In a much-anticipated April 12, 2011 order FERC authorized the PJM Interconnection to stop exempting state-mandated capacity resources from the Minimum Offer Price Rule (MOPR) of PJM’s Reliability Pricing Model (RPM) forward-capacity auction market. An original provision of the 2006 FERC-endorsed settlement that implemented the RPM auction – MOPR puts a price floor on capacity offers into the RPM in order to prevent the exercise of buyer market power from suppressing auction clearing prices below levels required to induce new investment and entry. Agreeing with competitive capacity sellers, FERC, in the April 12 order, found “mounting evidence” in recent New Jersey legislation and a pending Maryland regulatory directive that exempting state-mandated capacity resources from the MOPR threatened to invite uneconomic entry by new, state-subsidized capacity resources. Accordingly, it ended the exemption; beginning with the next RPM auction scheduled for May 2011, the MOPR (as modified effective April 13, 2011) will apply equally to offers, irrespective of whether the state was involved in the decision to build the underlying capacity.

The April 12 order approved other changes to the RPM to make the MOPR more effective in combating potential exercises of buyer market power. The MOPR price floor is set in relation to a determination of the net cost of new entry (CONE) that a developer of a new capacity resource confronts. Generally prices offered from combustion turbine (CT) and combined cycle (CC) plants below 90 percent of CONE will be mitigated up to 90 percent, even if that causes them not to clear the auction. Previously the floor was 80 percent. Further, mitigation now will proceed even if an uneconomically low offer cannot be shown (pursuant to a now-eliminated “impact screen”) to lower significantly RPM auction clearing prices. Likewise, mitigation will proceed regardless of whether the capacity offeror is shown to be a net buyer of capacity.

The MOPR will continue to apply only to offers from CT and CC plants based on the premise that only resources with such relatively short development lead times are able to respond strategically to capacity shortages and suppress RPM auction prices. The April 12 order rejected proposals to apply the MOPR to all types of capacity, and continues to exempt long-lead-time nuclear, coal, integrated gasification combined cycle, and hydroelectric capacity that confront high threshold capital costs, but only small incremental costs for participating in the RPM auction. Those resources will continue to be able to offer at or near a zero-price to ensure that their offer clears. The April 12 order even expands the universe of exempt resources to include capacity offers from intermittent generators ¾ wind and solar ¾ in recognition that their intermittency reduces their value as capacity to “only a fraction of the nameplate capacity.” They too will be able to offer at or near a zero-price to ensure that they clear.

FERC rejected the objections of state legislators and regulators and hopeful beneficiaries of state subsidies who argued that ending the exemption for new state-mandated CT or CC capacity intruded on states rights. FERC countered that the rights of states are not impinged since the states remain free to do whatever they think they need to ensure adequate generating capacity, including subsidizing the construction of new capacity. The MOPR as modified in the April 12 order simply prevents offers from those subsidized resources from setting wholesale clearing prices in the RPM auctions at levels below 90 percent of net CONE.