Item E-6: Commissioner James Danly Dissent Regarding PJM Interconnection, L.L.C.

Commissioner James Danly Statement
February 18, 2022
Docket Nos. EL22-26-000, ER22-957-000 | Errata

I dissent from this order.[1]  PJM Interconnection, L.L.C. (PJM) has described circumstances of an ongoing transmission line upgrade (and outage) being likely to cause “significant increases in costs to load and widely oscillating [real-time energy market prices] without any anticipated response to such prices” in a relatively small region for a period of up to two years.[2]  PJM’s Transmission Constraint Penalty Factor sets the price at $2,000/MWh in intervals when a transmission constraint cannot be resolved through normal system dispatch.[3]  This price is designed to reflect the marginal cost of energy when a constraint is unresolvable and to send appropriate signals to the market to invest capital to resolve the constraint.  Having determined less than three weeks after the line was taken out of service that no response to the high prices would be likely, PJM now files to eliminate these price signals and make a so-called “discrete rate modification”[4] to set rates “‘at a level that ensures the offers of the resources being used to control the constraint are reflected in the Congestion Price,’” whatever that means.[5]

As best I can make out, the high prices required by the tariff in the face of an unresolvable constraint are both too high for PJM’s liking but are simultaneously an insufficient incentive for anyone to do anything about it.  I dissent because I disagree that PJM has met its Federal Power Act section 206 burden to demonstrate that the existing Transmission Constraint Penalty Factor tariff rate is unjust and unreasonable.[6]  I thus never arrive at a determination of whether the proposed replacement rate is just and reasonable.[7]

I am suspicious that this is a case of scarcity pricing being allowed in a market tariff only until it actually occurs, and then it must be eradicated.  Markets cannot work when high prices that occur by design are disallowed in practice.

The circumstances here are presented in a way that makes them compelling.  It does appear that there may not be any quick response to the “oscillating” prices, although I am skeptical that three weeks is sufficient time in which to determine this.  High prices for the sake of being high would be unjust and unreasonable.  But prices set by the Transmission Constraint Penalty Factor are not high for the sake of being high; they are high because there is an unresolvable transmission constraint.  I agree, however, that if the Commission is going to eliminate Transmission Constraint Penalty Factor prices when they occur, then they cannot serve any purpose in the tariff.  False promises are poor market design.

The other problem here is regulatory uncertainty.  I cannot imagine how an existing generation resource in PJM can remain in business given the frequency of changes the Commission repeatedly imposes on these markets, all tending to reduce prices for existing generation.[8]  Today, we reduce price again, demonstrating to everyone that the mechanisms we put in place to harness market forces will be abandoned when they work as planned.

Meanwhile, the constraint will apparently remain unresolved for the next two years.  That sounds bad, but the majority is content to get rid of the price signals designed to resolve it.  I hope no reliability events arise as a result.  I would let the tariff and the markets work to find a better solution.

For these reasons, I respectfully dissent.