Commissioner James Danly Statement
September 2, 2021
Docket Nos. EL19-47-000, et al.
I respectfully dissent from today’s order because it risks over-mitigation in the capacity markets.[1]
Currently, only sellers above the default offer cap must submit to unit-specific review. The current default offer cap does not trigger much review because of the way in which it is set: it assumes a higher number of triggering performance intervals than ever occurs in real life. I would adjust how the offer cap is set by changing the assumption regarding the number of performance intervals, perhaps along the lines originally proposed in this proceeding by the Independent Market Monitor. This is not a perfect solution. But perfection is not the standard required by the Federal Power Act.
What is perfectly clear, however, is that fixing the default offer cap would be a far better solution than the alternative supported by the majority. The majority jettisons the default offer cap and replaces it with a full unit-specific review of all offers above zero by the Independent Market Monitor. There are problems with the current default offer cap, but unit-specific review of all resources is far too invasive a “remedy.”
Some argue that there is no harm in universal or even widespread unit-specific review. I disagree. The harm is over-mitigation. Sellers in the PJM capacity market base their offers on detailed cost estimates and assumptions about what is likely to happen more than three years in the future. The crucial issue is risk, particularly the risk that actual costs and revenues will vary from projections. Under the majority’s remedy, the Independent Market Monitor is empowered to substitute its judgement of future costs—i.e., the risks—for each supplier’s offer and then reduce offers as the Independent Market Monitor deems fit. PJM ultimately decides whether to accept the Independent Market Monitor’s offer, or the offer submitted by the offeror.
The majority downplays as “speculative, unsupported, and contrary to the purpose of the unit-specific review” the likelihood that PJM or the Independent Market Monitor will substitute its judgement for that of sellers.[2] And while it is true that any substitutions would occur in the future and have not yet been witnessed, it cannot be considered “speculative” because the entire point of unit-specific review is for the Independent Market Monitor to second guess the sellers’ judgement. Also, we should ask those sellers who have been subjected to unit-specific review how frequently the market monitor substituted its own judgement for that of the seller. We should further heed PJM’s own warning, summarized by the majority, that “unit-specific review is unworkable because of the complexity of calculating and quantifying risk under the Capacity Performance construct.”[3]
The only check on these extraordinarily broad new powers will be the Commission. I do not know how common mitigation and subsequent challenges before the Commission will become under this new regime, but the Commission should not be in the business of determining seller offers in advance of auctions.
The Federal Power Act prohibits market manipulation and imposes stiff penalties for violations. There has been no indication that this statutory authority has failed as a deterrent to the unlawful exercise of market power, at least not by existing generators. In the absence of evidence, I thus disagree that there is any need to let the Independent Market Monitor review and second guess all seller offers in advance. I do not want to see a construct that fixes the locus of market decisions in the hands of anyone other than the parties who know their own risks and their own finances. In short, I want our markets to remain markets.
The majority is troubled that the two other proposals on the table, which would adjust the default offer cap so that it was triggered more often than at present, “would both result in fewer offers being reviewed” than universal unit-specific review.[4] Clearly anything short of universal review would result in fewer offers being reviewed. But I see no need for (and substantial harm from) reviewing all offers. It is much more reasonable to improve the default offer cap by adjusting the assumed number of performance intervals.
It is even more problematic that the majority adopts this overly aggressive remedy at the same time we are considering—and at least some of my colleagues have publicly advocated—proposals to eliminate or hollow-out the Minimum Offer Price Rule which protects the market from the unmitigated exercise of market power by state-sponsored or subsidized resources.[5] Should the Commission adopt such a proposal, the states will be able to subsidize favored resources. These resources can then be offered at artificially low prices with total impunity. This will crater capacity market prices. Meanwhile, all existing generators will have their offers scrutinized by the Independent Market Monitor to be reduced as it deems appropriate.
It should be clear to anyone paying attention that PJM’s market design is becoming increasingly discriminatory against existing generators. It is swift becoming unduly so. And the more we redesign our markets into elaborate cost-justification exercises, the fewer of the benefits promised by markets can be realized.