Commissioner Richard Glick Statement
November 3, 2020
Docket No. EL19-58-001
I dissent from today’s order on rehearing as it is yet another abdication of the Commission’s responsibility to protect consumers from unjust and unreasonable rates. As I explained in my dissent from the underlying order, this sweeping overhaul of PJM’s energy and ancillary services markets abandons basic principles of competitive markets in favor of a byzantine administrative pricing regime.[1] The inevitable result will be a multi-billion dollar increase in consumers’ bills without any commensurate benefit.
Today’s order on rehearing does little to fix the flaws in the underlying order. The Commission continues to mischaracterize or ignore relevant evidence and it makes no effort to wrestle with the sweeping consequences that its novel approach will have for what is, at least nominally, still a market based on locational marginal pricing. It is fundamentally arbitrary and capricious.
The Commission Has Not Shown That PJM’s Existing Tariff Is Unjust and Unreasonable
The record before us does not show that PJM’s existing Tariff is unjust and unreasonable. PJM points to various bits of evidence, including low prices, uplift, out-of-market actions by operators, and the growth of renewable resources, to argue that there is something fundamentally amiss with its reserve market. But, as explained below, that evidence simply cannot bear the weight that PJM would put upon it. In every instance, the protests and rehearing requests explain in detail why the Commission’s conclusions cannot logically follow from the evidence on which they rely. By blindly accepting PJM’s evidence, and failing to adequately respond to those protests and rehearing requests, the Commission fails to carry its burden under section 206 of the Federal Power Act (FPA).[2]
No one disputes the importance of reserves. They help to balance the grid in the event of an unexpected loss of generation or increase in demand.[3] In so doing, they quite literally keep the lights on. Properly pricing reserves is thus an integral part of ensuring reliable electricity service at just and reasonable rates. Similarly, shortage pricing is a critical element of properly pricing reserves. During a reserve shortage, the energy price is increased by the administratively determined cost of falling below the reserve requirement—i.e., the Reserve Penalty Factor. That upward adjustment sends a strong price signal to both load and supply to respond to the shortage condition, helping to restore normal reserve levels. Those basic principles are, for all intents and purposes, beyond dispute.
The crux of PJM’s case against its current Tariff is that resources are not being paid enough for providing reserves. In particular, PJM claims that because much of its minimum reserve requirement is met by zero cost reserves, prices in the reserve market are suppressed.[4] PJM argues that a $0/MWh reserve clearing price in the majority of hours does not accurately reflect the “operational value of resource flexibility” and fails to incentivize resource penetration and flexibility.[5]
Let’s begin there. There is nothing intrinsically unjust and unreasonable about low prices. In an efficient market, if the marginal cost of an additional MW of reserves is low or zero then the efficient market price for those reserves should also be low or zero. That is Econ 101.
The Commission purports to accept this principle and agree that reserve prices should reflect the marginal cost of procuring reserves.[6] But it then proceeds to ignore the evidence indicating that the reason reserves are cheap is that they are cheap to produce. As the IMM explains, reserve prices are low because the majority of reserves in PJM are provided at no marginal cost by resources that are online, but operating below their maximum output.[7] The IMM further explains that low prices for a service that is cheap to provide is evidence of an “efficient market outcome,” not an unjust and unreasonable tariff.[8] Accordingly, low prices themselves simply do not indicate that there is anything wrong with PJM’s reserves market. By failing to wrestle with the evidence that contradicts its preferred outcome, the Commission commits a classic example of arbitrary and capricious agency action.[9]
Next, PJM and the Commission contend that the prevalence of out-of-market actions by PJM operators shows that the current operating reserve demand curve (ORDC) does not procure sufficient reserves.[10] To be sure, avoiding out-of-market operator actions and improving transparency is a laudable goal. But the mere presence of out-of-market actions does not suggest, much less prove, that PJM’s current market design is unjust and unreasonable. As an initial matter, the Commission fails to wrestle with the evidence that PJM operators bias PJM’s projected demand downward by hundreds or even thousands of MWs (indicating the need to procure fewer resources to provide reserves) roughly as often as they bias projected demand upward.[11] The fact that PJM just as often acts to reduce projected demand undercuts the argument that the current ORDC is unjust and unreasonable because it fails to procure adequate reserves.[12]
The same is true when you examine individual examples of operator bias. Both PJM and the Commission primarily rely on the example of a cold snap that occurred in January 2019 and during which PJM operators repeatedly biased demand forecasts upward.[13] The record, however, suggests that PJM maintained a considerable reserve surplus throughout that cold snap and irrespective of operators’ out-of-market actions.[14] Indeed, even during the peak demand hour, PJM had a reserve margin above 25%—almost twice its target reserve margin[15]—as a result of generators self-scheduling energy or coming online to produce energy earlier than scheduled by PJM.[16] No one—not even the Commission—seriously suggests that operator actions were necessary to maintain that elevated reserve margin.[17] Simply put, the fact that operators elected to take what turned out to be unnecessary out-of-market actions hardly proves that the existing ORDC is unjust and unreasonable.
Next the Commission points us to evidence of high uplift payments, asserting that “uplift payments for reserves in PJM indicate that the current PJM reserve market fails to provide operators with sufficient reserves.”[18] As with out-of-market actions, reducing uplift payments is a laudable goal. But the mere presence of uplift does not necessarily indicate that the existing Tariff is unjust and unreasonable.[19] Instead, the Commission must show that there is something about those uplift payments that makes it so.
The evidence, however, suggests that the vast majority of uplift payments in PJM have nothing to do with the supposed under-procurement of reserves. For example, PJM and the Commission rely on the IMM’s 2018 State of the Market Report for the proposition that roughly half of the compensation for Tier 2 reserves comes from uplift, which they argue constitutes evidence that the current market design is inadequately valuing reserves. The IMM, however, convincingly explains why that is a mischaracterization of that report. In particular, the IMM explains that the identified uplift payments result from problems with PJM’s settlement process and how it compensates resources for the lost opportunity cost of providing energy, not an under-procurement of reserves.[20] The Commission’s only response to the IMM’s discussion of his own report is a single paragraph that disagrees with his interpretation without any explanation or even a single citation to the record.[21] Such a conclusory rejection of the IMM’s interpretation of its own report is patently arbitrary and capricious.[22]
In any case, even if the out-of-market operator actions and uplift could somehow be read to support the existence of a reserve shortfall during certain periods, PJM’s existing Tariff provides it with the flexibility to extend the reserve requirement and procure additional reserves through the use of Step 2B on its existing ORDC. As I explained in my prior dissent, Step 2B provides a mechanism for increasing the price and quantity of reserves procured by PJM, which would seem to address exactly the problems that PJM claims to have with its current Tariff.[23] PJM, however, has never used Step 2B based on limitations established in its Business Practice Manuals—limitations that PJM can change without Commission approval.[24] An RTO should not be allowed to “decline to exercise its existing authority and then use that decision to explain why its existing Tariff is unjust and unreasonable.”[25] The Commission’s circular reasoning that Step 2B has not prevented the use of out-of-market actions or the payment of uplift—which is of course accurate since it has never actually been used—is not a reasoned response to the argument that PJM’s current Tariff provides everything it needs to address the problems it asserts exist in its reserve market.[26]
The bottom line is that none of PJM’s arguments provide a compelling case that PJM’s existing Tariff, and in particular its existing ORDC, is unjust and unreasonable. Instead, today’s order continues to uncritically accept PJM’s assertions, while rejecting contrary evidence out of hand and without explanation.[27] Those shortcomings only underscore the extent to which the Commission has failed to carry its burden under section 206 of the FPA.[28]
The Commission Has Not Shown that the Replacement Rate Is Just and Reasonable
The Commission also fails to demonstrate that the replacement rate is just and reasonable.[29] Instead, it rubber stamps PJM’s proposal to create a complex and opaque administrative pricing scheme that will increase prices in the energy and ancillary services markets by between $500 million and $2 billion per year.[30] As I explained in my prior dissent, that replacement rate will cause “pervasive scarcity pricing, even when reserves are plentiful.”[31] Forcing customers to pay billions of dollars in scarcity pricing when no shortage exists will produce a windfall for generators, not just and reasonable rates.
As noted, scarcity pricing is an essential element of any market-based approach to managing an electricity system.[32] It provides an economic incentive for resources to provide services that are in short supply, thereby providing more of those essential services. But the logic of shortage pricing presupposes that there is a shortage. Imposing scarcity pricing in the absence of a shortage will beget windfalls for generators, not just and reasonable rates for consumers.
Imagine if ride-sharing companies, such as Uber, all suddenly began doubling or tripling the cost of rides when there were far more cars on the road than customers using those apps. Now imagine that those companies had a monopoly on transportation and you had to use those services to get where you want to go. That would look a lot more like price gouging than a reasonable response to market fundamentals.
And that is essentially what the Commission approves in today’s order. To appreciate why, we need to start with the shape of the ORDC and what it means both in terms of pricing and price signals. Today’s order approves a transition from a vertical stepped demand curve for reserves, to a downward-sloping ORDC. That downward slope supposedly reflects a probabilistic distribution of the likelihood that PJM would fail to meet its minimum reserve requirement for a reserve product when varying amounts of reserves in excess of the minimum reserve requirement are available to the system.[33] The downward-sloping ORDC extends far beyond the minimum reserve requirement and assigns a positive value to acquiring operating reserves well in excess of that requirement.[34] In particular, this positive value assigns every MW of load served a cost associated with failure to satisfy the reserve requirement. That cost is the scarcity component that is added to the energy price.
The new downward-sloping ORDC dramatically changes how, and at what prices, PJM acquires reserves. In particular, it assigns a scarcity price to every MW of reserves procured, even when the market has more than enough reserves to meet applicable reliability standards.[35] The resulting change in pricing will increase prices in PJM’s markets in more than three out of every four hours of the year, irrespective of whether there is an actual shortage.[36]
In an effort to justify such a sharp break with economic logic, the Commission accepts a new standard for pricing reserves: “the expected cost of a reserve shortage,” which PJM contends “represents a reasonable measure of PJM’s willingness to pay to avoid a reserve shortage.”[37] The Commission goes on to explain that the prices generated by the new ORDC will align reserve market prices with the “marginal reliability value” of reserves.[38] How this “marginal reliability value” concept comports with traditional principles of competition and marginal cost pricing is never addressed.[39] That logical leap is a particularly glaring omission since, as noted, the Commission elsewhere in today’s order repeatedly accepts the premise that reserve pricing should reflect the marginal cost of providing those reserves.[40] The Commission’s failure to explain how its new standard relates to or is consistent with what it itself suggests should be the basis of reserve market pricing is arbitrary and capricious.
Making matters worse, the Commission adopts a $2,000/MWh Reserve Penalty Factor, which is more than double the current $850/MWh Reserve Penalty Factor. As a general matter, a system that jointly optimizes dispatch of energy and reserves should reflect the opportunity costs of providing reserves instead of energy.[41] A Reserve Penalty Factor achieves that goal by reflecting the revenues a seller forgoes by committing to provide reserves, rather than to sell energy, during shortage conditions. The Reserve Penalty Factor is then reflected in market clearing prices. The problem here is that the record suggests that $2,000/MWh is not a legitimate opportunity cost the overwhelming majority of the time.[42] In particular, because energy offers cannot exceed $1,000/MWh without prior PJM approval of a cost-based offer, a number greater than $1,000/MWh will rarely ever reflect the actual opportunity cost of resources providing reserves.[43] Assuming that a resource’s opportunity cost will, in effect, always be the absolute highest level allowed under the Tariff is not a reasonable assumption or a serious effort to protect customers from Commission-sanctioned price gouging.
Making matters still worse, the Commission approves PJM’s proposal to eliminate the current cap on the maximum overall Reserve Penalty Factors. As a result, when multiple Reserve Penalty Factors are triggered across different products and zones within the PJM footprint,[44] the total reserve prices can rise to $12,000/MWh while the energy price climbs to $14,000/MWh.[45] Those prices far exceed maximum prices in neighboring markets,[46] and most estimates of the value of lost load.[47] Indeed, the $12,000/MWh and $14,000/MWh prices are significantly higher than even the $9,000/MWh value used in the Electric Reliability Council of Texas’s (ERCOT) energy-only market, where that value is intended to raise energy prices above marginal cost as an alternative to a capacity market.[48] The idea that PJM, with its “generous” capacity market prices, should have energy and ancillary service price caps higher than those in ERCOT is farcical.
Although I am deeply disappointed in today’s order, I will note a lone bright spot: The Commission’s decision to require PJM to run a forward-looking energy and ancillary services offset (E&AS Offset), which will help to limit the adverse impacts on consumers. PJM's various markets work in concert and the Commission cannot reasonably make changes to one without considering the likely effects on the others. The forward-looking E&AS Offset adopted in this 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.[49] That is a step, albeit a small one, in the right direction.
* * *
Properly pricing reserves is an essential element of maintaining reliability at just and reasonable rates. I support efforts to more accurately price operating reserves, which, when done right, should reward flexibility and ensure that both demand and supply receive accurate price signals to respond to changing system conditions. I also support efforts to better define energy market needs that would increase the ability of resources to earn revenues in the energy and ancillary services markets based on the services they provide, rather than through the slush fund that has become the PJM capacity market.
Today’s order achieves none of those goals. The record in this proceeding simply does not support a finding that the current market is unjust and unreasonable. To be sure, the current market is not perfect, but showing that an existing rate is unjust and unreasonable requires more than suggesting that there may be something better.[50] Moreover, the replacement rate set by today’s order clearly is not an improvement over the status quo. Instead of incentivizing resources to respond to system conditions or improving price formation, it replaces ordinary locational marginal pricing principles with heavy reliance on an administrative construct that implements scarcity pricing even when there is no shortage. Rather than improving the market, that replacement rate will result in a windfall that props up inefficient resources.[51] At the end of the day, today’s order is just another scheme to prop up prices and insulate generators from the vicissitudes of the market.
For these reasons, I respectfully dissent.
[1] PJM Interconnection, L.L.C., 171 FERC ¶ 61,153 (2020) (May 2020 Order) (Glick, Comm’r, dissenting at PP 1-2, 17, 29); see id. (Glick, Comm’r, dissenting at PP 2, 18, 30, & n.52).
[2] 16 U.S.C. § 824e(a); FirstEnergy Serv. Co. v. FERC, 758 F.3d 346, 348 (D.C. Cir. 2014) (“Section 206 empowers FERC to make a determination on existing rates and to modify them if they are found to be ‘unjust, unreasonable, unduly discriminatory or preferential.’” (quoting 16 U.S.C. § 824e(a))); see also Emera Me. v. FERC, 854 F.3d 9, 27 (D.C. Cir. 2017) (“[T]he Commission’s decision must actually be the result of reasoned decision-making to receive that deference. Without further explanation, a bare conclusion that an existing rate is ‘unjust and unreasonable’ is nothing more than ‘a talismanic phrase that does not advance reasoned decision making.’” (quoting TransCanada Power Mktg. Ltd. v. FERC, 811 F.3d 1, 12-13 (D.C. Cir. 2015))); City of Anaheim v. FERC, 558 F.3d 521, 525 (D.C. Cir. 2009) (explaining that the section 206 standard is entirely different and stricter than the standard pursuant to section 205).
[3] PJM has two primary reserve products: 10-minute Reserves, which can be available to provide energy in 10 minutes or less, and 30-minute Reserves, which can be available to provide energy in 30 minutes or less.
[4] PJM Transmittal, Docket No. EL19-58-000, at 5-6 (filed Mar. 29, 2019) (PJM Transmittal).
[5] Id. at 7-8.
[6] PJM Interconnection, L.L.C., 173 FERC ¶ 61,123, at P 25 (2020) (Rehearing Order) (“Reserve prices should reflect the marginal cost of procuring necessary reserves.”); May 2020 Order, 171 FERC ¶ 61,153 at P 83 (“We continue to believe that market clearing prices should reasonably reflect the marginal cost of providing necessary reserves. . . .”).
[7] IMM Rehearing Request at 14-15, & n.24 (citing IMM Protest, Docket No. EL19-58-000 (filed May 15, 2019) (IMM Protest) (“Coal and combined cycle gas units comprise most of PJM’s excess online capacity that is not providing energy at full output levels. Both have inflexibility in starting and shutting down, but provide relatively large range of dispatchable capacity once online. . . . 60 percent of PJM’s energy is provided by resources that create large quantities of zero cost synchronized reserves.”)); PJM Load Coalition Rehearing Request at 11 (explaining that the Commission ignored evidence presented by protestors showing that “the marginal price of reserves [in PJM] is frequently zero because the marginal cost of the marginal unit providing reserves is $0.00/MWh, which is, in fact, an efficient reserve price”).
[8] IMM Protest at 14 (“A frequent price of zero for a reserve product is an efficient market outcome, because it is consistent with supply and demand conditions.”).
[9] See Fred Meyer Stores, Inc. v. NLRB, 865 F.3d 630, 638 (D.C. Cir. 2017) (holding that failing to “grapple with contrary evidence . . . disregard[s] entirely the need for reasoned decisionmaking”); Genuine Parts Co. v. EPA, 890 F.3d 304, 312 (D.C. Cir. 2018) (“[A]n agency cannot ignore evidence that undercuts its judgment; and it may not minimize such evidence without adequate explanation.”).
[10] Rehearing Order, 173 FERC ¶ 61,123 at PP 37-45, 57-62.
[11] IMM Protest at 45-46.
[12] See Lakeland Bus Lines, Inc. v. NLRB, 347 F.3d 955, 962 (D.C. Cir. 2003) (explaining that a court “may not find substantial evidence ‘merely on the basis of evidence which in and of itself justified [the agency’s conclusion], without taking into account contradictory evidence or evidence from which conflicting inferences could be drawn’” (quoting Universal Camera Corp. v. NLRB, 340 U.S. 474, 487 (1951))).
[13] See Rehearing Order, 173 FERC ¶ 61,123 at P 39.
[14] See IMM Rehearing Request at 14-15; PJM Load Coalition Rehearing Request at 11-12.
[15] IMM Protest at 10-11 & attach. A; PJM Load Coalition Protest, Docket No. EL19-58-000, at 19 (filed May 15, 2019).
[16] IMM Rehearing Request at 14; PJM Load Coalition Rehearing Request at 12; see also May 2020 Order, 171 FERC ¶ 61,153 (Glick, Comm’r, dissenting at P 8) (“[T]he record suggests that, from the perspective of the grid, the conditions were not actually that challenging: PJM was operating with a reserve margin above 25 percent during the peak hour of that cold snap.”).
[17] Cf. IMM Rehearing Request at 14-15 (explaining that operator bias during this time period did not actually affect the resulting quantity of reserves that came online). In response to the IMM’s arguments, today’s order contains a new twist: That the problem is not with inadequate reserves, but rather that PJM may need to bias the software to account for “faster-than-expected load, lower-than-expected generation, and generators that are slow to ramp-up.” Rehearing Order, 173 FERC ¶ 61,123 at PP 13, 39, 41. It supports that statement with a citation to single statement asserting that PJM operators will sometimes bias demand upward to address the morning ramp. Id. But, as with the 2019 cold snap, the Commission fails to show that these actions are even remotely necessary to maintain reliability. Simply pointing to evidence that operators bias demand is not a reasoned response to the argument that such biasing is typically unnecessary and, in any case, not evidence that PJM is procuring too few reserves. Here again, the Commission’s failure to wrestle with contrary evidence is arbitrary and capricious. See Sorenson Commc’ns Inc. v. FCC, 755 F.3d 702, 710 (D.C. Cir. 2014) (holding that leaving contrary evidence unaddressed is arbitrary and capricious).
[18] Rehearing Order, 173 FERC ¶ 61,123 at P 57.
[19] May 2020 Order, 171 FERC ¶ 61,153 (Glick, Comm’r, dissenting at P 9).
[20] IMM Second Answer, Docket No. EL19-58-000, at 9 (filed July 16, 2019) (noting that the uplift payments were, in significant part, the result of “incorrect settlements calculations, and a mismatch between the dispatch interval and the pricing interval”); IMM Rehearing Request at 16-18 (providing a detailed breakdown of uplift costs and why they do not support the conclusion that PJM is under-procuring reserves).
[21] The Commission also rejects the supplemental evidence relied upon by the IMM showing that more than four-fifths of the uplift payments provided for synchronous reserves was paid to synchronous condensers held offline and paid lost opportunity costs. Rehearing Order, 173 FERC ¶ 61,123 at P 61; see IMM Rehearing Request at 16-18. It argues that older data submitted by PJM can be read to suggest that the current market design contributes to uplift. Rehearing Order, 173 FERC ¶ 61,123 at P 61. I fail to see how pointing to out-of-date data is a reasoned response to the IMM’s reliance on more current information that further undercuts the Commission’s conclusion. Instead, it is only the latest example of the Commission twisting the record in a desperate attempt to support its conclusion.
[22] See Int’l Union, United Mine Workers of Am. v. Mine Safety & Health Admin., 626 F.3d 84, 94 (D.C. Cir. 2010) (“Conclusory explanations for matters involving a central factual dispute where there is considerable evidence in conflict do not suffice to meet the deferential standards of our review.” (quoting AT&T Wireless Servs., Inc. v. FCC, 270 F.3d 959, 968 (D.C. Cir. 2001))). In addition, as the PJM Load Coalition points out, the estimated annual cost of PJM’s proposed replacement rate is roughly half a billion dollars, while the corresponding reduction in uplift payments is about four million dollars. PJM Load Coalition Rehearing Request at 13. It is hard to believe that uplift is evidence of an unjust and unreasonable tariff if remedying uplift comes at cost of 100 dollars for every dollar of uplift reduced.
[23] The Commission “disagrees” that PJM’s existing “vertical demand curve would resolve PJM’s underlying concerns and procure reserves, as needed.” Rehearing Order, 173 FERC ¶ 61,123 at P 98. Its only support for this contention is a perplexing footnote indicating that it “is just and reasonable for an ORDC to reflect the fact that reserves beyond the [Minimum Reserve Requirement] have value,” and that the vertical demand curve fails to assign “a rational value” to each point on the curve. Id. P 98, n.205. In fact, PJM’s existing Tariff already values reserves beyond the Minimum Reserve Requirement. See PJM Transmittal at 25-26 (explaining that PJM’s “current ORDCs acknowledge the value of committing reserves beyond the [Minimum Reserve Requirement].”). Step 2A of the current ORDC ensures that PJM procures 190 MW of additional reserves beyond the Minimum Reserve Requirement, priced at $300/MWh, and Step 2B can extend that part of the vertical curve out even further to procure additional reserves, as needed. Id. What today’s order does is place a substantial value on reserves well in excess of the Minimum Reserve Requirement, irrespective of the marginal cost of procuring those additional MWs of reserves. How that amounts to “a rational value” is never explained.
[24] PJM Load Coalition Rehearing Request at 15-18.
[25] May 2020 Order, 171 FERC ¶ 61,153 (Glick, Comm’r, dissenting at P 14).
[26] Rehearing Order, 173 FERC ¶ 61,123 at P 49; May 2020 Order, 171 FERC ¶ 61,153 at P 94 (“[Step 2B] does not address the suite of reserve market design shortcoming we identify above, as evidenced by the fact that its existence has not prevented those shortcoming from emerging.”).
[27] FERC v. Elec. Power Supply Ass’n, 136 S.Ct. 760, 784 (2016) (EPSA) (explaining the Commission’s duty to engage in reasoned decisionmaking, which includes weighing competing views, selecting a proposal with adequate support in the record, and intelligibly explaining the reasons for its choice); see also New England Power Generators Ass’n, Inc. v. FERC, 881 F.3d 202, 211 (2018) (“It is well established that the Commission must ‘respond meaningfully to the arguments raised before it.’” (quoting TransCanada, 811 F.3d at 12)).
[28] See, e.g., Emera Me., 854 F.3d at 24 (“Section 206’s procedures are ‘entirely different’ and ‘stricter’ than those of section 205.” (quoting City of Anaheim, 558 F.3d at 525)).
[29]Advanced Energy Mgmt. All. v. FERC, 860 F.3d 656, 663 (D.C. Cir. 2017) (“[U]nder section 206, ‘it is the Commission’s job—not the petitioner’s—to find a just and reasonable rate.’ When the Commission changes an existing filed rate under section 206, it is ‘the Commission’s burden to prove the reasonableness of its change in methodology.’” (quoting Md. Pub. Serv. Comm’n v. FERC, 632 F.3d 1283, 1285 n.1 (D.C. Cir. 2011) and PPL Wallingford Energy L.L.C. v. FERC, 419 F.3d 1194, 1199 (D.C. Cir. 2005), respectively)).
[30] PJM estimates the proposal will result in an increase of $556 million per year, while the IMM estimates the proposal will result in an increase of at least $1.7 billion per year. IMM Protest at 53; PJM Transmittal, attach. D at 46.
[31] May 2020 Order, 171 FERC ¶ 61,153 (Glick, Comm’r, dissenting at PP 17-18); id. (Glick, Comm’r, dissenting at PP 20-21) (explaining how the new downward sloping ORDC adds a scarcity component to the energy price for each incremental quantity of reserves procured in excess of the minimum reserve requirement); see also IMM Protest at 7 (explaining that the result of PJM’s proposed replacement rate “is scarcity pricing all the time, all hours of the day, all days of the year, regardless of actual shortage conditions.”).
[32] See supra P 4.
[33] PJM Transmittal at 58-59; see also id., attach. F at P 6 (Affidavit of Dr. Patricio Rocha Garrido) (“[T]he proposed ORDC is composed of [a Minimum Reserve Requirement] segment and a downward-sloping segment whose shape is determined by the declining probability of failing to meet the [Minimum Reserve Requirement] as the magnitude of total forecast error (and available reserves) increases.”).
[34] IMM Protest at 22 (“PJM’s current calculations for its proposed ORDC define a positive marginal value for reserves up to nearly twice the current reserve requirements.”).
[35] See Maryland Pub. Serv. Comm’n Rehearing Request at 7-8 (explaining that additional quantities of reserves beyond the Minimum Reserve Requirement add to PJM’s level of conservatism, but do not necessarily improve reliability).
[36] PJM Load Coalition Rehearing Request at 2, n.3; IMM Protest at 24-25 (noting that the price effects are not limited to hours when the market is “stressed”).
[37] Rehearing Order, 173 FERC ¶ 61,123 at P 98.
[38] Id.
[39] See IMM Rehearing Request at 18-20 (arguing that the new administratively-determined ORDC prices do not remedy the identified problem of reserve prices not reflecting the marginal cost of procuring reserves).
[40] See, e.g. Rehearing Order, 173 FERC ¶ 61,123 at P 25 (“Reserve prices should reflect the marginal cost of procuring necessary reserves.”); see also, e.g., id. PP 6, 13, 17-18, 45 (similar).
[41] See PJM Interconnection, L.L.C., 139 FERC ¶ 61,057, at PP 69, 75 (2012) (accepting PJM’s proposal to implement a $850/MWh Reserve Penalty Factor based on historical evidence of the actual opportunity costs paid by PJM on peak days in past years).
[42] See PJM Load Coalition Rehearing Request at 33-37 (showing that from 2014-2018, LMPs in the day-ahead and real-time PJM energy markets never reached $2,000/MWh, and in fact rarely exceed $1,000/MWh); IMM Rehearing Request at 20-21 (arguing that the Commission ignored the fact that a $1,000/MWh Reserve Penalty Factor is consistent with legitimate opportunity costs and efficient market dispatch); ODEC Rehearing Request at 2-3 (arguing that PJM’s own analysis showed that opportunity costs only reached $2,000/MWh in eight percent of intervals studied between January 1, 2015 and April 30, 2019).
[43] Offer Caps in Mkts. Operated by Reg’l Transmission Orgs. & Indep. Sys. Operators, Ord. No. 831, 157 FERC ¶ 61,115, at P 1 (2016), order on reh’g & clarification, Ord. No. 831-A, 161 FERC ¶ 61,156 (2017), amended by 165 FERC ¶ 61,136 (2018); see also IMM Rehearing Request at 32-33 (explaining that the short run marginal cost of energy rarely exceeds the current $850/MWh Reserve Penalty Factor and cannot exceed $1,000/MWh without prior PJM approval of a cost-based offer).
[44] It is worth noting that PJM’s proposal also unjustifiably and discriminatorily bars over 5,000 MW of pre-emergency and emergency demand response from serving as 30-minute Reserves, despite the fact that these resources have Capacity Performance obligations requiring them to perform if called upon. IMM Rehearing Request at 21-22. By failing to allow these resources to participate, PJM is understating its amount of available reserves, which will result in increased reserve prices above the competitive level. Id. I am not surprised that the Commission accepts this proposal, given its overall miserly approach to allowing demand response participation in the wholesale markets. See, e.g., N.Y. Pub. Serv. Comm’n v. N.Y. Indep. Sys. Operator, Inc., 173 FERC ¶ 61,022 (2020) (Glick, Comm’r, dissenting at PP 20-31).
[45] ODEC Rehearing Request at 5.
[46] See Maryland Pub. Serv. Comm’n Rehearing Request at 9 (arguing that a maximum price of $12,000/MWh is inconsistent with the Commission’s prior belief that maximum energy prices associated with shortage conditions should be closely aligned in neighboring RTOs in order to reduce incentives to export power from one RTO to another).
[47] May 2020 Order, 171 FERC ¶ 61,153 (Glick, Comm’r, dissenting at P 25).
[48] Id. (Glick, Comm’r, dissenting at P 25).
[49] Rehearing Order, 173 FERC ¶ 61,123 at P 126, n.249. Ironically, because of the lengthy delay in running the 2022/2023 Base Residual Auction, when that auction is eventually run, the forward-looking E&AS Offset the Commission required should be in place and should take into account the reserve market changes directed in this proceeding, mitigating the adverse impact on consumers.
[50] Emera Me., 854 F.3d at 27.
[51] IMM Rehearing Request at 9-10 (explaining that PJM’s proposal will result in a windfall to uneconomic baseload nuclear and coal resources); see also IMM Protest at 47-49, tbl. 3 (showing that nuclear resources will receive the largest increase in energy revenue from PJM’s proposal at $15,345/MW-year for the simulated year 2018 while combustion turbines and steam coal units will receive an increase of $5,910/MW-year and $6,952/MW-year in energy and reserve revenues).