Commissioner Richard Glick Concurrence Regarding Utility Complaints Against PJM Capacity Market Rules

Commissioner Richard Glick Statement
May 21, 2020
Docket Nos. EL17-32-000, EL17-36-000
Order: E-25
Concurrence Regarding Utility Complaints Against PJM Capacity Market Rules

A seasonal capacity construct appears to be a more just and reasonable approach than PJM’s current one-size-fits-all answer to ensuring resource adequacy.  Nevertheless, I concur in today’s order because I agree that the record in this case does not demonstrate that PJM’s existing tariff is unjust and unreasonable and, therefore, we cannot impose that more just and reasonable result.[1]  The record does, however, hint at a number of more fundamental problems with PJM’s capacity construct.  Those problems merit a comprehensive review in PJM’s stakeholder process and, if necessary, by this Commission. 

This proceeding boils down to whether PJM’s annual capacity market, with its single undifferentiated capacity product, is unjust and unreasonable or unduly discriminatory or preferential.  Frankly, I am skeptical that PJM’s current approach is a sustainable way of ensuring resource adequacy.  And a seasonal capacity market along the lines contemplated in these complaints would certainly seem to be a better approach to resource adequacy than the current one.  Nevertheless, I recognize that section 206 of the Federal Power Act (FPA) contemplates a range of just and reasonable approaches and that, to revise an existing tariff, the Commission must do more than show that there is a better way.[2]  Although it is a close call, I do not believe that the record is sufficient to allow us to conclude that showing has been made. 

I note, however, that the complainants’ failure to meet their burden under section 206 of the FPA is not entirely their fault.  These complaints have sat before the Commission for more than three years[3] and, in that time, PJM’s tariff has evolved, including, for example, through the addition of new mechanisms to allow seasonal resources to pair up with other seasonal resources in order to provide what is effectively an annual product.[4]  While that matching is hardly a panacea, it at least partially addresses many of the issues identified in this record, making it difficult to conclude that the tariff as it exists today is unjust and unreasonable or unduly discriminatory or preferential for the reasons stated in the complaints.  In the event that the matching scheme fails to sufficiently accommodate seasonal resources, the Commission will have to revisit these issues and take a hard look at whether a seasonal capacity market is necessary for PJM’s capacity construct to ensure resource adequacy at rates that are just and reasonable and not unduly discriminatory or preferential. 

In addition, while this record does not provide a basis for Commission action, it does highlight a number of more fundamental challenges facing PJM’s approach to resource adequacy.  First and foremost, it underscores the difference between the reliability challenges in the summer and winter and it suggests that moving away from a uniform annual product could allow more resources to provide capacity, thereby increasing competition and promoting more efficient pricing.  A seasonal approach could also allow PJM to address the unique seasonal needs more directly.  Historically, PJM’s principal reliability concern was ensuring that peak summer demand does not exceed supply and the resource adequacy paradigm evolved accordingly.  This record, however, illustrates that winter-time challenges are demanding more attention within the region and that those challenges have more to do with managing planned outages and the complications associated with cold weather—e.g., frozen coal piles or interrupted gas supplies[5]—than with ensuring that installed capacity exceeds demand. 

Although the high reserve margins that help manage the summer-time peaks may also address winter concerns, they are not the most direct way to do so.  High winter reserve margins do not necessarily mean that PJM has the services needed to manage those winter reliability needs.[6]  That means that the resource adequacy paradigm that emerged to handle the summer peak—i.e., procuring more and more year-round blocks of undifferentiated capacity—is unlikely to prove a sustainable or efficient approach to addressing the region’s diversifying reliability needs.  In other words, the fact that having extra resources on the system may help manage non-peak reliability challenges does not necessarily justify PJM’s current approach or excuse it from pursuing means of addressing those challenges more directly and cost-effectively.

In addition, we cannot ignore the unintended consequences of flooding PJM’s system with excess capacity.  PJM, its stakeholders, and this Commission have devoted considerable time and resources to promoting proper price formation in PJM’s energy and ancillary service markets.  Over-procuring capacity tends to dull those price signals, reducing, or altogether eliminating, many of the benefits of those price formation efforts.  Those impacts are, in my view, very relevant to whether PJM’s resource adequacy construct remains just and reasonable.

I hope that PJM will get ahead of these issues by taking advantage of the Commission’s denial of these complaints to consider how it might design its markets to more directly procure the specific services that its system needs throughout the year.  If PJM requires far more capacity to handle the summer-time peak than it does the rest of the year, it should consider procuring capacity to address that specific issue, perhaps through something like the seasonal capacity market contemplated in these complaints.  By the same token, PJM could also consider different approaches to meeting winter challenges by defining requirements in a winter capacity market to address concerns, such as planned outages or winter preparedness.

With that perspective in mind, I cannot help but note some of PJM’s more troubling responses to the complaints, many of which are picked up in today’s order.  In particular, I am concerned by the implication of PJM’s statement that adopting a seasonal market could cause “premature resource retirement,” which PJM contends could result in “reduced energy market participation by conventional resources, perhaps by units that clear in one season shutting down in the other season.”[7]  PJM’s goal cannot be the protection of “conventional” resources nor should it spend its time fretting over the effects that a more efficient market design may have on the resource mix.  Instead, PJM should be focused on identifying the services the grid needs to remain reliable and structuring its markets to procure those services in the most efficient, technology-neutral manner possible.  In any case, it is hardly “premature” for a resource to retire because some other resource can more efficiently meet the needs of the market.  That type of competition should be the goal of the capacity market, not a problem to be avoided. 

I recognize that designing a system to procure the services needed to directly address the region’s reliability needs will prove more complicated than an approach of buying more and more undifferentiated capacity.[8]  But the simplest approach is not always just and reasonable.  After all, our responsibility is to ensure that PJM’s capacity construct ensures resource adequacy at just and reasonable rates.  We cannot neglect the latter just because we have found a simple way to carry out the former.  In any case, the complexity associated with a more nuanced approach to resource adequacy is a reason for PJM to start thinking through details of such an approach now, before the continuing evolution of the electricity sector renders its current approach unjust and unreasonable. 

In addition, this record also suggests that the time has come for PJM to take a hard look at its Capacity Performance regime.  PJM proposed, and the Commission approved, the general Capacity Performance construct in response to the 2014 “Polar Vortex,” when a large portion of the region’s resources struggled to meet their capacity obligations.[9]  The basic premise of Capacity Performance was that a more stringent set of criteria for qualifying for a capacity supply obligation coupled with penalties for non-performance would, together, ensure resources take the steps needed to perform reliably in adverse conditions.[10]  The goal was to ensure that resources procured to meet a summer peak would be equally available to manage the winter challenges as well.  

Whatever theoretical appeal that approach may have had, it has not been born out in practice.  Although PJM has declared minor Capacity Performance events over the last few years, the anticipated penalties have never materialized.  That is a stark contrast to the underpinnings of PJM’s Capacity Performance proposal, which envisioned many penalty hours per year.  The lack of Capacity Performance events appears to be due, in large part, to the region’s persistent oversupply of capacity.  That surplus has minimized the likelihood of any capacity shortfall, causing resources to doubt, or disregard entirely, the threat of Capacity Performance penalties.[11]  The Commission’s recent decisions regarding PJM’s Variable Resource Requirement Curve[12] and Minimum Offer Price Rule (MOPR),[13] will only exacerbate that capacity glut, further reducing the chances of a Capacity Performance penalty.  Similarly, Capacity Performance events will be even less likely after the issuance of today’s order on the Operating Reserve Demand Curve, which will result in PJM carrying reserves far in excess of its reserve requirement, further reducing the likelihood of a Capacity Performance event.[14]

The current capacity glut, and the prospects for it to grow in the future, call into question the basic premise of Capacity Performance.  In particular, if there is little-to-no prospect of a capacity shortfall, then it would seem correspondingly harder to justify the qualification restrictions, including the limitations on seasonal resources.[15]  I recognize that some of the capacity glut is the result of the Commission’s actions, not PJM’s, and that this share may continue to grow as the consequences of the Commission’s MOPR ruling play out.  But that should not stop PJM from taking a hard look at whether Capacity Performance remains appropriate under current market conditions and, in particular, whether the barriers it created for seasonal resources should be removed.  Although that is a question that I believe is best handled by PJM in the first instance, I recognize that the Commission may ultimately need to act if a future record demonstrates that the trade-offs associated with Capacity Performance have become unjust and unreasonable or unduly discriminatory or preferential.

For these reasons, I respectfully concur.