Docket No. ER25-1357-001 & EL25-46-001
The circumstances surrounding this filing are sobering: Recent market conditions have led to higher prices in the capacity market, signaling the pressing need for supply to meet new demand. State policymakers are rightly concerned about how these prices will affect their residents and businesses in the years ahead. I appreciate PJM taking these concerns seriously as they worked with those policymakers and other stakeholders to develop this proposal. Yet although I understand the drivers supporting the majority’s reasoning in the original order and now on rehearing, I cannot support the outcome-driven result before us. No matter how well-intended, an approximately $175/MW-day price floor is at odds with economic logic, and I fear it could lead to unjust and unreasonable rates.
Properly functioning electricity markets provide immense value to ratepayers. Market-fostered competition and innovation can lower energy costs across an entire region. Current stresses aside, the PJM capacity market has done just that during its tenure—aiming to ensure reliability in the PJM region by securing the appropriate amount of resource commitments to meet demand in a competitive and efficient manner.
All of those benefits, however, depend on the capacity market producing prices that accurately reflect market conditions. My concern with PJM’s proposal is that it addresses the real price concerns at stake by rewriting capacity auction results in a profoundly uneconomic way. The new price floor PJM proposed—the only issue in its proposal challenged on rehearing, and the only issue I address here—is a sharp break from market fundamentals and opens the door to bad ratepayer outcomes.
In my view, the protesters are right that the Commission’s original order did not sufficiently explain how the price floor in PJM’s proposal passes economic muster to stay within just-and-reasonable limits. Touching on those objections briefly, a non-zero price floor does not make sense as a matter of economics and leads to real-world problems. When baked into market design, it falsely represents that ratepayers are willing to pay for any amount of capacity—here, approximately $175/MW-day. In reality, capacity beyond the reliability requirement has diminishing returns.[1] Each unit of capacity beyond what is needed to meet PJM’s reliability requirement is less and less valuable, so ratepayers should pay fewer dollars for each next unit of capacity. But the price floor before us could lead to procuring more capacity than is economically appropriate, leading to higher ratepayer bills. We should give a skeptical eye to a proposal that could leave consumers on the hook for the costs of over-procurement by undermining a key feature of the capacity auction.
Responding to concerns that Commission precedent does not support this non-zero price floor, the majority reasons that our orders have never rejected a price floor under similar conditions. True, but that logic only holds so far. Most everyone involved agrees that the price floor aspect of PJM’s proposal is novel. So the lack of specific precedent forbidding it is unremarkable given that no one has asked the Commission to approve something like this before. The Commission’s precedent, taking the traditional economic approach to related demand-curve issues, is our better guide.[2] Our job is to test whether PJM met its burden to show its proposal is just and reasonable. Lack of express contrary precedent does not, to me, overcome the pitfalls of an uneconomic and potentially inefficient proposal.[3]
I sympathize with the majority’s case-specific factors pushing the other direction. I also appreciate and support the majority’s focus on cabining its reasoning because timing and other unique features in PJM may make it unlikely that uneconomic consequences will materialize while the price floor remains in place. But ultimately, under these facts, I would not have accepted a rate I find unjust and unreasonable in hopes that the proposal’s worst consequences will not come to pass.
I also hesitate to undermine market integrity through a short-term patch that may further reduce investor confidence and increase regulatory uncertainty. Market durability depends on sound price signals—providing enough revenue to retain needed reliability resources and to spur investments to meet growing need. And yes, PJM has important work to do in ensuring that its markets work in a way ratepayers can tolerate under our current demand-heavy and supply-tight conditions. But putting a heavy thumb on market results rather than analyzing its inputs is only a band-aid for those broader challenges.
Lastly, I fear opening the door to outcome-dictating proposals at a time when we need the market to show accurately what it can and cannot do. Severely restricting possible auction clearing outcomes, and thus limiting the market’s ability to guide needed, economically efficient supply, is a risky proposition. With full appreciation for PJM’s substantial challenges, I would have rejected the proposal as straying too far from market fundamentals at the potential detriment to ratepayers.
For these reasons, I respectfully dissent.
_____________________________
Lindsay S. See
Commissioner
[1] See PJM Interconnection, L.L.C., 117 FERC ¶ 61,331, at P 76 (2006) (“Incremental capacity above the Installed Reserve Margin is likely to provide additional reliability benefits, albeit at a declining level. This value is reflected in the positive (but declining) prices in the sloped demand curve to the right of the Installed Reserve Margin.”); PJM Interconnection, L.L.C., 115 FERC ¶ 61,079, at P 104 (2006) (agreeing with PJM that “a downward-sloping demand curve provides a good indication of the incremental value of capacity at different capacity levels”).
[2] PJM Interconnection, L.L.C., 115 FERC ¶ 61,079 at P 104; see also Midcontinent Independent System Operator, Inc., 187 FERC ¶ 61,202, at P 80 (2024) (accepting the use of downward-sloping demand curves as just and reasonable and finding that a sloped demand curve will result in capacity price signals that reflect the marginal reliability impact of incremental capacity additions, provide better incentives for efficient resource entry and exit, and as a result, improve resource adequacy and economic efficiency); ISO New England Inc. and New England Power Pool Participants Committee, 147 FERC ¶ 61,173, at P 29 (2014) (“we further find that the sloped demand curve represents an important improvement to the FCM, as it will address some of the challenges presented by the use of a vertical demand curve in previous auctions, including, among other things, the Commission's concerns regarding price volatility and the administrative pricing provisions”).
[3] See S.C. Pub. Serv. Auth. v. FERC, 762 F.3d 41, 65 (D.C. Cir. 2014) (explaining that the court “will uphold” the Commission’s prediction-grounded judgments when “based on reasonable economic propositions”; ‘[a]gencies do not need to conduct experiments in order to rely on the prediction that an unsupported stone will fall; nor need they do so for predictions that competition will normally lead to lower prices’”) (quoting Assoc. Gas Distributors v. FERC, 824 F.2d 981, 1008 (D.C. Cir. 1987)).