FERC on Tuesday explained why it declined to act on requests by power generators and public interest groups to rehear a January compliance order on the treatment of energy market revenue calculations in PJM’s capacity auctions (EL19-58-005).

The rehearing requests — one filed jointly by Exelon and Public Service Enterprise Group — were automatically denied in January when FERC failed to act on them within the requisite 30 days.

At issue is the implementation of PJM’s net energy and ancillary services (E&AS) offset calculation used to help estimate the net cost of new entry (CONE) for resources in the RTO’s Base Residual Auction. The offset “is designed to model net revenue that a ‘representative resource’ would earn during its first year of commercial operation,” according to PJM.

FERC last November approved the details of PJM’s offset calculation, which draws on energy market results from the three calendar years before the BRA to inform modeled offers for resources. (See FERC Approves PJM Key Capacity Market Variable.) As noted by Chair Richard Glick in a concurring statement to Tuesday’s order, approval of the offset allows PJM to conduct “its long-delayed, much-needed capacity auction,” the subject of enduring disputes over the treatment state-sponsored resources.

But the commission had also directed PJM to allow combustion turbine resources to reflect in their E&AS offsets a 10% adder to account for “the additional costs and risks that may be incurred by operating the CT reference resource in a manner that fully recognizes flexibility, which is not limited only to peak hours or times of system stress.” No other resources would be eligible to include the adder.

PJM was also ordered to use historical prices to forecast operating reserve and regulation dispatch and revenues for capacity resources, variables also used in the calculation of the E&AS offset for all resources.

Exelon, PSEG and a group of public interest and customer organizations (PICOs) in PJM, however, petitioned FERC to reconsider those directives. (FERC staff on Jan. 4 accepted PJM’s compliance filing implementing them in a delegated order.)

The PICOs argued that the 10% adder would unjustifiably increase net CONE for CT resources and drive up costs for ratepayers. They also contended that the use of historical operating reserve prices would underestimate the future revenues capacity resources would earn based on recent market changes.

FERC responded by noting “that PICOs’ rehearing arguments opposing the adder are repetitive of arguments that the commission previously considered and found unpersuasive” in a quadrennial review of PJM’s variable resource requirement curve. “We continue to find adequate evidence in the record to demonstrate that including the 10% adder results in a just and reasonable approximation of the costs for a CT unit.”

In rejecting the PICOs’ opposition to the use of historical prices, the commission said it “selected PJM’s proposed approach as a just and reasonable replacement rate given the lack of a futures markets for reserves and uncertainty regarding the actual reserve price impacts of PJM’s reserve market reforms.”

Exelon and PSEG attacked the plan from the other direction, objecting to the fact that the 10% adder wouldn’t be available to other resources. The companies also contested the use of historical prices, arguing that past performance in the small regulation market was not a good indicator of future revenues.

FERC gave these arguments similar treatment: “As the commission explained in the compliance order, PJM reasonably excluded the 10% adder from the modeled offers of combined cycle units and other resources, such as coal units, because, unlike CTs, those resources ‘do not significantly alter their operating schedules based on evolving conditions between the day-ahead and real-time markets.’”

The commission also rejected the generators’ concerns about the use of historical prices. “Contrary to the rehearing arguments of Exelon/PSEG, the use of scaled historical prices to estimate future regulation prices is consistent with the directive in the May 2020 order to use a forward-looking E&AS offset,” FERC said.

Clements Dissents

Despite the commission’s approval, a majority of the commissioners seemed to agree that the petitioners’ arguments had merit.

But Chairman Glick and Commissioner Mark Christie essentially overruled a dissent by Commissioner Allison Clements, arguing that it was imperative that PJM run the BRA for the 2022/23 delivery year.

Clements wrote that there is a “paucity of record evidence” to support the 10% adder. She disagreed with the commission’s assumption that PJM’s application of the adder and use of historical reserve prices “will yield just and reasonable capacity rates;” rather, they could have “material real-world consequences” because they feed into the net CONE value.

Clements pointed to the PICOs’ assertion that PJM’s 10% adder translates to a daily increase in net CONE of roughly $30/MW, which is nearly 12% of the recently posted RTO-wide per-day figure of $260.50/MW for the 2022/2023 BRA. These estimates “translate to significant additional capacity costs to customers,” she said.

Glick acknowledged that Clements “makes a number of good points” but said that “the real problem lies with PJM’s misguided choice of the reference resource to calculate net CONE, rather than in how it implemented the forward-looking E&AS offset in this proceeding.”

FERC has “meddled with one aspect of PJM’s capacity market after another,” said Glick, who has “dissented at nearly every turn” in the capacity market proceedings, arguing that “truly bad public policy” produces rates that are “patently unjust and unreasonable.”

“With that in mind, now is not the time to once again pull the rug out from underneath the auction,” Glick said. He added that there is no “superior alternative to PJM’s proposal to use historical reserve prices as the basis for projecting future reserve revenues.”

“Were such an alternative available, I agree that it would merit a hard look,” Glick said. “But as it is not, we must provide PJM with the certainty it needs to finally run the upcoming auction and then, with that behind us, turn to remedying the more fundamental problems that the commission has created over the course of the last three years.”

Christie said he shared Clements’ concerns about the adder but is “convinced any such changes at this stage would threaten — or indeed obstruct — the ability of PJM to conduct the Base Residual Auction as scheduled this May, which is essential for reliability purposes.”

He added that “the PJM capacity market is not a true market, but is, instead, an administrative construct whose very complexity is inconsistent with transparency.” He said he has been “vocal” about considering the issue in a “general proceeding” such as a technical conference.