Commissioner James Danly Dissent Regarding PJM Interconnection, L.L.C.

Commissioner James Danly Statement
January 20, 2022
Docket Nos. EL19-58-006, ER19-1486-003

I dissent from this order.[1]  I both object to the process by which it has come before the Commission and dissent on the merits.  As to process, the FERC Solicitor’s office (Solicitor’s Office)[2] was directed to seek voluntary remand without the knowledge or acquiescence of the Commissioners, which at least violated longstanding Commission practice and may not have been legal.  On the merits, this order arbitrarily retains certain of the Commission’s prior findings and reverses others, all without any further briefing or supplementation of the record.  It is particularly inappropriate for the Commission to take this unexpected action when PJM Interconnection, L.L.C.’s (PJM) impending auction has been further delayed, when reliance interests have solidified around the Commission’s prior order, and PJM’s market design has already been profoundly altered by intervening Commission issuances.  In sum, we are arbitrarily changing another fundamental element of PJM’s market, over PJM’s and litigants’ objections, without a full understanding of the consequences.

The Motion for Voluntary Remand of this Order Should Not Have Been Submitted Without the Approval of a Majority of the Commissioners

This order is before us because the Chairman directed the Solicitor’s Office to seek a voluntary remand of this proceeding without seeking the consent of the Commission, or even notifying his colleagues of his decision to do so.  What is more, in this order, the revisions go far beyond the specific issue identified in the motion for voluntary remand,[3] which was to revisit the 10% adder in light of the U.S. Court of Appeals for the District of Columbia Circuit’s (D.C. Circuit) recent decision in Delaware Division of the Public Advocate v. FERC.[4]

Through this instruction to the Solicitor’s Office, the Chairman unilaterally subjected validly-issued, final Commission orders to extensive revisions that reversed several of the calls made in the orders.  That directive violates the Commission’s longstanding tradition of polling the Commissioners for major litigation decisions.  These are typically the subject of litigation memoranda from the Solicitor’s Office and, in the past, the votes of the various offices were recorded by the Secretary.  Recently, at the direction of the Chairman, this practice has been abandoned.

I would note that the Chairman’s direction to stop conducting votes regarding the Commission’s litigation strategy not only violates longstanding Commission tradition, but also may exceed the Chairman’s legal authority.[5]  I question whether the DOE Organization Act either intends or contemplates such unilateral authority asserted by the Chairman to request a voluntary remand, in effect nullifying the votes of a majority of the Commissioners that approved the orders at issue,[6] particularly when the Chairman dissented in those orders.  Regardless of the legality of the Chairman’s action, I would like to see the Chairman reinstate the practice of conducting votes on these types of litigation decisions.  Substantive policy and regulatory determinations, which go beyond mere administrative responsibilities, are more appropriately addressed by the Commission as a whole.[7]

The Chairman, when still a commissioner, dissented from the underlying orders, as was his privilege.[8]  If the Chairman continued to believe that those orders were wrongly decided, the Federal Power Act (FPA) provides a vehicle by which to revisit the tariff provisions approved by those orders.  Instead of unilaterally seeking voluntary remand[9] and taking another vote (this time by a Commission with a composition more to his liking) the Chairman should have availed himself of FPA section 206,[10] which is the statutory mechanism established by Congress for the Commission to revisit tariff provisions that it has previously approved.

There is a reason the FPA establishes the 206 mechanism for reviewing the tariff provisions accepted by earlier Commission decisions.  First, section 206 has a higher burden than section 205.[11]  The first step of section 206 requires a demonstration that the prevailing rate is not just and reasonable before the Commission can then move to step two’s establishment of a replacement rate.  This requirement biases Commission action toward preservation of prevailing rates absent a heightened showing.

The inertia created by the heightened 206 standard enhances stability and encourages the development of the expectations that utilities (especially in the organized markets) must have to conduct business in a capital-intensive industry.  Unilateral action taken by the Chairman alone not only circumvents the statutorily-prescribed mechanism by which the Commission is to revisit its earlier decisions, but it also creates the kind of uncertainty that chills investment and increases costs to market participants and, ultimately, ratepayers.

Section 206 also requires a hearing.  The hearing requirement ensures that the Commission has the benefit of litigants’ briefing before action is taken.  Whatever the perceived urgency now attending the issuance of this order, can the Commission be making a fully-informed decision in the absence of further briefing, especially given the number and complexity of Commission orders that have followed the issuance of the Operating Reserve Demand Curve (ORDC) orders?  The Commission will now have to entertain contrary arguments and consider new information for the first time on rehearing.

The Instant Order Revises Prior Findings Without Any New Evidence or Briefing and Can Only Further Disrupt the Orderly Conduct of PJM’s Auction

This Order Arbitrarily Reverses Certain Past Section 206 Findings Without Any New Evidence to Support its Revised Findings

Procedural concerns aside, I have serious misgivings about any order that arbitrarily upholds some of our prior FPA section 206 findings and abandons others when the record is exactly the same as that upon which the earlier determinations were based.  This order affirms the Commission’s findings that: PJM’s separate treatment of Tier 1 and Tier 2 Synchronized Reserve products was unjust and unreasonable;[12] that PJM misaligned the day-ahead and real-time reserve markets;[13] and that various provisions covering eligibility for reserves, determining reserve capability, and offer rules were unjust and unreasonable.[14]

Yet, this same order reverses other Commission determinations.  It finds that PJM failed to meet its FPA section 206 step one burden to show that the currently effective Reserve Penalty Factors and two-step ORDCs are unjust and unreasonable.[15]  It also reverses the Commission’s determination that the prior backward-looking energy and ancillary services offset (E&AS Offset) is unjust and unreasonable.[16]

How is it possible for the Commission to make a step-one determination for some (but not all) issues based upon the exact same record as that which informed the underlying orders?  It can do so only by ignoring extensive record evidence.

 For example, the order simply looks past the detailed evidence presented by PJM that: (1) ORDCs failed to address uncertainties around load, wind and solar forecasts, and unanticipated supply resource outages and thus required PJM operators to frequently bias their scheduling of supply resources and take other out-of-market actions to preserve reliability; (2) reserve market clearing prices did not reflect the operational value of flexibility; and (3) Reserve Penalty Factor of $850/MWh was below the legitimate opportunity cost some resources could face in shortage or near-shortage conditions.[17]

Remarkably, this order also eliminates a key benefit of the underlying orders that even then-Commissioner Glick supported as a “lone bright spot”—stating “[t]he forward-looking E&AS Offset adopted in [the] proceeding should help reduce the adverse impacts on consumers by reducing capacity market revenue to reflect some of the increases in revenue earned through the energy and ancillary services markets . . . a step, albeit a small one, in the right direction.”[18]  Reversal of the orders eliminates the forward-looking E&AS Offset.

Given the Complexity of PJM’s Market Redesign, this Order Should Not Have Been Issued Without Briefing

I also question the wisdom of making another profound (and in this case, unexpected) change at this particular time and with so little information.  Reformation of PJM’s reserve market is and has been a complex undertaking as we have seen in recent proceedings.  These market reforms all relate to one another and, doubtless, PJM stakeholders considered earlier market reform submissions when considering and voting upon subsequent ones.  This order upsets PJM’s expectations and frustrates its market design.

For example, by the time PJM had filed its minimum offer price rule (MOPR) revisions,[19] the Commission had already issued orders accepting PJM’s quadrennial revision of the Variable Resource Requirement (VRR) curve as required by its Tariff.[20]  PJM’s VRR curve submission included a provision that required the net cost of new entry (Net Cone) for the Reference Resource be calculated with the assumption that the combustion turbine would include a 10% adder to each energy market offer.[21]  While appellate review of PJM’s quadrennial revisions was pending PJM also revised its ORDC rules—which are the subject of this order on voluntary remand.

These are complex, interrelated tariff filings.  The tariff provisions at issue have profound consequences for how the market functions.  And the Commission now has interfered with them.  The Commission’s earlier orders in this proceeding directed the adoption of a forward-looking E&AS Offset[22] and approved PJM’s proposed 10% adder,[23] almost certainly forming the basis of later proposed tariff revisions and the stakeholders’ support for them.  Given that, it is unjustifiable for this order to reverse our earlier determinations absent further briefing.[24]

 It would have been quite helpful to have known what PJM and the market participants might have thought of the consequences of our decisions before we made them.  But, absent further briefing on remand, we must resort to the parties’ earlier submissions in this proceeding.  And if those submissions are anything to go on, we can be fairly certain that there would have been opposition to the changes made in this order.  PJM has stated that the changes approved by the Commission in May of 2020 are “an essential step in the evolution of PJM’s market design.” [25]  According to PJM, “[t]he foundational determinations made by the Commission in this proceeding—that PJM’s existing reserve market is unjust and unreasonable, and that the Commission-set replacement rate is just and reasonable—are correct”[26] and “are as correct today as they were eighteen months ago.”[27]  Others support PJM’s position: “P3 emphasizes and urges the Commission to heed PJM’s request to leave the Commission-approved reserve[] pricing reforms untouched”[28] and to “allow the revised Commission-approved reserve pricing rules to remain in place until the other dramatic changes to PJM’s market rules are fully understood and reconciled.”[29]  P3 also stated that the Commission should respond to the court’s remand by considering and citing publicly-available evidence as support for continuing to include the 10% adder.[30]  The Electric Power Supply Association (EPSA) and P3 also together “urge the Commission to reaffirm its findings in the ORDC Orders” asserting that “[t]here is no reason for the Commission to now reverse course.”[31]  They state that to the extent the Commission intends to revisit the orders, additional procedures should be established “in order to permit all interested parties to supplement the record and fully brief any issues of concern, as it has done in past cases where it has requested voluntary remand.”[32]  As P3 observed, “[t]he last thing the upcoming auction needs is yet another last minute, arbitrary policy change that will further disrupt an already extremely compromised auction.”[33]  How could a responsible regulator not accede to such a request?

Failure to require further briefing has led us to make profound, uninformed changes which may have profound, unforeseen consequences.  This is all the more troubling given when this order issued.  Should our decisions have been in error, and depending upon the timing of the auction,[34] it may be impossible to provide meaningful relief to the market participants because the auction is unlikely to be re-run.[35]

For these reasons, I respectfully dissent.