On April 9, 2018, PJM Interconnection, L.L.C. (“PJM”) filed two alternative proposals to address supply-side state subsidies that, as PJM argues, could otherwise depress prices in PJM’s capacity market, the Reliability Pricing Model (“RPM”). As presented by PJM, its “Capacity Repricing” proposal would establish a two-stage capacity market to accommodate subsidized resources, while the other proposal, the “MOPR-Ex proposal,” would expand PJM’s use of the Minimum Offer Price Rule (“MOPR”) to address subsidized resource entry. With PJM’s filing, the issue of how to address out-of-market capacity market subsidies returns again to FERC exactly one month after a divided Commission approved a similar filing from the ISO New England Inc. (“ISO-NE”) (see March 20, 2018 edition of the WER).

As PJM argued, the PJM Region has been seeing increased participation of resources receiving out-of-market state revenues. Hewing closely to FERC’s observations in its March 9, 2018 ISO-NE Order (“ISO-NE Order”), PJM noted that such subsidies threaten to undermine the “first principles” of capacity markets, as FERC articulated in its ISO-NE Order, namely, investor confidence, robust competition, accurate price signals to guide orderly resource entry and exit, and appropriately-shifted cost risks between consumers and private capital. According to PJM, although it has been able to manage some below-cost subsidized offers from generators, as subsidies have grown, however, PJM argues that the status quo is insufficient and that tariff changes are necessary to ensure that the RPM can still satisfy FERC’s “first principles.”

To that end, following a lengthy, and ultimately, divided, stakeholder process, PJM submitted two alternative proposals, neither one of which having garnered the two-thirds affirmative sector vote required to be PJM’s sole endorsement. Through the “Capacity Repricing” proposal, PJM would replace its existing MOPR and establish a two-stage auction, whereby the first stage would determine resource commitments using subsidized prices, while the second stage would substitute competitive prices for subsidized prices and determine the clearing price for all resources committed in the first stage. All capacity resources would be paid the single clearing price resulting from the second stage. Under the “MOPR-Ex” proposal, PJM would expand and extend its existing MOPR and apply it to both existing and new resources, but would not apply it to demand resources, existing renewable resources, and certain future renewable resources.

As PJM summarized, the two proposals differ on the basic question of whether a subsidized resource’s artificially low offer could be used to qualify it to receive a capacity commitment (Capacity Repricing proposal), or instead whether PJM should require such resources submit and clear a competitive offer in order to receive a capacity commitment (MOPR-Ex proposal).

PJM argued that FERC could accept either proposal as “just and reasonable” under Federal Power Act section 205, and requested that FERC issue an order on the filing by June 29, 2018, or direct a paper hearing on any remaining issues in the event that FERC is unable to accept either proposal.

A copy of PJM’s filing with its dual proposals can be found here.