On May 8, 2018, FERC rejected PJM Interconnection, L.L.C.’s (“PJM”) proposed revisions to its Open Access Transmission Tariff (“Tariff”) and Reliability Assurance Agreement Among Load Serving Entities in the PJM Region. PJM stated that these revisions would reform its Incremental Auctions and its method for addressing excess capacity in the PJM region (“Incremental Auction Proposal”). PJM specified that its current market rules do not protect against, and may in fact provide an incentive to engage in, speculative behavior, which distort price signals on the value of capacity. FERC rejected PJM’s Incremental Auction Proposal because, according to FERC, PJM did not support its argument that speculative behavior is actually transpiring, and PJM already had procedures in place to address this activity if it is actually occurring.

On March 10, 2014, PJM submitted Tariff revisions that it stated would discourage speculative offers from being submitted in the capacity auctions. In its 2014 filing, PJM included six components intended to reform its capacity markets: (1) a sell-back offer floor at the relevant Base Residual Auction’s clearing price; (2) a charge for all replacement capacity transactions; (3) the elimination of two Incremental Auctions; (4) an increase in Capacity Resource Deficiency Charges; (5) a requirement of generation resources to support their Sell Offers with a project development schedule; and (6) a requirement for potential bidders to have a facilities study agreement as a condition to making an offer into an Reliability Pricing Model auction.

In a May 9, 2014 order rejecting the proposed Tariff revisions contained in the 2014 filing, FERC found that the proposed revisions would have “significant undesirable effects such as increasing the risk for capacity market sellers, creating undue barriers to entry, limiting opportunity for beneficial trade, and unnecessarily raising the cost of capacity through the acquisition of excess capacity.” However, FERC stated in its order that “PJM has identified a reliability issue that merits consideration…and the existing tariff provisions may be unjust and unreasonable in that they fail to promote long-term reliability.” FERC then established a proceeding under section 206 of the Federal Power Act and ordered a technical conference to “facilitate the development of a just and reasonable solution.”

Following several requests by PJM to delay the technical conference, on March 9, 2018, PJM submitted to FERC its Incremental Auction Proposal that would reform its existing market rules to promote long-term reliability in its capacity market by eliminating speculative sell offers, which PJM claimed were being submitted into its capacity market auctions. According to PJM, the Incremental Auction Proposal would: (1) allow PJM to submit sell-back offers at a price equal to the relevant Delivery Year’s Base Residual Auction clearing price, (2) eliminate the existing Excess Commitment Credits mechanism, (3) reduce the number of Incremental Auctions that allow Capacity Market Sellers to sell capacity at an unjustifiably low price from three to two per Delivery Year, and (4) eliminate the need for PJM to buy additional capacity in one Incremental Auction only to submit sell-back offers in the next Incremental Auction for the same Delivery Year or vice versa.

In rejecting the Incremental Auction Proposal, FERC noted that, in addressing the 2014 proposed Tariff revisions, it had previously rejected proposed Tariff revisions that were similar the ones contained in PJM’s most recent proposal. Additionally, FERC noted that PJM did not adequately support its assertion that speculative behavior in the capacity market is, in fact, happening. PJM stated that demand resources replace their capacity by submitting Sell Offers in the Base Residual Auction without any reasonable possibility of delivering that capacity. However, FERC reasoned that this activity did not necessarily indicate speculative behavior as it may “reflect the ability of resources…to relieve their capacity obligations while efficiently and profitably following economic signals.” FERC also specified that PJM’s proposal to submit sell-back offers at the relevant Base Residual Auction clearing price was unjust and unreasonable because the proposal failed to establish a reasonable price for excess capacity. FERC noted that it had previously, on three separate occasions, rejected similar proposals by PJM to value sell-back offers at a fixed, rather than market-based, price, including, most recently, in its 2014 order. Finally, FERC found that PJM already had in place mechanisms to reduce the likelihood of speculative offers. FERC stated that PJM requires demand resources to provide supporting information prior to submitting offers in the Base Residual Auction, and enforces performance requirements and penalties for resources unable to provide capacity when the system requires it. Thus, FERC concluded, “These requirements and penalties create significant economic risk to any would-be speculators who retain a capacity commitment into a given Delivery Year.”

FERC’s order rejecting PJM’s proposed tariff revisions can be found here.