Commissioner James Danly Dissent Regarding Independent Market Monitor for PJM v. PJM Interconnection, L.L.C., et al.

Commissioner James Danly Statement
February 18, 2022
Docket Nos. EL19-47-002, et al. | Errata

With this order on rehearing, the Commission’s campaign to destroy PJM Interconnection, L.L.C.’s (PJM) markets is one step closer to completion.  The majority now confirms that every seller offer into the PJM capacity market will be subject to unit-specific review by the Internal Market Monitor (IMM), in which the IMM may freely impose its own assessment of costs and risks on all offers the IMM deems “unsupported” (with PJM itself playing the role of arbiter to decide whether the IMM’s assessment carries the day).  The majority also excludes—sometimes categorically—certain types of risk from those that sellers may attempt to include in their offers.  And how is it that some entity other than a utility itself can determine the rates it wants to charge?  The majority concludes that the PJM capacity market is a regime in which seller offers are mere “inputs” into a formula rate (the capacity auction rules) and therefore this scheme passes muster under the Federal Power Act (FPA) because sellers voluntarily sought market-based rate authority and joined a Regional Transmission Organization (RTO).  Who knew that obtaining market-based rate authority extinguishes a utility’s FPA section 205 rights in an RTO?  Apparently, we can now therefore approve a tariff that requires generators to offer only that rate the IMM and PJM tell them to offer.  No court has ever upheld such reasoning.  Meanwhile, even as the clampdown on sellers continues unabated, the Commission also has eliminated nearly all buyer-side market power mitigation.

I dissent from the order in full.[1]  I would grant rehearing, approve modest revisions to the existing rate, such as by changing the number of performance intervals as originally proposed by the IMM, and reject the “replacement rate” of essentially universal unit-specific review of seller offers that we imposed below.[2]

My opposition to unit-specific review is fully articulated in my earlier dissent and I will not repeat those arguments here except to say: unit-specific review will over-mitigate seller offers and artificially suppress capacity prices in PJM.  Nothing in the majority’s order changes my opinion.  I address a few additional issues further discussed on rehearing. 

A.       Unit-specific review will be too broadly applied.

The majority repeatedly justifies unit-specific review because it is only imposed on sellers deemed to have market power in PJM.[3]  But of course, PJM’s screen for seller market power—the so-called three pivotal supplier test—is so broad that, according to the majority, “most sellers fail the [screen] in PJM’s capacity market.”[4]  That is an understatement.  Only a handful of sellers have ever passed the screen in its history, and none currently pass it.[5]  Sellers protested the three pivotal supplier test when it was introduced, explicitly articulating their concern that the screen finds seller market power where none exists, but the Commission set the issue for hearing and ultimately approved a “settlement” largely upholding the three pivotal supplier test.[6]  That does not mean that the screen itself necessarily must be jettisoned (although I welcome a section 206 investigation of this issue in light of subsequent market rule changes, like those we have recently imposed and those we uphold today).  But the majority’s cure is worse than the disease.  Under the regime upheld by the majority today, the IMM first finds that every single seller in PJM has market power.  Second, the IMM dictates what every single seller can offer.  As long as PJM is doing this, why not make it easier on everyone and just let the IMM tell us all what the auction results will be?  It sounds preposterous but that is the power the majority has now conferred upon the IMM and PJM.

B.       Sellers should be able to offer their own assessment of costs and risks.

The Commission extols the “full opportunity to include appropriate costs and risks in their offers”[7] it purports to grant sellers even as it disallows numerous risks that sellers might have included in their offers now that we have mandated nearly universal unit-specific review.  This includes, for example, the very real risk of unanticipated outages.  How interesting it is that the Commission disallows generators from including the risk of unanticipated outages in this case on the same day that it revokes Transmission Constraint Penalty Factor pricing associated with a long term transmission line outage in a separate order.[8] 

The majority concludes that “while we agree that sellers may face unanticipated outages in real-time, such risks are not unique to resources with a Capacity Performance obligation; rather, all resources—including those without Capacity Performance obligations—face the same risk.”[9]  Taking on a Capacity Performance obligation also “takes on” a much greater risk of Capacity Performance penalties for failing to perform.  Higher penalties equal higher risks.  No matter, the majority decides; sellers do not get to include an assessment of unanticipated outages and several other categories of risks in their offers.[10]  In its risk analysis, the majority also neglects to mention that all sellers, with very limited exceptions, are required to participate in the capacity market.[11]

The majority does highlight the “complex calculation” that assessing such risks would require for each capacity resource, but nevertheless decides that the IMM and PJM get the final say in what risks—and therefore costs—will be allowed in every offer.[12]  Thus the entire “complex calculation” is left in the hands of one person, the IMM, with PJM itself serving as the only check on the IMM’s immense power to fix prices before the auctions are run.

While reiterating the IMM’s well-known view that seller “‘market power is and will remain endemic to the structure of the PJM capacity market,’”[13] apparently forever, the majority also repeatedly promises that the IMM will only reject “unsupported” costs and risks.[14]  In so doing, the majority discounts or finds “irrelevant”[15] all the evidence in the record of the tendency—but the evidence suggests “certainty”[16]—of the IMM substituting its own judgment for that of sellers.[17]  This includes evidence—from PJM, not some greedy generator—of the IMM already rejecting seller offers and risk assessments via unit-specific review in the next auction, a fact that the majority finds “inapposite.”[18]

It is no surprise that entities with no skin in the game (i.e., capital at stake) easily discount risk.  We should at least listen to the sellers that have been subjected to unit-specific review, or in this case, the RTO itself, before we pronounce that an IMM would never in a million years impose its own overly conservative assessment of risk on the resource owners tasked with keeping expensive, aging machines in service.  We should listen very carefully since the Commission itself in this same order upholds its ban of numerous categories of costs and risks from inclusion in offers notwithstanding the unit-specific review the majority imposes upon the market.

The majority asserts that this “dissent fails to acknowledge that the Commission is not changing the risks included in the [Avoidable Cost Rate] calculation, or the ability for sellers to include such quantifiable, reasonably supported risks in their offers.”[19]  To the extent clarification is necessary, my point is that we should consider and meaningfully respond to arguments and evidence in the record that the existing bans on including numerous costs and risks in capacity offers are no longer just and reasonable given the sweeping new mitigation regime the majority just imposed.  Perhaps we could at least allow sellers an opportunity to argue for the inclusion of these forbidden costs and risks given that the majority empowers the IMM to impose its own assumptions on every current seller offer.

The Commission’s lack of any meaningful response to this record evidence is a failure to engage in reasoned decision making.  The Commission must do more to reconcile conflicting evidence than to declare that it is “inapposite,”[20] “irrelevant,”[21] and “speculative.”[22]  When coming to a determination, we must support every decision by substantial evidence and, when confronted with credible countervailing evidence, actually explain either why that evidence is in error or why some other evidence is more credible.  The majority fails to do so.

C.       Sellers must retain real section 205 rights.

I also reject the majority’s determination that sellers lose their section 205 rights over sales of capacity once they obtain market-based rate authority, join an RTO, and submit capacity offers.  The majority repeats the old chestnut that seller offers are mere inputs into the PJM capacity auction formula rate and thus the IMM and PJM can do whatever they like with the offer in running the auction without violating the central provision of the FPA.[23]  The majority fails to cite any court case that has upheld such reasoning, instead citing the Commission’s “decades of administration” of the FPA.[24]  The case that most nearly addressed the majority’s reasoning, Exelon Corp. v. FERC, 911 F.3d 1236 (D.C. Cir. 2018) (Exelon), expressly did “not resolve” whether seller offers (specifically in that case, retirement bids) “are ‘rates’ [as opposed to “inputs”] under 16 U.S.C. § 824d(a),” nor whether a seller “can rightly be said to have consented to the new rules by virtue of having participated” in the capacity auction, by obtaining market-based rate authority and joining an RTO.[25]  The court then remanded the case to the Commission because FERC counsel during oral argument suggested the selling party retained the section 205 rights—necessarily including burdens of proof and presumptions—before the Commission.[26]  That is my view.  No wonder the order spends 37 paragraphs of “discussion” on this issue without citing controlling precedent from a court:  the law is not nearly as settled as the majority might wish.[27]  And even “decades of administration” cannot rewrite the statute.[28]

 I agree that sellers’ offers are “inputs” to the capacity auction, but they are inputs that independently enjoy section 205 rights.  There is no more important input into an auction than the offer to sell.  If I offer to sell something at auction for $5, and a buyer accepts my offer, the price paid (aka the “rate”) is $5.  If $5 is too high for the buyer, I keep the thing I offered to sell.  Evidently, that sell offer is quite the input—it determines the rate.  And that rate determines whether there is a transaction at all.

So too here.  Each individual seller has the statutory right to propose its offer to sell under FPA section 205 and make a showing in the first instance at the Commission whether the offer is just and reasonable.  The Commission has no choice under the statute but to allow sellers the opportunity to make this showing.  While multiple individual seller offers compete against each other to set the price in the auction, this does not change the fact that each individual seller offer is a proposed rate.[29]

Claims that sellers can challenge the IMM’s substituted rate at the Commission under the PJM tariff are unavailing.[30]  The majority finds that “[c]onsistent with PJM’s market mitigation framework, a Commission order acting on [a § 6.4(c) seller’s challenge] filing would not substitute a seller’s offer for the PJM/Market Monitor mitigated offer absent a [Commission] finding that PJM and/or the Market Monitor violated the Tariff in rejecting or modifying the seller’s offer . . . .”[31]  “In other words,”[32] the IMM’s rate gets the 205 rights, not the seller’s rate, yet somehow, “sellers’ section 205 rights remain fully intact.”[33]

This flips section 205 right on its head.  It also leaves sellers little real opportunity for their own rate to prevail before the auction is run, and once the auction is run the Commission will tell sellers it is too late to challenge the IMM’s determination because the one thing we do not do is re-run auctions.[34]

The majority admits that “[u]nlike the [ISO New England Inc. (ISO-NE)] procedures at issue in Exelon, where the governing tariff required ISO-NE to submit certain bids in an FPA section 205 filing [in advance of the auction], the PJM Tariff does not require PJM (or sellers) to submit offers for Commission review, or reference FPA section 205.”[35]  The majority mistakenly believes, however, that the lack of a pre-auction FERC filing requirement in PJM excuses the usurpation of sellers’ section 205 rights.[36]  It does not.

Nor is there any merit in the majority’s “alternative,” “separate, independently sufficient” assertion that the IMM is empowered to dictate what a seller can offer merely because the seller has obtained market-based rate authority.[37]  Obtaining market-based rate authority and joining an RTO do not cause the forfeiture of a seller’s right to propose rates—including the right to determine at which price it is willing to offer capacity—under FPA section 205. 

If the demands of our statute require the recomposition of PJM’s entire capacity market to bring it into compliance, so be it.  No matter how vaunted PJM and its markets may (or used to) be, they cannot dislodge the FPA.  The speculative parade of horribles that the majority supposes, even should they come to pass, even were they inevitable, do not work revocation of the unambiguous rate-proposal rights enshrined in the FPA, no matter the purported benefits that might arise under a “uniform application of [] RTO/ISO mitigation rules.” [38]

D.       Commission-imposed mitigation in PJM is unduly discriminatory.

The Commission blithely asserts that the changes it imposes will “best ensure the capacity market’s overall competitiveness.”[39]  This is little short of risible; no serious student of our markets can believe this.  Even as we impose changes to eliminate virtually every opportunity for sellers to offer capacity according to their own assessment of cost and risk, we simultaneously permit states and others with deep-pockets to engage in the rampant exercise of buyer-side market power.  The majority justifies this distinction by asserting that “[t]he Commission evaluates and treats seller side and buyer-side market power within RTO/ISO markets differently, and applies mitigation mechanisms appropriate to how each type of market power is exercised and the harm to the market it poses.”[40]  Yes; if you are a seller, you almost automatically have market power and the IMM tells you what you can offer; if you are a state-subsidized, new, renewable resource, the state can almost automatically use you to suppress capacity prices as much as it likes.

There is a purpose behind this: to support favored classes of resources, including demand response and energy efficiency, at the expense of disfavored classes.[41]  If this is not undue discrimination under the FPA, nothing is.  What another remarkable coincidence it is that not a single, new, subsidized renewable resource has market power, in contrast with all existing generators.  Call it the “Strange Case of New Renewables and Existing Generators,” with market saints transformed into manipulators by mere serum of emissions.[42]

The over-mitigation caused by unit-specific review will also distort market outcomes.  And like all market distortions, it will have consequences.  Artificially low prices are unsustainable.  The market will fail.  The result will be bankruptcy, reliability crises, and an eventual full-scale retreat to cost-of-service ratemaking.  Who will ultimately suffer the most?  Ratepayers.

For these reasons, I respectfully dissent.