Commissioner Richard Glick Dissent Regarding Rehearing on PJM’s Reliability Pricing Model

Commissioner Richard Glick Statement
April 16, 2020
Docket No. ER19-105-004
Order: E-18

Dissent Regarding Rehearing on PJM’s Reliability Pricing Model

I dissent from today’s order because PJM has failed to show that its proposal will produce just and reasonable rates.  Instead, today’s order will only perpetuate PJM’s over-procurement of capacity resources, raising customers’ rates and dulling the price signals established in PJM’s other markets.  That is because the Commission is approving a Reference Resource whose costs are so much higher than the actual resources entering the market that it will distort PJM’s entire capacity market design.  And, if that were not bad enough, in so doing, the Commission commits several of the cardinal sins of administrative law:  Today’s order is unsupported by substantial evidence, inconsistent with Commission precedent, and it altogether fails to address arguments made on rehearing.  Simply put, it is inconsistent with both our statutory mandate under the Federal Power Act (FPA) and basic principles of reasoned decisionmaking.

For many years now, the PJM capacity market has procured too much capacity at too high a price.  The root of that problem is PJM’s excessively high Net Cost of New Entry 1 (Net CONE) parameter.  Net CONE provides the “anchor” point for the demand curve—known as the “Variable Resource Requirement” curve (VRR curve)—used to clear the capacity market. 2   The last few years have provided mountains of evidence that PJM’s Net CONE figure is much too high.  Since the 2015/2016 Base Residual Auction, over 31,000 MW of new generation resources have cleared the PJM capacity market, despite the auctions clearing at prices that were, on average, less than half of Net CONE. 3   Those figures indicate that developers are willing to enter the market at a fraction of PJM’s estimate, 4 suggesting that the actual net cost of new entry is nowhere near as high as “Net CONE.”  That means that PJM’s capacity market is designed to procure too many resources at too high a price, with obvious harm for customers.

But the harm from an inflated Net CONE estimate goes beyond its direct impact on customers.  Because it causes PJM to retain too many resources, it dulls the price signals in the energy and ancillary service markets, impairing their ability to incentivize the services we need to operate the grid reliably. 5   In addition, Net CONE plays a critical role in mitigating market power by helping to set the market seller offer cap, which is the maximum level at which a capacity resource can bid at without having that bid automatically reviewed by the market monitor. 6   Because an artificially high Net CONE raises that cap, it increases the potential for market power abuse. 7   Suffice it to say, the Net CONE figure is the root of many of the most vexatious issues facing PJM.  By the same token, getting Net CONE right would go a long way toward ensuring that PJM’s markets produce just and reasonable rates.

Given those stakes and the mountains of evidence indicating that PJM’s capacity market is over-procuring resources, 8 you might expect the Commission to take a hard look at how PJM proposes to establish the VRR Curve—and Net CONE in particular. But you would be wrong.  In the underlying order, the Commission breezed over these issues, uncritically adopting PJM’s rationale even in the face of contrary Commission precedent, persuasive protestor arguments, and many contested issues of material fact. 9   As explained below, today’s order on rehearing is no better. 

The main problem with PJM’s proposed Net CONE value—and, thus, with its entire filing to establish the VRR Curve—is its choice of Reference Resource.  The Reference Resource is a “theoretical new power plant” that PJM examines to determine the representative cost of entering the market. 10   In establishing Net CONE, PJM sums up all the costs of building a new version of the Reference Resource and then subtracts the revenue that the resource could be expected to earn from energy and ancillary services—hence the “net” in Net CONE. 11   Net CONE is the so-called “anchor” of the VRR Curve, making it critical to the capacity market’s ability to send efficient price signals. 12   If it is too high it will incentivize the entry or retention of resources that are not needed, but that customers will still have to pay for.  If it is too low, it will not incentivize enough resources to participate in the market, potentially raising reliability concerns.  PJM previously proposed, and the Commission accepted, a proposal to make the Reference Resource a “combustion turbine” (CT) unit—one of the two principal types of natural gas power plants, the other being a combined-cycle (CC) unit.    

In preparation for this filing, PJM commissioned reports by the Brattle Group, an independent consultancy that studies these things.  As relevant here, Brattle recommended that PJM change the Reference Resource from a CT to a CC. 13   Brattle concluded that maintaining the CT as the Reference Resource would beget a VRR Curve that would over-procure capacity given that new CCs would likely continue to enter the market at prices well below the resulting Net CONE estimate. 14   To better align the curve with the cost at which capacity is actually available, which would further PJM’s objective of meeting resource adequacy requirements cost-effectively, Brattle recommended switching to a CC as the reference technology. 15

Brattle provided several reasons for recommending a CC.  It explained that a CC would (1) align the VRR curve with the facts on the ground, which show that CCs have been the dominant technology entering the market for the decade and a half and will likely remain so for the foreseeable future, 16 (2) avoid unnecessary costs while continuing to meet reliability objectives, 17 and (3) more accurately reflect revenue from energy and ancillary services since those figures are easier to predict for a CC than a CT. 18  In making that recommendation, Brattle recognized that selecting a CC would result in a Net CONE value 25-63 percent lower than if PJM selected a CT.  Brattle explained that lower figure reflects the fact that, although a CC would cost slightly more to build, it would more than offset those higher costs by earning significantly more energy and ancillary service revenue over the life of the facility, thereby reducing its net cost. 19  

Notwithstanding that recommendation, PJM proposed to continue using a CT as the Reference Resource. 20   It observed that roughly 1,600 MW of CT capacity had been added to PJM in the 15 years since its current capacity construct was inaugurated, including two CT units developed in the last five years. 21   In addition, PJM pointed to what it suggested were various benefits of using a CT over a CC, including the fact that CTs are cheaper and easier to build and that there is great risk to misestimating the revenue that a CC would earn from energy and ancillary services. 22   The Commission accepted the filing based on those representations. 23

A group of self-described Public Interest Entities 24 sought rehearing.  They principally contended that it was unreasonable for the Commission to approve a CT as the Reference Resource for establishing Net CONE when the record showed the costs of the proposed CT were much higher than the resources actually entering the market.  They argued that the Commission failed to adhere to the three-part test it had previously applied when reviewing ISO New England Inc.’s choice for the Reference Resource-equivalent in its capacity market. 25   That test requires the Commission to consider (1) whether the reference resource is likely to be developed in the region, (2) whether cost and revenue estimates for that unit can be developed with confidence, and (3) whether the resulting curve produces “prices high enough to meet the reliability standard but not so high as to add unnecessary costs.” 26   In particular, Public Interest Entities argued, with extensive supporting detail, that the Commission had ignored the evidence suggesting that precious few CTs had built in recent years, especially relative to CCs, and that the Commission had essentially failed to weigh the costs and benefits of selecting a CT. 27  

Today’s order does not provide a reasoned response, doubling down on the flawed reasoning in the underlying orders.  The Commission simply does not wrestle with the basic point that it is unjust and unreasonable to approve a Reference Resource whose net costs are not at all representative of the resources that are actually entering the PJM market.  As discussed above, that choice will distort the market, raising costs to consumers, impairing the market’s ability to send efficient price signals, and increasing the risk of an exercise of market power. 28   Rather than confront that issue, which is squarely presented on rehearing, the Commission provides only half-hearted responses that are unsupported by substantial evidence, inconsistent with the Commission’s own precedent, and that ignore arguments in the record. 

As an initial matter, the Commission briefly suggests that it is not required to apply the same three-part test that it applied to ISO New England’s filing because PJM’s Tariff does not explicitly define the criteria that the Commission must consider in evaluating the proposed Reference Resource. 29  That assertion would, on its face, seem to contravene “‘the great principle that like cases must receive like treatment” 30 as there are no relevant differences between the role that Net CONE and the VRR Curve play in PJM’s capacity market and the role that their equivalents play in ISO New England’s capacity market. 31   But, in any case, the Commission’s elects not to pursue that point, instead justifying its acceptance of the CT as the appropriate Reference Resource solely on the basis that it comports with that same three-part test. 32   Accordingly, its acceptance of PJM’s proposed Reference Resource must stand or fall solely based on whether its application of that three-prong test was the product of reasoned decisionmaking.

Let’s go through the three prongs one-by-one.  First, today’s order fails to seriously address the arguments that the proposed CT Reference Resource is unlikely to be developed in the region.  As noted, the overwhelming majority of new entry in PJM—and almost all new natural-gas fired capacity—over the last five years has consisted of CCs, not CTs. 33   Only two merchant CT units—consisting of a total of less than 500 MW of capacity—have been developed over that same period.  In addition, as discussed further below, both of those CTs were “brownfield” resources built on the site of existing power plants. 34   As such, they do not indicate that PJM’s proposed “greenfield” CT Reference Resource is likely to be built anywhere in PJM.  To the contrary, to the extent new entry is needed, it will almost certainly be in the form of a CC, not a CT.

 Nevertheless, the Commission brushes those concerns aside, contending that “the Reference Resource need not be the most frequent entrant into the PJM capacity auctions.” 35   That’s not the point; no one is contending that the Reference Resource can only be the most common new entrant.  The point is that it unreasonable to select a CT as the Reference Resource when CTs are so rarely developed and when a CC is overwhelmingly more likely to be developed. 36   The Reference Resource may not need to be the most common new entrant, but it also should not be one of the least common either, at least not without further explanation. 37  

But that is only part of the problem.  Today’s order completely glosses over Public Interest Entities’ argument that, even if you assume for the moment that a CT is the appropriate Reference Resource, the Commission erred in approving a greenfield CT rather than a brownfield CT. 38   As noted, the two CTs developed in recent years in PJM were at “brownfield” sites that already housed existing power plants. 39   That means that there is no evidence in the record that a greenfield CT is likely to enter the market.  And that matters because it is generally much cheaper to develop a resource at an existing site than an altogether new one.  After all, think how much cheaper it would be to add a new bedroom onto a five-bedroom house than to buy a freestanding one-bedroom house in the same neighborhood.  A greenfield CT and a brownfield CT are equally different propositions and the development of one does not necessary suggest that the development of the other is likely.  Accordingly, the Commission’s finding that a greenfield CT was sufficiently likely to be developed was not supported by substantial evidence.

The Commission responds to Public Interest Entities’ argument with the puzzling assertion that the absence of any recent greenfield CTs does not suggest that they are unlikely to be developed, since CTs “typically are built at a lower total cost than CC plants, and as a result, . . . CTs typically can be deployed quickly to address any potential resource adequacy or reliability concerns.” 40   Whatever the Commission thinks about CTs generally, the fact that no greenfield CTs have recently been developed in PJM would seem to suggest that they are unlikely to be developed, even if they have certain advantages. 41   At the very least, if the Commission is going to rely on the theoretical cost advantages of a CT to justify its assertion that they are likely to be developed, it must confront the contrary evidence (i.e., the total absence of any developers capitalizing on those advantages to build a greenfield CT) and explain why its decision is rational in the face of that evidence. 42  That is especially so given Brattle’s conclusion that CCs are likely to remain more economic for the foreseeable future, which would seem to offset the fact that a CT can be built cheaply and deployed quickly. 43   Most developers are, after all, in the business of turning a profit, not just putting steel into the ground. 

Second, today’s order also fails to rigorously apply the second prong of the Commission’s three-part test:  Whether cost and revenue estimates can be developed with confidence.  PJM contended that it is more challenging to measure energy and ancillary services revenue for a CC than a CT because a CC generally makes much more revenue from those services (which is a big part of why a CC is so much more economic than a CT). 44  But as explained in my underlying statement, the fact that energy and ancillary service revenue may be more important to developing an accurate Net CONE for a CC does not mean that it cannot be developed with confidence. 45   After all, Brattle explained that while estimated energy and ancillary service revenue may be more important for a CC, those revenue estimates can be verified using the performance data of actual CCs—something that is impossible for a CT because there are so few of them in operation. 46   The Commission, however, never wrestled with those points, instead simply parroting back PJM’s statement about the importance of energy and ancillary service revenue when estimating a CC’s Net CONE. 47

Finally, today’s order does not respond to Public Interest Entities’ argument that the Commission failed to weigh whether the Reference Resource will lead to prices high enough to meet the reliability standard but not so high as to impose unnecessary costs.  One of the foundational principles of administrative law is that an agency must respond to the arguments raised before it. 48   Public Interest Entities argued vigorously that the Commission failed to balance those concerns in a reasoned fashion 49 and today’s order even spent an entire paragraph summarizing that argument. 50   Yet the Commission completely ignores that argument in responding to Public Interest Groups’ rehearing request. 51   The utter failure to address arguments about one-third of the relevant legal standard is inarguably arbitrary and capricious and itself a basis for invalidation.

In any case, there is not much in the record that the Commission could have pointed to in response.  The one thing the record clearly shows is that new resources (overwhelmingly CCs) are entering the market at less than half PJM’s current Net CONE estimate and will likely continue to do so at a fraction of the revised CT-based Net CONE. 52  The Reference Resource is supposed to be the basis for developing an estimate of the representative net cost of a new resource entering the market.  It cannot do that job if its net costs are well above the resources actually entering the market.  Although the record before us is unambiguous that the costs of a greenfield CT vastly exceed the costs of the CCs entering PJM—meaning that a greenfield CT-based Net CONE will, by design, lead to the over-procurement of capacity—the Commission sidesteps the issue entirely, abdicating its responsibility to ensure just and reasonable rates.  That is arbitrary and capricious. 

It is also inconsistent with Commission precedent.  In addressing this same issue in ISO New England, the Commission found a proposed reference unit just and reasonable partly because it was “more economically efficient than the next lowest cost technology, indicating that the proposed Net CONE value will be high enough to incent new entry into the market, but not so high as to introduce unnecessary costs.” 53   Today’s order, however, seems to ignore the fact that, in PJM, a CC “is significantly more economically efficient than the next lowest cost technology,” 54 making it more consistent with Commission precedent than a CT. 55  

I recognize that PJM proposed changes that may push Net CONE slightly in a better direction. 56   But while PJM’s proposal would lower Net CONE, it would remain substantially above the levels at which new resources have been entering the market over the last few years. 57   So long as the Commission fails to wrestle with the evidence indicating that using a greenfield CT as the Reference Resource will impose costs that are unnecessary to ensure reliability, its orders cannot be the product of reasoned decisionmaking. 

Finally, recall that Net CONE, and the VRR Curve more generally, play an outsized role in many of the biggest and most contentious issues facing PJM. 58   Chief among those is PJM’s persistent oversupply of capacity resources.  That oversupply hurts customers directly—because they are paying too high a price for too much capacity—and indirectly insofar as it dulls the price signals in the energy and ancillary service markets  that should, in theory, drive the efficiency of those markets. That oversupply is also a direct and eminently foreseeable consequence of an inflated Net CONE value. 59   Because an artificially inflated Net CONE is, in effect, the same thing as a rightward shift in the capacity market demand curve, it will, by definition, cause PJM to procure more capacity resources than are needed to ensure reliability at just and reasonable rates.    

Although the Public Interest Entities raised this point in their rehearing request, the Commission brushed it aside as outside the scope of this proceeding. 60   Apparently the Commission believes that their concern is too general and that their rehearing request “fail[ed] to identify how specific parameters should be adjusted in light of this concern.” 61    I disagree.  For one thing, the Public Interest Entities did identify specific parameters that should be adjusted, including the choice of a greenfield CT as the Reference Resource. 62    Moreover, I see no reason why the eminently foreseeable costs of messing up a market design fall outside the scope of the Commission’s just and reasonable review, especially in instances when the Commission’s precedent requires a balancing test that explicitly weighs incremental reliability benefits against the costs to consumers.  To the contrary, those concerns illustrate the stakes of this proceeding and why Public Interest Entities’ concerns deserved a more thorough evaluation than they get in today’s order.
Many of the issues addressed in today’s order are the type of technical judgments for which the Commission receives deference. 63   But the fundamental flaws in several aspects of the Commission’s reasoning are not the sort of thing that deference can paper over.  Instead, they are exactly the type of arbitrary and capricious judgments that the Administrative Procedure Act was enacted to address. 64   As noted, the Commission’s acceptance of PJM’s proposed Reference Resource is unsupported by substantial evidence, contrary to Commission precedent, and utterly fails to respond to certain arguments raised in the record.  That is not reasoned decisionmaking and should not withstand review no matter how technical the particular issues at play.  

For these reasons, I respectfully dissent.


 

• 11 Net CONE is used to establish the administratively determined demand curve that—along with the supply curve formed from capacity supplier sell offers—is used to clear capacity auctions in PJM. The higher the Net CONE figure, the higher the market-clearing price and the higher the total capacity cleared.
• 22 PJM Transmittal, Attachment G, Exhibit 2, at iv, vii (2018 VRR Curve Report) (explaining that for the VRR curve to procure enough capacity to meet and not substantially exceed PJM’s resource adequacy requirements, the curve must be anchored on the price at which investors are willing to add capacity, and that new gas-fired resources have been entering the market at clearing prices that are less than half of PJM’s Net CONE estimate and “[a]s a result, the cleared quantities in the PJM capacity auctions have exceeded the PJM reserve margin target by 3 to 6 percentage points”).
• 33 PJM Transmittal, Attachment E, Exhibit 2 at 4 (2018 CONE Study). The 31,000 MW figure is equivalent to roughly 20 percent of the reliability requirement procured through the capacity auction in any given year. See The Independent Market Monitor for PJM, Analysis of the 2021/2022 RPM Base Residual Auction 10-11 (2018), available at  http://www.monitoringanalytics.com/reports/Reports/2018/ IMM_Analysis_of_the_20212022_RPM_BRA_Revised_20180824.pdf (stating PJM’s reliability requirement in the most recent capacity auction was roughly 150,000 MW). In addition, the 60 percent figure represents the clearing price in the auction, meaning that many new entrants cleared the auction with bids even lower than that. 2018 CONE Study at 4; see also id. Fig. 1 (comparing PJM capacity market clearing prices and Net CONE).
• 44 “As the clearing prices reflect the offer price of the marginal unit clearing the market, new generation resources must have on average been submitting offers into the auction at even lower prices.” Id. at 4.
• 55 The capacity market procures capacity—the ability to produce electricity—but not the services, such as the ability to respond quickly to price signals and dispatch instructions, that are increasingly important to operating the grid safely and reliably. To the extent those services are compensated at all, it is through the energy and ancillary services markets.
• 66 The market seller offer cap is calculated by multiplying Net CONE by the historical average of the Balancing Ratios experienced during Performance Assessment Intervals/Hours in the three most recent calendar years. PJM’s tariff states that bids up to the market seller offer cap “shall not, in and of itself, be deemed an exercise of market power.” PJM Tariff, Attachment DD § 6.4(a).
• 77 This is not just theoretical. Recently, excessive Net CONE values have resulted in very high market seller offer caps. These market seller offer caps have elicited concerns from the Market Monitor that the exercise of market power caused the clearing price to exceed competitive levels in the most recent capacity auction. See Monitoring Analytics, Analysis of the 2021/2022 RPM Base Residual Auction 3-4 (Aug. 9, 2018).
• 88 E.g., Public Interest Entities Rehearing Request at 6-7 (“The record shows that PJM’s Base Residual Auction regularly clears a substantial excess amount of capacity. . . In the last four Base Residual Auctions, the cleared capacity has exceeded the target installed reserve margin by between 4.1 and 6.7%.” (footnotes omitted)).
• 99 PJM Interconnection, L.L.C, 167 FERC ¶ 61,029, at PP 59, 61 (2019) (Order), order on reh’g, 171 FERC ¶ 61,040 (2020) (Rehearing Order); see generally Order, 167 FERC ¶ 61,029 (Glick, Comm’r, dissenting) (criticizing the Commission’s failure to wrestle with contrary record evidence).
• 1010 Order, 167 FERC ¶ 61,029 at P 3.
• 1111 2018 VRR Curve Report at iii (“Net CONE represents the capacity revenue a new generator would need to be willing to enter the market. It reflects the levelized investment and fixed costs (or CONE) of an economic reference technology, minus expected net energy and ancillary service . . . revenues.”).
• 1212 2018 VRR Curve Report at iv.
• 1313 PJM Transmittal, Attachment G at P 14 (Affidavit of Samuel A. Newell and David Luke Oates) (“We recommended in the 2018 VRR Curve Report a VRR Curve based on the estimated Net CONE of a CC plant.”).
• 1414 2018 VRR Curve Report at iv.
• 1515 Id. at 69.
• 1616 Id. at iii, 32, 63.
• 1717 Id. at 32. Brattle also explained that its analysis indicated that using a CC-derived Net CONE would yield a loss of load expectation 2-3 times better than the industry standard and at much lower cost to customers. Id. at 65.
• 1818 Brattle explained that, because modern CCs are widespread in PJM, it can study their historical performance to validate its estimates of a CC’s energy and ancillary service revenue, but that it cannot do the same for a CT because there are so few modern CTs in PJM and those that exist lack the pollution controls needed to operate as frequently as the theoretical CT it used to estimate energy and ancillary service revenue. Id. at 19-20.
• 1919 Id. at 17 (“Net CONE for gas-fired combined-cycles (CCs)—the dominant technology of new generation in PJM for more than fifteen years— is 44-76% lower than PJM’s 2021/22 CT-based Net CONE parameter, and 25-63% below the updated CT Net CONE estimate, depending on location. This difference is mostly due to the much higher E&AS revenues of CCs and plant costs that are only slightly higher than those of CTs on a dollar-per-kW basis.”).
• 2020 Order, 167 FERC ¶ 61,029 at P 5. PJM did follow Brattle’s proposal to change the type of turbine used in the Reference Resource from so-called “F-class” turbine to an “H-class” turbine. Id.
• 2121 Id. P 32. That may initially sound like a large number, but, for context, 27,000 MW of new CC capacity has cleared the PJM capacity market in the last five years alone. 2018 CONE Study at 5.
• 2222 Order, 167 FERC ¶ 61,029 at P 33.
• 2323 Id. PP 59, 61.
• 2424 The Public Interests Entities consists of: The Office of the People’s Counsel of the District of Columbia, the Delaware Division of the Public Advocate, the Illinois Citizens Utility Board, the New Jersey Board of Public Utilities, the Maryland Office of the People’s Counsel, the Sierra Club, and the West Virginia Consumer Advocate Division. See Order, 167 FERC ¶ 61,029 at n.15.
• 2525 Public Interest Entities Rehearing Request at 11-19.
• 2626 See ISO New England, Inc., 161 FERC ¶ 61,035, at P 38 (2017), reh’g denied 170 FERC ¶ 61,052 (2019); see also Rehearing Order, 171 FERC ¶ 61,040 at P 8 (summarizing Public Interest Entities’ discussion of the three-part framework applied in the ISO New England order).
• 2727 Public Interest Entities Rehearing Request at 11-19.
• 2828 See supra PP 2-3.
• 2929 Rehearing Order, 171 FERC ¶ 61,040 at P 14.
• 3030 Baltimore Gas & Elec. Co. v. FERC, No. 18-1298, 2020 WL 1482394, at *6 (D.C. Cir. Mar. 27, 2020) (quoting NLRB v. Gen. Stencils, Inc., 438 F.2d 894, 905 (2d Cir. 1971) (Friendly, J.)); see W. Deptford Energy, LLC v. FERC, 766 F.3d 10, 20 (D.C. Cir. 2014) (“It is textbook administrative law that an agency must provide . . . a reasoned explanation for departing from precedent or treating similar situations differently.”).
• 3131 See, e.g., New England Power Generators Ass’n, Inc. v. FERC, 881 F.3d 202, 211 (D.C. Cir. 2018) (finding that the Commission “did not engage in the reasoned decisionmaking required by the Administrative Procedure Act” when it accepted an ISO New England filing with rationale that appeared to conflict with a comparable finding regarding PJM).
• 3232 Rehearing Order, 171 FERC ¶ 61,040 at PP 14, 15.
• 3333 See 2018 Cone Study at 5 (“Nearly all new generating units entering the BRAs are natural-gas-fired. Most of these new natural gas plants consist of CC plants, as shown in Figure 2 below, while the Net CONE parameter is currently set based on a CT. There were significant additions of new CTs in PJM prior to 2005, but limited merchant entry since then.”); id. Figure 2 (comparing new CC and CT capacity clearing in each of the last several capacity auctions).
• 3434 See Order, 167 FERC ¶ 61,029 (Glick, Comm’r, dissenting at P 7) (discussing the 340 MW Doswell Peaking Unit and the 141 MW Perryman Unit 6 The Doswell Peaking Unit, which are on the site of the existing Doswell Energy Center and Exelon’s existing Perryman Generating Station, respectively (Public Interest Entities Protest, Attachment A at P 39 (Wilson Affidavit)).
• 3535 Rehearing Order, 171 FERC ¶ 61,040 at P 15.
• 3636 See supra 33.
• 3737 The only other explanation that is even plausibly related to this point is the Commission’s statement that “different technologies can efficiently exist within the market and are needed to meet different types of demand.” Rehearing Order, 171 FERC ¶ 61,040 at P 15. That is true. But the economic viability of multiple resource types hardly justifies PJM’s selection of this particular resource type as the Reference Resource.
• 3838 Public Interest Entities Rehearing Request at 13; Order, 167 FERC ¶ 61,029 (Glick, Comm’r, dissenting at P 7).
• 3939 2018 CONE Study at 5 & n.17; Wilson Affidavit at P 39; see also Order, 167 FERC ¶ 61,029 (Glick, Comm’r, dissenting at P 7) (similar).
• 4040 Rehearing Order, 171 FERC ¶ 61,040 at P 15.
• 4141 Order, 167 FERC ¶ 61,029 (Glick, Comm’r, dissenting at P 7); see Public Interest Entities Rehearing Request at 12-13; see also Am. Gas Ass’n v. FERC, 593 F.3d 14, 19 (D.C. Cir. 2010) (citing Chamber of Commerce v. SEC, 412 F.3d 133, 137-38 (D.C. Cir. 2005)); see also Kamargo Corp. v. FERC,852 F.2d 1392, 1398 (D.C. Cir. 1988) (recognizing that while the case may “present[] a difficult problem for the Commission, . . . it has no alternative but to confront the questions raised by the dissent”).
• 4242 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”); 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”); see also Sw. Airlines Co. v. Transportation Sec. Admin., 650 F.3d 752, 759-60 (D.C. Cir. 2011) (explaining that it is arbitrary and capricious for an agency to reject contrary evidence based only on its “‘knowledge and experience’” (quoting Int’l Union, United Mine Workers of Am. v. Mine Safety & Health Admin., 626 F.3d 84, 93 (D.C. Cir. 2010)).
• 4343 VRR Curve Report at 63.
• 4444 Rehearing Order, 171 FERC ¶ 61,040 at P 15.
• 4545 Order, 167 FERC ¶ 61,029 (Glick, Comm’r, dissenting at P 8).
• 4646 See supra note 18.
• 4747 Rehearing Order, 171 FERC ¶ 61,040 at P 15.
• 4848 See BNP Paribas Energy Trading GP v. FERC, 743 F.3d 264, 270 (D.C. Cir. 2014) (observing that a court “cannot affirm [an agency order] on the basis of a Commission rationale that fails to respond to critical arguments raised before the agency”); Pub. Serv. Comm’n of Kentucky v. FERC, 397 F.3d 1004, 1008 (D.C. Cir. 2005) (“The Commission must also respond meaning-fully to the arguments raised before it.” (citing Canadian Ass’n of Petroleum Producers, 254 F.3d 289, 299 (D.C. Cir. 2001)); Frizelle v. Slater, 111 F.3d 172, 177 (D.C. Cir. 1997) (holding that an agency’s decision is arbitrary and capricious to the extent that it fails to respond to arguments that “do not appear frivolous on their face”); see also Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (agency decision is arbitrary and capricious insofar as it “entirely failed to consider an important aspect of the problem”).
• 4949 Public Interest Entities Rehearing Request at 8, 11, 18-19.
• 5050 Rehearing Order, 171 FERC ¶ 61,040 at P 10; see id. (“With respect to the final factor in the ISO-NE framework, Public Interest Entities argue that the Commission failed to weigh evidence as to whether a CT-based VRR Curve would ensure reliability without unnecessary cost.”).
• 5151 Rehearing Order, 171 FERC ¶ 61,040 at PP 14-15.
• 5252 VRR Curve Study at vii (stating that the 27,000 MWs of new CC resources that cleared the capacity auctions in 2015/16 through 2020/21 “entered the market at clearing prices 50-80% below PJM’s CT-based Net CONE estimates”).
• 5353 ISO New England Inc., 170 FERC ¶ 61,052, at P 18 (2020) (internal quotation marks omitted).
• 5454 Id. Remember that Brattle’s study found that Net CONE for a CC was 25-63 percent lower than a CT. 2018 VRR Curve Report at iii.
• 5555 In its transmittal letter in support of its filing, PJM suggested that choosing a CT would facilitate competition among diverse resources. Although the Commission does not rely on that point in its rehearing order, it deserves a brief mention. In particular, PJM asserted that the “VRR Curve should not be designed to limit competition from a plant type available to developers that has all the essential features of a peaking plant that is most reliant on capacity market revenues [i.e., a CT].” PJM Transmittal at 13. It may be true that the purpose of the Reference Resource selection should not be to limit competition to a small subset of resource types. But, by the same token, if the economics of the various resource types are such that almost all new entry is coming from only a single resource type, I see no reason why Net CONE or the VRR Curve should be inflated to the point where all resource types can economically enter the market, if that is not what the market demands. 2018 VRR Curve Report at iv (explaining that the VRR Curve “must be anchored on the price at which investors are willing to add capacity”). That is, why should customers have to pay higher prices for the benefit of keeping all resource types theoretically viable? That certainly seems like an “unnecessary cost.”
• 5656 For example, PJM proposed a 1 percent leftward shift in the VRR curve, undoing a 1 percent rightward shift adopted in the most recent VRR Curve reset. Rehearing Order, 171 FERC ¶ 61,040 at PP 3, 29.
• 5757 Compare 2018 VRR Curve Report at iii (explaining that the updated estimate for CT Net CONE is 25-42 percent lower than PJM’s current Net CONE parameters) with id. at vii (observing that that CCs have been entering the market at prices 50-80 below PJM’s current Net CONE parameters); see id. at iii (noting that a Net CONE based on a CC unit is 25-63 percent below even the updated CT figures using reduced cost estimates).
• 5858 See supra PP 2-3.
• 5959 2018 VRR Curve Report at vii (explaining that resources have been entering the market at less than half of PJM’s estimate of Net CONE, which has caused PJM to procure a quantity of capacity resources that exceed its target reserve margin by 3-6 percent).
• 6060 Order, 167 FERC ¶ 61,029 at P 33.
• 6161 Id.
• 6262 Public Interest Entities Rehearing Request at 11-19 (detailing reasons why the selection of a CT, as opposed to a CC, was not just and reasonable); id. at 19-21 (objecting to the Commission’s acceptance of PJM’s proposal to include a 10 percent adder on energy market offers, which will have the effect of reducing estimated revenue from energy and ancillary services and, thus, increasing Net CONE).
• 6363 See, e.g., NextEra Desert Ctr. Blythe, LLC v. FERC, 852 F.3d 1118, 1122 (D.C. Cir. 2017) (“Congress explicitly delegated to FERC broad powers over ratemaking, . . . and because the Commission has greater technical expertise in this field than does the Court, we accord deference to the Commission’s interpretation[s].” (quoting Lomak Petroleum, Inc. v. FERC, 206 F.3d 1193, 1198 (D.C. Cir. 2000))); Transcon. Gas Pipe Line Corp. v. FERC, 518 F.3d 916, 919 (D.C. Cir. 2008) (“Our review is ‘particularly deferential when FERC is involved in the highly technical process of ratemaking.’” (E. Ky. Power Co-op, Inc. v. FERC, 489 F.3d 1299, 1306 (D.C. Cir. 2007)).
• 6464 See, e.g., State Farm, 463 U.S. at 43 (listing the “normal” bases for finding agency action arbitrary and capricious).