The Federal Energy Regulatory Commission (FERC) issued an order on the Minimum Offer Price Rule (MOPR) in the PJM Interconnection, L.L.C. (PJM) tariff on June 29, addressing recent controversies over the capacity market impact of some generators receiving state rate subsidies. In the June 29 order, FERC rejected two alternative proposals by PJM to modify the MOPR in response to concerns of state subsidization of new generation resources, granted a complaint filed by market participants against the MOPR, and instituted a paper hearing proceeding under Section 206 of the Federal Power Act (FPA) to determine the just and reasonable revisions to the PJM tariff that would be necessary to address the subsidization issues. The resulting FERC proceeding promises to significantly reshape the PJM capacity market, which has struggled for years to address in a manner that FERC would accept the market impacts of subsidies to specific resources. FERC’s decision, although limited to PJM, could also lead to widespread changes in other capacity markets dealing with the same issues.

Background

The MOPR is a feature of PJM’s Reliability Pricing Model (RPM), which is PJM’s capacity market. Through the RPM, PJM conducts a series of auctions to procure resources to meet regional reliability reserve requirements. A variety of resources may participate, including fossil-fuel, renewable, and demand response resources. Winners of the auction are awarded a fixed price for their capacity in exchange for a commitment to make their capacity available for dispatch by PJM.

In PJM’s capacity market, the MOPR is a “price floor” below which new, gas-fired generation may not bid. The MOPR is intended to protect against the suppressive impact on capacity auction prices that could occur through the exercise of buyer-side market power, as well as to mitigate the effects from state subsidies that lower the cost of new gas generation. State subsidies or other support are deemed “out-of-market revenues” that lower the cost of a resource, thereby enabling bids below the resource’s actual cost. The scope of the MOPR is limited in that it does not apply to coal, nuclear, renewable or other types of new resources, and does not apply to new demand response resources. The MOPR also does not apply to existing resources.

The Complaint

A group of market participants in PJM filed a complaint on March 21, 2016, asserting that PJM’s MOPR is unjust and unreasonable because it allows for the artificial suppression of prices in PJM’s capacity market by below-cost offers from existing resources subsidized by out-of-market payments from state programs. To remedy this, the complaint proposed interim tariff revisions that would extend the MOPR to certain existing resources. The complaint also requested that PJM initiate a stakeholder process to develop a long-term remedy to the problem.

PJM’s Proposed MOPR Revisions

PJM filed two alternative proposals on April 9, 2018, to revise the MOPR, urging the Commission to recognize that “now is the time” to resolve the state support issue. PJM’s first approach, referred to as the “Capacity Repricing” proposal, would eliminate the existing MOPR and revise the capacity auction so that it is composed of a two-stage annual auction, with capacity commitments determined in stage one of the auction and the clearing price set separately in stage two. In stage one, any resource that has received a material subsidy would be allowed to clear based on its submitted offer. Once PJM cleared enough resources to meet its reliability requirement, it would then re-run its optimization algorithm in stage two, using the same demand curve but a new supply stack that reprices any resource that has received a material subsidy, based on a reference price.

While PJM’s preference was for the Capacity Repricing proposal, PJM included an alternative proposal, dubbed the “MOPR-Ex,” in the event that FERC did not accept the Capacity Repricing proposal. Under the MOPR-Ex, the existing MOPR would be expanded and apply to any type of generation resource, both new and existing, that receives a material subsidy, unless qualifying for certain exemptions. The proposed exemptions included one for resources selected in competitive, non-discriminatory, renewable portfolio standard (RPS) processes.

FERC Rejects All Proposals

In the June 29 order, FERC granted the complaint, but rejected the complaint’s proposed remedy. In addition, FERC rejected both of PJM’s proposed alternative revisions to the MOPR. FERC found that the existing MOPR failed to mitigate price distortion from state programs that provide out-of-market revenues to resources in PJM, and that the state subsidies suppressed capacity market clearing prices, resulting in capacity rates that are unjust and unreasonable.

FERC found that the Capacity Repricing proposal was unjust and unreasonable, and unduly discriminatory and unduly preferential, because it would allow state-subsidized generators to receive a capacity award without competing on a comparable basis with other generators, and could potentially exclude other competitive resources whose bids are above the stage one clearing price but ultimately fall below the stage two clearing price. In addition, FERC found that the Capacity Repricing proposal would send a distorted price signal and provide a windfall to the subsidized resources.

With regard to the MOPR-Ex proposal, FERC focused upon PJM’s proposed exemptions from the MOPR, and concluded that PJM had not supported its proposed distinction between renewables selected in such processes and other resources receiving out-of-market support.

FERC Directs Additional Proceedings to Address Subsidized Resources

Having rejected the proposals before it, FERC instituted a paper hearing under Section 206 of the FPA to address an alternative approach, proposed by FERC, in which PJM would modify two existing aspects of the PJM tariff. Specifically, FERC proposed that PJM’s tariff be revised to (i) modify PJM’s MOPR such that it would apply to new and existing resources that receive out-of-market payments, regardless of resource type, but would include few to no exemptions; and (ii) in order to accommodate state policy decisions and allow resources that receive out-of-market support to remain online, establish an option in the tariff (called the “FRR Alternative”) that would allow, on a resource-specific basis, resources receiving out-of-market support to choose to be removed from the PJM capacity market, along with a commensurate amount of load, for some period of time. FERC invited market participants to provide initial evidence, testimony, or argument within 60 days on FERC’s alternative proposal, and to provide reply evidence, testimony, or argument within 90 days.

The vote on the June 29 order was 3-2, with the Republican commissioners supporting the order and the Democrats dissenting. Commissioner Cheryl LaFleur argued that the Commission should instead have provided guidance to PJM stakeholders on refining the MOPR-Ex proposal, and criticized the Commission’s decision to move so quickly to overhaul the PJM capacity market without more stakeholder involvement. Commissioner Richard Glick argued that the Commission should not use its authority to frustrate the efforts of states to address externalities, such as greenhouse gas emissions.

One of the commissioners supporting the order, Robert Powelson, subsequently announced his resignation from FERC effective in August 2018 – prior to the date that reply comments on FERC’s June 29 order are to be filed. This leaves FERC’s remaining commissioners split 2-2 on the June 29 order.