PJM and its Independent Market Monitor on Wednesday shared with stakeholders their proposals for responding to FERC’s April 16 directive that state default service auctions be considered state subsidies and subject to the minimum offer price rule (MOPR).

The straw proposals are attempting to address Paragraph 386 of FERC’s rehearing order, which said that state procurement auctions are a form of a state subsidy because they provide a payment or other financial benefit to capacity resources that are part of a state-sponsored or state-mandated process.

PJM attorney Chen Lu presented the RTO’s “potential compliance approach” during a special session of the Market Implementation Committee on Wednesday.

The commission on April 16 rejected rehearing of its June 2018 order declaring PJM’s capacity market unjust and unreasonable (EL16-49-001, et al.) and virtually all of its December 2019 ruling spelling out the expanded MOPR while providing clarification on several points (EL16-49-002, et al.). PJM presented its initial response to the orders at the April 30 Markets and Reliability Committee meeting. (See PJM Outlines Revised MOPR Compliance Filing.)

Opponents of the expanded MOPR wasted no time in petitioning the 7th Circuit Court of Appeals and the D.C. Circuit Court of Appeals to review the orders. (See Stakeholders Appeal Expansion of PJM MOPR.) On Tuesday, the U.S. Judicial Panel on Multidistrict Litigation consolidated the five petitions and assigned the case to the 7th Circuit in Chicago (Case 07/1:20-ca-01645).

While the appeals are pending, PJM is required to make a new compliance filing by June 1.

To comply with FERC’s directive, Lu said PJM plans to amend its March compliance filing by removing state default procurements as an exception from the definition of a state subsidy.

“We recognize there are several implementation challenges with this rule given that state auctions are generally brought after PJM’s capacity auctions, and also the fact that the entities that bid in state procurement auctions do not necessarily participate in PJM’s capacity market,” Lu said. Revenues from state procurements may not be traceable to specific capacity resources, he added.

PJM Straw Proposal Approach

Lu said the proposal attempts to comply with the rehearing order while preserving “normal commercial activity” associated with the state procurements.

PJM’s proposal includes default service auctions in the definition of a state subsidy but excludes certain voluntary bilateral transactions from the definition where there’s no clear linkage between the revenues from a state default procurement auction and a capacity resource.

Lu said any capacity resource that has a clear link to revenue from a state default procurement auction would be subject to the MOPR under the proposal. Included would be:

• a capacity resource that directly clears or intends to clear in a state default procurement auction;
• any state-directed, long-term bilateral transaction between a default retail service provider and an owner of the capacity resource; and
• long-term transactions between a default retail service provider and an “affiliated owner” of the capacity resource in which the transaction is unit-specific or “not at prevailing market rates.”

Chen also laid out the types of transactions that would not be triggered by the MOPR:

• Transactions of one year or less between a default retail service provider and the owner of the capacity resource. These transactions are not designed to support the development, construction or operation of a resource.
• Long-term transactions between a default retail service provider and an “unaffiliated owner” of the capacity resource so long as the transaction is not directed by a state.
• Long-term transactions between a default retail service provider and an “affiliated owner” of the capacity resource where the transaction is not unit-specific, is at prevailing market rates and is not directed by a state.

Sam Randazzo, chairman of the Public Utilities Commission of Ohio, asked Lu how the “prevailing market rate” would be calculated if a default auction is for an unspecified quantity and an unspecified time.

Lu said prevailing market rates could be demonstrated by showing the price was consistent with either the generally available price to all buyers or other competitive supply bids at the time of the auction. Lu said PJM recognizes state auctions typically happen after the capacity auctions have occurred, so auction participants would have to obtain documentation of sales in the event PJM or the Monitor seeks to review bids.

Randazzo said Ohio’s auction is managed by an independent auction manager who, as part of the process, reviews all the bids and makes sure that the structure of the auction and its outcome are competitive. The lowest bid is picked on the recommendation of the auction manager, he said, creating a structure that ensures the outcome is competitive and consistent with prevailing prices. He said it will be much more difficult to come up with a market price after the fact for a capacity product that is unique and dynamic.

“What you’re creating is something that’s going to subject the results of these auctions to hindsight analysis,” Randazzo said. “It’s going to reduce the number of suppliers and increase the cost of the product itself.”

Jason Barker of Exelon said he also fears reduced liquidity in the state provider of last resort (POLR) auctions could result in less competitiveness and higher prices. He said it is impractical for PJM to try to determine a specific generator source for every megawatt that marketers use to fulfill their winning POLR supply offers.

“Marketers hedge with market products at different points in time,” Barker said. “It is fruitless to go behind the POLR auction to try to paint the megawatts that the suppliers use to hedge. PJM could quickly implicate every generator that sells power.”

IMM Alternative

Monitor Joe Bowring presented an alternative proposal to PJM’s straw proposal. Bowring said compliance with Paragraph 386 should be the simplest method that conforms with FERC’s intent and to minimize the impact on state auctions, given that intent.

Bowring said that regardless of how PJM or stakeholders feel about the impacts of Paragraph 386 and whether it should have been included in FERC’s determination, the best way to move forward was a narrow interpretation. Otherwise, he said, it could result in a much wider interpretation of the MOPR than was intended by the commission.

In the IMM proposal, resources used to meet a load-serving entity’s retail auction obligations would not be subject to the MOPR if the resources are purchased at market rates. Bowring said the IMM defines market rates as “the forward curve for energy for the time period of the retail auction obligation, with a basis adjustment to the zone.”

Bowring said that market rates would also include the PJM capacity market price for the applicable delivery year and locational deliverability area, and PJM ancillary service market prices.

Resources subject to the MOPR would be those already under it and those sold above market rates, Bowring said. The MOPR would also apply to any resource sold to LSEs participating in a retail auction to meet any state-mandated requirements, including renewable energy credits, zero-emission credits, offshore renewable energy credits or any other mandate that limits participating capacity by technology, fuel, location or other attributes.

“The intent is to be as light-handed as possible while still attempting to meet what we interpret to be the commission’s intent,” Bowring said.