physical option, by contrast, levies no monetary penalty when an FRR resource under-performs, but rather requires that the FRR entity procure additional capacity for the next delivery year as a form of penalty.[4] The quantity of additional capacity the FRR entity must supply the next year is calculated pursuant to a tariff formula.[5] Under the physical option an FRR resource is not eligible for any bonus for over-performance. However, an FRR entity may—similar to the portfolio approach under the financial option—offset the under-performance of some of its resources with the over-performance of others. Any physical penalty is applied to the net performance across its portfolio.[6] In 2015 the Commission found both options to be just and reasonable and not unduly discriminatory or preferential.[7]
PJM now proposes to eliminate the physical option, to address what it argues is a lack of adequate performance incentives for FRR sellers that choose this option. PJM proposes to leave the financial option untouched. The majority rejects this change because it “would subject FRR entities to financial Non-Performance Charges on an individual resource basis.”[8] The majority also finds that the change “fails to provide an appropriate accommodation to the unique planning processes of FRR entities” and that PJM has not sufficiently justified its departure from the precedent created when the Commission accepted the existing two-option model.[9]
I disagree that there is a basis to reject this element of PJM’s proposal. To the majority’s first point that the change would subject FRR entities to penalties on an individual resource basis, that is already the case today under either the financial or physical option. All resources, whether they clear PJM’s capacity auction or are included in an FRR plan, are assessed for performance on an individual basis.[10] And, as described above, both the financial and physical options provide for portfolio netting. The distinction that the financial option nets on penalty/bonus dollars and the physical option nets on MWs is immaterial—the outcome is that an FRR entity’s performance is judged on a portfolio basis under either option.[11]
The majority’s second justification is that elimination of the physical option deprives FRR entities of an appropriate accommodation to their unique planning processes and that PJM has failed to support a departure from the basis on which the Commission previously accepted the two-option structure. As an initial matter, it is not clear from the record why the physical option is necessarily more consistent with FRR entities’ retail regulatory structure. Whether an FRR portfolio’s under-performance incurs a monetary penalty or a penalty requiring the acquisition of additional capacity, the FRR entity will no doubt need to coordinate with its state regulator to account for the penalty. This reality is embedded in the two-option structure that exists today.
Regardless, this consideration must be balanced against PJM’s interest in incentivizing the resource performance that allows it to maintain reliability during the emergency conditions that trigger assessment intervals. Providing robust incentives for capacity resources to deliver energy during critical periods was PJM’s stated objective in proposing the Capacity Performance construct in 2014[12] and was central to the Commission’s acceptance of it.[13] And today’s order—in a finding that I strongly support—affirms that maintaining those incentives is a critical element of the Capacity Performance design.[14]
The Commission’s 2015 Capacity Performance order also found that, “while [FRR] entities do not procure their capacity commitment through PJM’s capacity auctions, the ability of these resources to perform is equally critical to system reliability.”[15] Now, after nearly six delivery years’ worth of experience with Capacity Performance, PJM asserts it is appropriate to eliminate the physical option because it “can severely mute incentives to perform when the system needs [performance] the most” given that the penalty’s effects are deferred (until the next delivery year).[16] PJM states this is especially the case when an FRR entity “has excess supply not already in its FRR plan or can readily purchase it on the market at low cost.”[17] PJM argues that removing the physical option, among other market changes the Commission recently accepted unanimously,[18] “create[s] equitable treatment between FRR entities and [capacity market] participants[.]”[19]
PJM continues to grapple with inconsistent resource performance during extreme weather events, most recently in Winter Storm Elliott.[20] As FRR resources are “equally critical to system reliability,” I believe it is reasonable for PJM to subject them to performance penalties and incentives comparable to those faced by other capacity resources on its regional system.
Today’s order also opines on the validity of PJM’s proposal to independently calculate offer caps in administering its capacity market power mitigation tariff rules.[21] While styled as guidance, the majority raises several concerns with PJM’s proposal, signaling that it does not believe this element of the proposal passes muster under FPA section 205. I see no support for that conclusion. In fact, the two authorities cited by the majority—the Commission’s Order No. 719 and section 12A of PJM’s tariff—appear to clearly support PJM’s position, rather than that of protestors.
Under PJM’s existing tariff, when a capacity seller found to possess market power offers a resource into a capacity auction, the offer is subject to a unit-specific review process to ensure it comports with PJM’s market rules.[22] The result of this review process is that PJM determines an offer cap for each resource—i.e., a maximum price at which the seller can offer the resource into the capacity auction.[23] PJM’s tariff also provides a defined role for the Market Monitor in this process. Specifically, capacity sellers must (1) provide to both PJM and the Market Monitor data and documentation supporting its preferred offer price; (2) promptly address any concerns identified by the Market Monitor regarding that data and documentation; (3) review the offer cap calculated by the Market Monitor; (4) attempt to reach agreement with the Market Monitor on an offer cap level; and (5) notify PJM and the Market Monitor whether such agreement has been reached and, if no agreement is reached, what offer price the seller wishes to put forward for PJM’s review.[24]
The tariff then provides that PJM will review the data submitted by the seller and make a determination as to whether to accept the seller’s preferred offer or reject it.[25] As PJM explains in its filing, in the event PJM determines the seller’s offer is inconsistent with the tariff rules, PJM’s only option is reject the seller’s offer, which then requires the seller to offer its capacity at a default price level corresponding to the resource’s technology type, as specified in the tariff.[26]
It is this last part—PJM’s limited choice to accept or reject the seller’s preferred offer price—that PJM seeks to revise in the instant filing. PJM argues that having only the binary choice of accepting or rejecting a seller’s preferred offer is overly restrictive. PJM states that this limitation can result in a seller’s offer being rejected outright even when PJM agrees with certain components of the seller’s preferred offer (but disagrees with others).
To allow itself greater flexibility in administering these rules, PJM proposes a tariff revision to allow it to calculate an alternative offer cap for a resource based on the seller’s submitted documentation.[27] If implemented, PJM would be able to (1) accept a seller’s preferred offer price, (2) reject it and subject the seller to the tariff-derived default value, or (3) select PJM’s own calculated value based on the data and documentation submitted by the seller.[28] PJM states that this change would “allow[] PJM to calculate and approve a unit-specific offer based on components that are consistent with the Tariff while rejecting others that are not.”[29] PJM asserts that this change does not alter the respective roles of PJM and the Market Monitor with regard to this process as it exists under the existing tariff because PJM, with consideration of the Market Monitor’s input and determination, already has ultimate approval authority of all offer caps; and the Market Monitor can escalate any disagreements with a PJM-approved offer cap to the Commission.[30]
The majority takes issue with PJM’s proposal on several grounds. First, it asserts that “the Market Monitor is ultimately responsible for market power mitigation[.]” This is incorrect. As described in the summary above, the Market Monitor plays an important but circumscribed and advisory role under PJM’s offer cap rules; PJM is, under the existing tariff, the ultimate arbiter of whether a seller’s offer comports with the market power mitigation rules. This is clear both from Attachment DD, section 6.4(b), of the tariff[31] and from section 12A of the same. The majority quotes one excerpt of section 12A, which provides that “[PJM] does not make determinations about market power, including, but not limited to, whether the level or value of inputs or a decision not to offer a committed resource involves the potential exercise of market power.” The majority ignores, however, the portion of section 12A that immediately precedes this excerpt. That portion states that
[PJM] determines whether an offer, bid, components of an offer or bid, or decision not to offer a committed resource complies with the PJM Market Rules. [PJM] has the final authority to determine whether an offer, bid or decision not to offer a committed resource complies with the PJM Market Rules. [PJM] may accept an offer, bid or decision not to offer a committed resource regardless of whether the [Market Monitor] has made a finding that such conduct raises market power concerns, unless the Commission issues an order determining that the offer or bid must be rejected prior to the clearing of the relevant RPM Auction.
Thus, when read in context—and in conjunction with the details of the market power mitigation rules in PJM’s tariff, including Attachment DD, section 6.4—the section 12A excerpt cited by the majority provides only that PJM does not make express findings that a seller’s offer, or constituent parts thereof, represent a potential exercise of market power. That is, PJM does not make findings as to a seller’s intent. Rather, PJM makes findings as to whether a seller’s offer comports with PJM’s tariff rules.[32]
This reading is also consistent with the Commission’s Order No. 719, which, among other things, established requirements for the respective roles played by RTOs/ISOs and external market monitors.[33] The majority quotes an excerpt from Order No. 719 that states that external market monitors “may provide the inputs required by the RTO or ISO to conduct prospective mitigation, including determining reference levels, identifying system constraints, costs calculations, and the like.”[34] The majority argues that this excerpt supports the conclusion that PJM’s proposal is objectionable because it would “duplicate the role of the Market Monitor.”[35] But this argument ignores that Order No. 719, including the quoted sentence, provides only that external market monitors “may provide” this assistance to RTOs/ISOs, not that it must be the role of the external market monitor to make final determinations as to these inputs. In fact, this statement from Order No. 719 is pulled from a broader Commission determination that RTOs/ISOs—whether themselves or through an internal market monitors—are the appropriate entities to administer the prospective mitigation rules in their tariffs.[36] The Commission concluded that while an external market monitor may provide a supporting role to an RTO/ISO, permitting it to conduct “unfettered” prospective mitigation[37] raised conflict of interest and subordination concerns.[38]
Lastly, the majority argues that PJM’s proposal “does not align with the important role of the Market Monitor” and would serve to “bypass” the Market Monitor, and that under the proposal “the Market Monitor would not be able to provide meaningful feedback.”[39] I believe these concerns are unfounded. As described above, the Market Monitor’s role under the existing tariff is important but clearly circumscribed. The Market Monitor reviews a seller’s supporting data and documentation and attempts to reach agreement with the seller on an offer price that is consistent with PJM’s mitigation rules. When the Market Monitor and the seller do not reach agreement, it is the seller’s choice as to what offer price it puts forward for PJM’s consideration. The tariff provisions governing the Market Monitor’s role in this process are unchanged by PJM’s filing here.[40] PJM already reviews a seller’s data and documentation under the existing tariff,[41] and the existing tariff states that, in the event the Market Monitor does not provide its determination to PJM and the seller by a specified deadline, PJM will independently determine the offer cap level.[42]
To be clear, the Market Monitor plays a critically important role in the market power mitigation process under PJM’s tariff and provides valuable analysis of the performance of PJM’s markets more broadly. I have been outspoken in urging the Commission to fully investigate market power concerns raised by the Market Monitor when I believe they have merit.[43] However, I see no basis in this record to conclude that PJM’s proposal undermines the Market Monitor’s role or that PJM is either uniquely unqualified or prohibited from calculating offer caps in administering its capacity market rules.[44]
For these reasons, I respectfully dissent in part.
[1] 16 U.S.C § 824d(e).
[2] Transmittal at 55.
[3] PJM, Intra-PJM Tariffs, OATT, attach. DD, § 10A (Charges for Non-Performance and Credits for Performance), § 10A(g) (12.0.0).
[4] PJM, Intra-PJM Tariffs, RAA, Schedule 8.1.G (Capacity Resource Performance), § 8.1.G.2 (11.0.0).
[5] Id. An example is illustrative. Suppose an FRR resource completely fails to deliver on a 500 MW obligation during a five-hour assessment interval, such as a period during a winter storm. Under the financial option, it would be penalized in the ballpark of $7.6 million (using PJM’s published penalty rate applicable to the Rest of RTO zone during Winter Storm Elliott). PJM, Winter Storm Elliott, slide 28 (2023), https://pjm.com/-/media/committees-groups/committees/mic/2023/20230111/item-0x---winter-storm-elliott-overview.ashx. Under the physical option, it would be required to include an additional 41.7 MW of capacity in its plan for the next delivery year.
[6] Id.
[7] PJM Interconnection, L.L.C., 151 FERC ¶ 61,208, at PP 202-212 (2015) (Capacity Performance Order).
[8] PJM Interconnection, L.L.C., 186 FERC ¶ 61,097, at P 81 (2024) (Order Rejecting Tariff Revisions).
[9] Id.
[10] PJM, Intra-PJM Tariffs, RAA, Schedule 8.1.G.2 (11.0.0) (“For each Performance Assessment Interval, the Actual Performance and Expected Performance of each resource contained in an FRR Entity’s FRR Capacity Plan or Price Responsive Demand committed to reduce the FRR Entity’s unforced capacity obligation . . . will be determined in the same fashion as prescribed by the Tariff, Attachment DD, section 10A.”). Tariff, Attachment DD, section 10A is the tariff provision governing how the performance of resources clearing PJM’s capacity market is assessed during assessment intervals. PJM, Intra-PJM Tariffs, OATT, attach. DD, § 10A (Charges for Non-Performance and Credits for Performance) (12.0.0).
[11] It can be argued that the physical option is actually disadvantageous to FRR entities relative to the financial option. Under the financial option an FRR entity whose portfolio on net over-performs during an assessment interval will earn bonus payments; under the physical option it has no bonus payment eligibility.
[12] PJM, Transmittal, Docket No. ER15-623-000, at 2 (filed December 12, 2014).
[13] Capacity Performance Order, 151 FERC ¶ 61,208 at P 22.
[14] Order Rejecting Tariff Revisions, 186 FERC ¶ 61,097 at P 126.
[15] Capacity Performance Order, 151 FERC ¶ 61,208 at P 204.
[16] PJM, Keech Aff. ¶ 37.
[17] Id.
[18] PJM Interconnection, L.L.C., 186 FERC ¶ 61,080, at PP 251-252 (2024).
[19] PJM, Keech Aff. ¶ 37.
[20] PJM, Winter Storm Elliott Event Analysis and Recommendation Report, at 48-56 (July 17, 2023), https://pjm.com/-/media/library/reports-notices/special-reports/2023/20230717-winter-storm-elliott-event-analysis-and-recommendation-report.ashx.
[21] Order Rejecting Tariff Revisions, 186 FERC ¶ 61,097 at PP 159-164.
[22] PJM, Intra-PJM Tariffs, OATT, attach. DD, § 6.5 (Mitigation) (2.0.0).
[23] PJM, Intra-PJM Tariffs, OATT, attach. DD, § 6.4 (Market Seller Offer Cap), § 6.4(b) (4.0.0) (“[PJM] shall review the data submitted by the Capacity Market Seller, make a determination whether to accept or reject the requested unit-specific Market Seller Offer Cap, and notify the Capacity Market Seller and the [Market Monitor] of its determination[.]”).
[24] Id.
[25] Id.
[26] Transmittal at 30-31.
[27] PJM, Proposed OATT, attach. DD, § 6.4 (Market Seller Offer Cap), § 6.4(b) (5.1.0).
[28] Transmittal at 32.
[29] Id.
[30] Id.
[31] Supra n.23.
[32] The majority also points to Attachment M of PJM’s tariff to highlight that the Market Monitor reviews proposed sell offers and makes determinations about whether they involve a potential exercise of market power. Order Rejecting Tariff Revisions, 186 FERC ¶ 61,097 at n.431. This is consistent with the other portions of PJM’s tariff that I cite herein and would be unchanged by PJM’s proposal. The Market Monitor plays a key role by using its expertise to review offers and inform PJM as to what may constitute an exercise of market power. This allows PJM to make more informed decisions in administering the mitigation portions of its tariff.
[33] Wholesale Competition in Regions with Organized Electric Markets, Order No. 719, 125 FERC ¶ 61,071 (2008).
[34] Order Rejecting Tariff Revisions, 186 FERC ¶ 61,097 at P 162 (citing Order No. 719, 125 FERC ¶ 61,071 at P 375).
[35] Id.
[36] See Order No. 719, 125 FERC ¶ 61,071 at PP 373-375.
[37] Order No. 719 described prospective mitigation as “includ[ing] only mitigation that can affect market outcomes on a forward-going basis, such as altering the prices of offers or altering the physical parameters of offers . . . at or before the time they are considered in a market solution.” Order No. 719, 125 FERC ¶ 61,071 at P 375. PJM’s instant filing relates to prospective mitigation.
[38] Order No. 719, 125 FERC ¶ 61,071 at PP 371, 373.
[39] Order Rejecting Tariff Revisions, 186 FERC ¶ 61,097 at PP 160, 163 & n.439.
[40] See PJM, Proposed OATT, attach. DD, § 6.4 (Market Seller Offer Cap), § 6.4(b) (5.1.0).
[41] See supra P 12.
[42] PJM, Intra-PJM Tariffs, OATT, attach. DD, § 6.4 (Market Seller Offer Cap), § 6.4(b) (4.0.0).
[43] PJM Interconnection, L.L.C., 185 FERC ¶ 61,158 (2023) (Clements, Comm’r, dissenting in part).
[44] I note that most, if not all, of the other RTOs/ISOs already calculate offer caps or reference levels in administering their capacity and energy market mitigation rules, whether themselves or through an internal market monitor. See, e.g., ISO New England, Transmission, Markets and Services Tariff, Appendix A (Market Monitoring, Reporting and Market Power Mit) (64.0.0) (“[T]he Internal Market Monitor is responsible for reviewing certain bids and offers made in the Forward Capacity Market”) (emphasis added); Midcontinent ISO, FERC Electric Tariff, § III (Market Mitigation Measures), § 65.2.2 (Implementation) (47.0.0) (“If the criteria [for bid mitigation] are met, the Transmission Provider shall prospectively substitute a Default Offer for an Offer submitted for a Generation Resource or Planning Resource.”) (emphasis added); Southwest Power Pool, OATT Sixth Revised, attach. AF (Market Power Mitigation Plan), § 3.2(B) (1.0.0) (“[T]he Transmission Provider shall apply mitigation measures by replacing the Energy Offer Curve with the mitigated Energy Offer Curve if [mitigation conditions are met].”) (emphasis added); New York ISO, Market Administration and Control Area Services Tariff, attach. H (ISO Market Power Mitigation Measures), § 23.4 (Mitigation Measures), § 23.4.1 (Purpose) (53.0.0) (“If [mitigation conditions are met], the appropriate mitigation measure described in this Section shall be applied by the ISO.”) (emphasis added).