FERC ordered PJM Thursday to revise its market seller offer cap (MSOC) to prevent sellers from exercising market power in the RTO’s capacity market, but it emphasized the decision would not impact the long-delayed Base Residual Auction (BRA) scheduled for May.

The commission sided with the arguments made in separate complaints filed in 2019 by the Independent Market Monitor and several consumer advocate groups that challenged PJM’s Capacity Performance (CP) assumptions, saying the rules allowed sellers to exercise market power (EL19-47).

FERC ordered PJM stakeholders to submit briefs on the “appropriate remedy for the complaints” within 45 days and reply briefs may be submitted within 30 days after that.

“Although we are granting the complaints and finding that the existing rate is unjust and unreasonable, we conclude that additional record evidence is needed to set the appropriate replacement rate,” FERC said in the order.

The Issue

The Monitor said in its February 2019 complaint that PJM’s MSOC has been inflated by the “unreasonable and unsupported” expectation of 30 performance assessment hours (PAHs) annually. As a result, the Monitor said, it was prevented from effective mitigation of market power and was able to subject only a fraction of very high offers to unit-specific cost reviews. (See Monitor Asks FERC to Cut PJM Capacity Offer Cap.)

Unit-specific MSOCs are supposed to be based on avoidable costs and the opportunity cost of taking on a CP obligation, the Monitor said, including its expectations of bonus payments or penalties for performance during an emergency. The time span for measuring performance was changed from PAHs to five-minute performance assessment intervals (PAI) in compliance with FERC Order 825 in 2018.

A PAI is triggered when PJM determines a supply reliability issue exists, providing credits for generators that overperform their capacity commitments and penalties for those who underperform.

In August 2018, the Monitor concluded that PJM ratepayers were overcharged by $2.7 billion (41.5%) in the 2018 BRA because of “economic withholding” encouraged by the inflated MSOC. (See IMM: PJM 2018 Capacity Auction was ‘Not Competitive’.)

The Monitor suggested using 60 PAIs or five PAHs — compared with the current 360 PAIs/30 PAHs — in calculating a more appropriate seller cap.

Some intervenors in the docket said the current default offer cap allows capacity resources to exercise market power “to the detriment of consumers” because the PAI value used to set the default offer cap is well above levels PJM has experienced.

PJM argued in filings that the Monitor was not permitted to file a complaint under tariff rules and that it had failed to provide evidence that the cap — approved four years prior as part of the CP construct — and the results of BRAs suddenly became unjust and unreasonable. (See PJM: Dismiss Monitor’s Offer Cap Complaint.)

FERC said precedent already existed under previous proceedings allowing the Monitor to file complaints against PJM, pointing to the 2019 decision related to a challenge of its fuel-cost policy. (See FERC Upholds PJM Monitor’s Right to Protest Fuel-cost Policies.)

“As a threshold matter, we find that the Market Monitor is not barred from filing a complaint in this proceeding,” the Commission said in its order. “We further find that it is no longer just and reasonable for PJM to use 360 for Expected PAI in the default offer cap formula and order further briefing on the appropriate replacement rate.”

FERC said “based on the record demonstrating consistently low PAI each year,” it found that the 360 PAI exceeds market participants’ “reasonable, actual expectations of the number of PAI the system will experience in a given year.” The commission found that the default offer cap in PJM’s tariff is “incorrectly calibrated” and may “unjustly and unreasonably prevent the appropriate review of offers.”

“Although revising the expected PAI used to establish the default offer cap may ultimately represent the just and reasonable replacement rate, we find it is necessary to direct briefing that would enable the commission to further consider the appropriate replacement rate, including alternative approaches to market power mitigation in the capacity market,” FERC said in the filing.

The commission ordered PJM and stakeholders to determine a suitable replacement rate, addressing the “appropriateness of using different values” for penalty PAI and expected PAI in the default CP MSOC calculation and a method for setting each value.

FERC said it recognized that PJM’s capacity auction for the 2022-23 delivery year is scheduled for May and determined it should go ahead as scheduled under the current rules to prevent a further delay.

FERC said anticompetitive conduct observed during the auction may be referred to the commission, promising it will “take all measures necessary and appropriate to address anticompetitive conduct in the May 2021 auction.”

“As the courts have repeatedly explained, the commission’s discretion is at its zenith when fashioning remedies, and we find it to be an appropriate and equitable exercise of that discretion not to further delay the upcoming auction while the commission determines the just and reasonable replacement rate,” the order said. “The commission will, of course, continue to exercise its oversight of the upcoming auction.”

Commissioner Opinions

The unanimous decision by FERC instructing PJM to determine a suitable replacement rate elicited several responses from the commissioners.

Chairman Richard Glick said he was “pleased” with being able to issue the order and said the commission has spent “far too much time on buyer-side market mitigation” over the last several years. Glick said FERC has a responsibility to protect consumers from excessive prices brought about by the market power that sellers have in the system.

“We haven’t picked a particular approach on how we’re going to revise it,” Glick said. “But I think everyone unanimously agreed that the current approach allowed entities with market power to go forward without being screened, and that’s the issue we need to tighten up.”

Commissioner Neil Chatterjee said the order did two key things. He said it showed the commission agreed with the Monitor that the offer cap as currently configured is “not serving its intended purposes” and that the commission avoided a “rush to judgment” on the correct path forward on the issue.

“We seek more input from parties on the appropriate replacement rate,” Chatterjee said.

Chatterjee added that the commission “took pains” to make it clear in the order that there should be no delays or impacts to the upcoming BRA.

“It was extremely important to me that we exercise our discretion to avoid auction delays,” Chatterjee said. “It’s frankly the reason I could ultimately support this item.”

Commissioner Allison Clements said the commission granted two “highly consequential complaints” brought by the Monitor and consumer advocate groups and that it was important to remember the “scale of the problem.” Clements said given the size of PJM’s capacity market, the exercise of market power can lead to billions of dollars in “unjustified costs.”

“The Market Monitor and consumer advocates present compelling evidence here that the market power mitigation rules are not calibrated correctly and urgently need to be fixed,” Clements said.