Commissioner James Danly Statement
January 20, 2022
Docket No. ER19-105-005
Competitive power markets simply cannot attract the capital needed to build adequate generating infrastructure without regulatory certainty . . . .”[1] So cautioned the Commission in 2002, and twenty years later the Commission’s orders have so interfered with PJM’s markets that PJM routinely has to delay capacity auctions to sort out which rules still apply and which rules are defunct, obsolete, or superseded. Power markets simply cannot function when the rules constantly change, and for that, the blame lies squarely with the Commission.
I dissent from today’s order on remand from the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit), which granted in part and denied in part a petition for review of the Commission’s orders approving proposed revisions to PJM Interconnection, L.L.C.’s (PJM) Variable Resource Requirement (VRR) Curve, the demand curve used in its Reliability Pricing Model (RPM) capacity market.[2] Our order on remand “find[s] that PJM failed to meet its burden of demonstrating that inclusion of the 10% adder in modeling energy market offers for purposes of calculating the [energy and ancillary services offset (E&AS Offset)] for its VRR Curve is just and reasonable”[3] and orders PJM to “remove the 10% adder from the determination of the VRR Curve for the BRA 2023/2024 Delivery Year and subsequent auctions.”[4] Thus the Commission takes no less a step than to reduce the demand curve by 10% shortly before a capacity auction that had already been delayed to accommodate other recent Commission intrusions into PJM’s market design.
I disagree on the merits. There was more than sufficient record evidence to approve the 10% adder in the first place, even if our order failed to “further grappl[e] with the contrary evidence.”[5] That was a failure in our own orders because the evidence, as recounted in this order, was extensive.[6] The fact is, a new Commission with different membership has decided to reverse itself, which it is entitled to do, but in so doing, it discounts the evidence submitted by PJM and the market participants (including PJM Power Providers) in support of the 10% adder. But since not all generators will include the adder every time, we jettison it. Forget that PJM easily met their burden for a section 205 rate filing.[7]
I also disagree on the process. PJM detailed numerous reasons why the Commission should not require elimination of the 10% adder for the 2023/2024 Delivery Year. Among other things, PJM “would be required to recalculate the Net Cost of New Entry for the Reference Resource, which would also impact the VRR [demand] Curve. This would require PJM to update the already posted planning parameters in advance of the next Base Residual Auction.”[8] PJM “would also need to recalculate the unit-specific net energy and ancillary service offset for combustion turbine facilities in advance of the auction because the definition of Projected EAS Dispatch currently includes a 10% adder . . . .”[9] Likewise, “the net energy and ancillary services offset for combustion turbine facilities . . . would need to be revised.”[10] “[U]ltimately, the net Avoidable Cost Rate” would also need to be revised.[11] These are not minor details, but fundamental changes we now require after critical auction deadlines have already passed.
I am not certain it is possible for the Commission to make any more of a muddle of the PJM capacity market. I suppose if we really wanted to cause trouble, we could delay the auctions again but, wait . . . we already have.[12] And that is the Commission’s answer to PJM’s concerns. We require PJM to propose a “schedule that will provide adequate time to implement the changes directed herein.”[13] But of course delaying the auction unleashes its own regulatory uncertainty upon the market. Imagine a developer attempting to finance a plant via a winning capacity offer in the PJM capacity market as the Commission changes fundamental auction rules and then indefinitely delays the auction itself while PJM and market participants sort out those rules. Lenders account for such risks by raising interest rates.
One thing is clear. For every dollar my colleagues think they are saving ratepayers by eviscerating the buyer-side market mitigation measures we had recently expanded,[14] or imposing the Independent Market Monitor’s unit-specific review of all seller offers (thereby supplanting scores of carefully vetted and balanced offer provisions, including the ones at issue in today’s order),[15] or, as in this case, reversing ourselves on the inclusion of a 10% adder in the modeled energy market offers of the Reference Resource used to establish the Variable Resource Requirement Curve (the demand curve),[16] or seeking voluntary remand from an appellate court to reverse ourselves on less than two-year-old orders finding that the Reserve Penalty Factors and two-step Operating Reserve Demand Curves (ORDCs) are unjust and unreasonable and consequently reversing the determination that the prior backward-looking E&AS Offset is unjust and unreasonable,[17] or waiving lapsed tariff deadlines and delaying capacity auctions, we also impose ever-mounting regulatory risk.
Greater risk means greater costs, means more expensive power, means higher rates. In most markets, the cost of risk is passed on to customers. But we do not allow capacity sellers in PJM to offer according to their own assessment of risk, including the very real risk that the Commission will change fundamental elements of market design immediately ahead of an auction. We instead impose upon sellers the risk assessment of the Independent Market Monitor (who has himself assumed no risk), with PJM itself as the arbiter of whether the seller’s or the Independent Market Monitor’s offer (and therefore risk assessment) will be allowed.[18]
The result is that the Commission creates unfettered regulatory risk and then sets it up so that sellers likely can only offer what the Independent Market Monitor tells them they can offer. This structure is not a market. It also is unsustainable. It “simply cannot attract the capital needed to build adequate generating infrastructure,”[19] and the eventual result will be reliability crises, bankruptcies, and an eventual full retreat to cost-of-service ratemaking. Who does regulatory uncertainty ultimately harm the most? Ratepayers.
Finally, the majority asserts that “[t]here is no logical basis on which to assume, as suggested by the dissent, that removal of the 10% adder will threaten reliability in the PJM region.”[20] In support, the majority references PJM’s current capacity surplus.[21] I offer two points in reply. First, I do not claim that removal of the 10% adder alone will immediately threaten reliability. Rather, I assert that critical last-minute rule changes—such as slashing the demand curve by up to 10%—create regulatory uncertainty that threatens reliability over time. Second, I fundamentally disagree that a current capacity surplus gives the Commission license to wreak regulatory havoc on the market.
For these reasons, I respectfully dissent.
[1] Nev. Power Co. v. Duke Energy Trading & Mktg., L.L.C., 99 FERC ¶ 61,047, at 61,190, order on reh’g, 100 FERC ¶ 61,273 (2002).
[2] Del. Div. of the Pub. Advoc. v. FERC, 3 F.4th 461 (D.C. Cir. 2021) (Delaware Public Advocate). The remanded orders are PJM Interconnection, L.L.C., 167 FERC ¶ 61,029, reh’g denied, 171 FERC ¶ 61,040 (2020) (VRR Orders).
[3] PJM Interconnection, L.L.C., 178 FERC ¶ 61,020, at P 10 (2022) (PJM).
[4] Id. P 20.
[5] PJM, 178 FERC ¶ 61,020 at P 4 (footnote omitted); see also Delaware Public Advocate, 3 F.4th at 469; VRR Orders.
[6] See, e.g., PJM, 178 FERC ¶ 61,020 at PP 11-18 (recounting evidence).
[7] The majority is wrong that this dissent “suggests” that the Commission should uphold the 10% adder even if it is unjust and unreasonable to ensure regulatory certainty (or what they call “continuity with the underlying order”). See id. at P 19 n.44. My starting premise is that the 10% adder was shown to be—and remains—just and reasonable. My actual point is that a key part of ensuring just and reasonable rates is to take into account the profound cost for ratepayers created by regulatory uncertainty. The majority has no answer for that argument.
[8] PJM Interconnection, L.L.C. November 12, 2021 Motion for Leave to Answer and Answer, at 3.
[9] Id.
[10] Id.
[11] Id.
[12] See PJM Interconnection, L.L.C., 177 FERC ¶ 61,209, at P 2 (2021).
[13] PJM, 178 FERC ¶ 61,020 at P 9 n.18.
[14] See September 29, 2021 Notice of Filing Taking Effect by Operation of Law, Docket No. ER21-2582-000; see also Statement of James P. Danly, Docket No. ER21-2582-000 (Oct. 27, 2021).
[15] See Indep. Mkt. Monitor for PJM v. PJM Interconnection, L.L.C., 176 FERC ¶ 61,137 (2021) (Danly, Comm’r, dissenting).
[16] PJM, 178 FERC ¶ 61,020 (Danly, Comm’r, dissenting).
[17] PJM Interconnection, L.L.C., 177 FERC ¶ 61,209 (Danly, Comm’r, dissenting).
[18] See Indep. Mkt. Monitor for PJM v. PJM Interconnection, L.L.C., 176 FERC ¶ 61,137 (Danly, Comm’r, dissenting).
[19] Nev. Power Co. v. Duke Energy Trading & Mktg., L.L.C., 99 FERC ¶ 61,047, at 61,190.
[20] PJM, 178 FERC ¶ 61,020 at P 19 n.42.
[21] See id.