By Christen Smith and Rich Heidorn Jr.

Has FERC made its case that cooperatives, municipal utilities and vertically integrated utilities in PJM receive state subsidies and are using them to suppress capacity prices? Those are questions a federal appeals court will have to answer, assuming FERC declines requests to rehear its Dec. 19, 2019, order expanding PJM’s minimum offer price rule (MOPR) to self-supply (EL16-49, EL18-178).

The order left electric cooperatives, public power groups and vertically integrated utilities stunned. FERC had highlighted growing state subsidies for nuclear plants and renewables — not self-supply — in declaring in June 2018 that PJM’s MOPR must be expanded to all new and existing capacity receiving out-of-market payments. The MOPR currently covers only new gas-fired units. (See FERC Orders PJM Capacity Market Revamp.)

Self-supply advocates say there is no evidence they are causing a problem and point to the commission’s prior rulings concluding that self-supply subject to net-long and net-short thresholds did not have a meaningful impact on the market. (See related story, MOPR Ruling Threatens to Upend Self-Supply Model.)

In its 2018 order declaring PJM’s MOPR unjust and unreasonable, the commission said it would no longer limit the MOPR to new gas-fired resources, which it had said were the most at risk of suppressing prices because of their short development times and low construction costs. Citing PJM’s concerns with states “increasingly supporting specific resources or resource types,” the commission said it “no longer can assume that there is any substantive difference among the types of resources participating in PJM’s capacity market with the benefit of out-of-market support.”

But it wasn’t until the Dec. 19 order that the commission explicitly targeted self-supply resources and identified them as “state subsidized.” (See FERC Extends MOPR to State Subsidies.)

How Large an Impact?

The order did not quantify the impact of self-supply but quoted data from PJM, saying “the record suggests that new self-supply capacity is significant, representing 30%” of the new generation that cleared auctions from 2010 to 2017.

“Since these resources may receive state subsidies permitting uneconomic entry into PJM’s capacity market, regardless of intent, we find that it is not just and reasonable to exempt new self-supply from application of the applicable default offer price floor,” FERC said.

Subjecting self-supply to the MOPR will affect 43 public power utilities, including municipal utilities, municipal agencies, and distribution, generation and transmission cooperatives accounting for about 5% of PJM’s electric sales, according to consultant Marc D. Montalvo, who filed comments on behalf of the American Public Power Association (APPA) and the National Rural Electric Cooperative Association (NRECA) in 2018.

‘Potential to Wreak Havoc’

NRG Energy had raised the issue of self-supply in the 2018 proceedings, saying the load-serving entities (LSEs) were suppressing prices and shifting their investment costs to competitive supply by bidding their capacity as price takers. “Other subsidized resources, including self-supply resources and renewable generators, even though individually smaller than nuclear generators, in aggregate, have just as much potential to wreak havoc with PJM’s markets,” NRG said (ER18-1314).

The company cited testimony from its economic consultant, Robert B. Stoddard.

“In the face of massive surpluses, averaging over 7,300 MW in the past five BRAs [Base Residual Auctions], self-supply entities should be deferring new builds and buying any capacity shortfall at the low market prices, rather than exacerbating the surplus and lowering prices even more,” Stoddard said. “The net-short and net-long bands are providing a false sense of security, as evidenced by the fact that at least two ‘self-supply’ providers have cleared 4,152 MWs in the five BRAs in which the exemption and bands were in effect, even though capacity prices were low and no new supply was needed.”

Stoddard said the practice “undermines investor confidence in companies, like NRG, that previously invested billions of dollars in the PJM market on a merchant basis.”

Exelon complained in its Jan. 21 rehearing request that FERC’s December order was improper in imposing the MOPR on existing nuclear plants receiving zero-emission credit (ZEC) subsidies while exempting existing self-supply “receiving subsidies through state cost-of-service ratemaking structures.”

“Indeed, the commission’s decision to protect existing self-supply units from the MOPR, while imposing the MOPR on existing ZEC units, is particularly perverse because the market impact of self-supply units is so much greater,” Exelon said. “They amount to nearly 20% of PJM’s installed capacity, or 31 GW — in contrast to the 5 GW of existing nuclear units receiving ZECs.”

No State Mandates

Self-supply entities reject the subsidy label. North Carolina Electric Membership Corp. (NCEMC) says electric cooperatives procure capacity through long-term supply agreements with their members — on their own accord and not under pressure from a state mandate. The agreements generate a steady revenue stream that allow continued investment in resources, “without any entitlement to state-sponsored payments or other external subsidies,” NCEMC said.

NCEMC said its self-supply bids into the market are “washed” by its bids as load to purchase its own self-supply. “The revenues paid by the cooperative as the LSE are netted against the payments due to that cooperative for that transaction as the seller, leaving a zero impact on the market. … The out-of-market revenues received by self-supply resources from ratepayer payments are a substitute for, not a supplement to, PJM capacity markets revenues, and the commission has long recognized that the net-long and net-short restrictions on a limited self-supply exemption adequately address any market power concerns.”

In its December order, FERC said that a blanket self-supply exemption “rests on the premise that some kinds of entities should face less risk than others in choosing whether to build their own generation resources or rely on the market to satisfy their energy and capacity requirements.”

“We are not persuaded that premise is correct,” the commission continued. “For example, in a regional market dominated by states with retail competition, it is not clear why utilities in states that prefer the vertical integration model should be afforded a competitive advantage.”

Dominion Energy responded that the order’s definition of “state subsidy” is “overly broad and vague.”

“The commission’s decision also ignores the fact of an equal or greater amount of retirements of coal- and oil-fired units in PJM by the same self-supply entities.”

Dominion said its 2019 integrated resource plan in Virginia expects its load and reserve margin needs to be almost 3,000 MW below its existing generation beginning in 2025. The IRP includes planned generation to fill the gap. “Dominion does not yet possess unexecuted interconnection construction service agreements for these resources as required to meet the exemption as articulated in the order.

“To now deem it ‘a temporary reversal in commission policy’ completely ignores the realities of the planning horizons LSEs like Dominion Energy, cooperatives and public power entities use to provide service to their customers,” said Dominion, which said FERC should adopt PJM’s request to reinstate the self-supply exemption the commission eliminated in 2017.

American Municipal Power (AMP) and APPA acknowledged that municipal utilities have access to tax-exempt financing and often have stronger credit ratings than investor-owned utilities. Cooperatives use loans from the Department of Agriculture’s Rural Utilities Service or cooperative or private lenders. But they disputed FERC’s conclusion that they are seeking to ensure they face less risk.

“This myopic view seems to be based on the assumption that participation in the resource adequacy construct is the only risk entities face in making business decisions,” they said. “But public power has risks of its own when compared to other entities in the electric utility industry. Public power has no shareholders and lacks the overall economies of scale that spread the results of an unsuccessful business decision over millions of captive consumers.

“Many participants in the marketplace have access to low-cost debt, and there are a multitude of investment structures used to lower the cost of capital and effect financing. Appropriately, none of this legitimate business activity is subject to the MOPR. In the case of public power, then, applying the MOPR to self-supply investments could have the effect of undoing the benefits (e.g., access to low-cost debt) of the not-for-profit business model that the organizational structure was intended to confer, and which are enshrined in federal and state statutes.”

Self-supply entities also say there is no evidence that they are suppressing prices.

“The commission has previously reasoned that ‘an uneconomic new entry strategy by a vertically integrated utility … poses a substantial risk of increasing its net costs,’” Exelon said. “Therefore, it is unlikely that vertically integrated utilities would submit below-cost bids to manipulate PJM’s wholesale capacity market.”

AMP cited an affidavit from Christopher J. Norton, the company’s director of market regulatory affairs, that said it “has neither the incentive nor the ability to economically benefit from artificially lowering market prices.” Norton said public power’s tax-advantaged financing prohibits municipal utilities from building “generation as merchant generation, for market manipulation, or for anything other than legitimate self-supply.”

Moreover, some critics have said PJM’s excessive reserve margin — the 2021/22 BRA provided a margin of 21.5%, well above the target margin of 15.8% including fixed resource requirement load and resources — suggests capacity prices are too high, not too low. “If anything, PJM’s problem is that today’s prices are so high that the region continues to attract new ‘competitive’ generation resources at a time when the region already has too much capacity,” Commissioner Richard Glick wrote in his dissent on the 2018 order.

PJM Compliance Filing

PJM told a special session of the Market Implementation Committee on Jan. 28 that it agrees nothing has changed about self-supply to warrant FERC’s policy reversal — an argument the RTO made in its Jan. 21 rehearing request.

“The Dec. 19 order’s sweeping rejection of PJM’s proposed self-supply exemption for integrated utilities raises unreasonable barriers to such market participants’ continued pursuit of their longstanding approach to planning for and meeting their capacity needs,” PJM wrote in its rehearing request. “The blanket assumption that all such offers developed in the ratepayer-supported or municipal/cooperative member-supported regime are noncompetitive and interferes with efficient price formation is overbroad and unwarranted.”

The RTO went on to argue that the integrated resource and public power models “have been in a relative ‘steady state’ in the PJM region since their inception, long before the RPM construct.”

“Investors have long since taken into account the impact of those alternative models on the overall capacity market investment signal,” PJM said. “The record demonstrates that PJM has more than achieved the new investment (and retirement of inefficient investment) that the capacity market was designed to achieve notwithstanding any impact of the longstanding integrated utility models. For this reason alone, the commission’s decision is not adequately supported by record evidence and its reversal of prior precedents does not constitute reasoned decision-making as that standard has been defined by the courts.”

Nonetheless, PJM’s compliance filing will follow the commission’s “clear” guidance that only existing resources — those that have previously cleared a capacity auction, have an executed interconnection construction service agreement or have an unexecuted interconnection construction service agreement filed by the RTO before Dec. 19 — can use the self-supply exemption.

The RTO will host an additional MIC special session on Feb. 19 to further discuss the MOPR order and its compliance filing, due March 18.