PJM’s minimum offer price rule (MOPR) is living on borrowed time if the comments at FERC’s technical conference on capacity markets Tuesday are any guide (AD21-10).

FERC Chair Richard Glick and PJM CEO Manu Asthana both said the MOPR is not “sustainable” because it is frustrating state decarbonization efforts.

“We’re causing consumers to spend billions of dollars extra in the name of trying to address price suppression [by state-subsidized resources]. … We need to figure out a better way, in large part because the future and the benefits of the RTOs are really at stake … in the Eastern states,” Glick said, noting that some states within PJM, ISO-NE and NYISO — the only regions with mandatory capacity markets — are considering withdrawing from the markets.

Robert Rosenthal, counsel to the New York Public Service Commission, said the MOPR causes higher capacity prices, provides incentives for uneconomic resources to remain online and violates the states’ role under the Federal Power Act

“We believe there’s a need for different legal framework based on cooperative federalism and that FERC can get there by revising some first principles,” he said.

Rosenthal said the commission should “revisit the purpose of the Federal Power Act, which was enacted to address a narrow jurisdictional gap resulting from a 1927 Supreme Court decision. To address this gap, Congress enacted the FPA in 1935 for a specific purpose: to provide FERC’s predecessor the ability to regulate the interstate wholesale sales and rates of electric energy — not capacity.”

Democratic Commissioner Allison Clements appears likely to provide a second vote for overturning MOPR in PJM, while Republican James Danly appears to be adamantly against doing so.

That means Glick would need to win support from either Republican Commissioner Mark Christie, who joined the commission in January, or Commissioner Neil Chatterjee, who had pushed the controversial expansion of the MOPR in PJM when he was chair in December 2019. (See FERC Extends PJM MOPR to State Subsidies.) Chatterjee also supported a February 2020 ruling that narrowed the resources exempt from NYISO’s buyer-side market (BSM) power mitigation rules in southeastern New York, which ordered the ISO to subject storage and demand response to a minimum offer floor. (See FERC Narrows NYISO Mitigation Exemptions.)

Chatterjee promised that he entered the hearing Tuesday with an open mind, saying “I’m not wedded to the policies of the past.”

But he insisted competition should remain central to any future rules. “We shouldn’t overcorrect here,” he said. “We can’t lose sight of how successful our organized markets have been, not only in producing substantial cost savings for consumers but also … for our energy future.”

Although Christie did not opine on the MOPR, he indicated he would support changes that could make the capacity markets voluntary backstops instead of mandatory.

“After 15 years of this experiment … we now have to ask … does the reality of politics and rent-seeking [for subsidies] in a multistate RTO … simply make it impossible for these administrative constructs to consistently deliver on the economic goal of least-cost power and … accomplishing individual state policies?” Christie said. “If the reality is, they cannot … is the most realistic path now for states to reclaim their authority and reclaim their responsibility … for resource adequacy and chart their own course to achieve the resource mix they want?”

Danly said he was skeptical of suggestions that enhanced scarcity pricing or new ancillary services could provide the “missing money” to cover the revenue needs of all resources needed to serve loads.

“I hope that I’m wrong. But if I’m right, that means that we have to look to the cap markets to ensure that we get the proper revenues to provide the proper compensation to keep the required dispatchable resources in the market.”

Glick said he wants the commission to move quickly on the MOPR, even if other capacity market changes take longer to achieve. He indicated he will seek to replace or eliminate the PJM MOPR in time for the 2023/24 Base Residual Auction in December.

Glick also said the commission would act unilaterally if necessary. “I think we should, to the extent we can, allow and enable the RTOs themselves and the stakeholders to come up with their own proposals [for] an approach that’s different than the current MOPR rules around the country,” Glick said. “To the extent they don’t come up with something, I think we have an obligation under the Federal Power Act to act where rates and terms in these markets are unjust and unreasonable. In my opinion, I’ve said several times before, they are certainly in PJM, and so, if for whatever reason PJM and the stakeholders aren’t able to act, I think … we need to do it for them.”

NYISO: Confident in Stakeholder Process

NYISO CEO Richard Dewey expressed confidence that such intervention would not be required in his ISO, citing its Grid in Transition program to identify changes to energy, ancillary services and capacity market rules to accommodate the changing resource mix. He also said changes could result from the ISO’s comprehensive mitigation review program to modify the BSM test to allow the entry of state-sponsored resources while still maintaining the price signal for dispatchable resources needed for reliability.

“I’m confident that New York’s stakeholder process can generate effective solutions,” Dewey said “I look forward to bringing some of those solutions to the commission in the coming months.”

Few Defenders

Almost none of the 26 witnesses spoke in favor of the MOPR.

“MOPR is quickly becoming an orphan without an advocate,” said Maryland Public Service Commission Chair Jason Stanek.

Abe Silverman, general counsel for the New Jersey Board of Public Utilities, said the MOPR will cost New Jersey ratepayers $300 million in excess costs in 2025, with excess costs of $2 billion for all of PJM.

“I think the commission has the legal authority and the evidentiary record to tell PJM tomorrow to simply return to the tariff language that existed” before FERC’s December 2019 ruling.

Ohio Public Utilities Commissioner Daniel Conway said FERC’s claim that the expanded MOPR was needed because subsidized renewables were suppressing capacity prices was “too theoretical.”

Impact of Removing MOPR

The second panel of the conference focused on how soon the MOPR could be eliminated, and how the timing of its elimination could affect energy and capacity prices.

There was a general agreement that getting rid of the rule would not result in severe price swings or threaten reliability in the short term.

Glick asked how quickly FERC would need to act for the RTO to proceed with its December auction with the elimination of MOPR. September, answered Stu Bresler, PJM senior vice president of market services. He added that “between now and when that process would play out, it would be important for us to get as much stakeholder interaction as we possibly could, because … really robust stakeholder interaction is important to arriving at a durable, sustainable solution.”

Joe Bowring, president of PJM’s Independent Market Monitor, Monitoring Analytics, agreed with the general time frame, but he advised that there is a lot of preparation in the leadup to the auction. “So even if the order were not signed until [September], it would be excellent to have a clear signal to the market that the rules are changing, because there’s a lot of detailed work that people have to do before that,” he said.

“I fully expect the existing MOPR to be eliminated,” Bowring said, reiterating his position that removing it will have little immediate impact on the ability of most renewables to clear the market. Based on his unit-specific MOPR reviews, he said, “we see a lot of renewable resources that are extremely competitive.”

Because of its high price, offshore wind would be unlikely to clear with or without the MOPR he said.

Marji Philips, vice president of wholesale market policy at LS Power, cautioned that “you can’t just rip the MOPR off without having a backup plan. … Our view of the whole capacity construct needs to be reconsidered in light of the evolving grid. So what we’d like to see is a short-term fix that addresses this,” and then “maybe a yearlong process that really looks at how we define resource adequacy.”

Danly said he was concerned that without the MOPR in place, capacity prices would crash, leading “traditional” resources needed for reliability to shutter. He asked how those resources could be compensated to ensure reliability with the rule in place.

Multiple panelists had talked about the importance of valuing effective load-carrying capability, which they said would ensure inefficient thermal resources retire, while more efficient ones are maintained until they are no longer needed for reliability. Bresler signaled PJM’s support for this approach in response to Danly’s question.

But panelists also disputed the premise of Danly’s question. They said that, in at least the short term, energy market revenues would be high enough to prevent mass retirement of resources. PJM really has until the glut of offshore wind resources being constructed comes online to find the missing money for the capacity market, they said. In that time frame, it was more important to get things right than rush a replacement construct.

“We haven’t been sitting around for the past 15 years,” said Ed Tatum, vice president of transmission at American Municipal Power. “There have been many changes to our energy rules. We’ve got fast-start pricing; we’ve got this [operating reserve demand curve].”

Consultant Roy Shanker was about the only witness to mount a defense of MOPR, and even he acknowledged it is a “crude tool.”

But he said the capacity market would not remain competitive without it, expressing skepticism over the idea of a “targeted” MOPR that only applied to buyer-side market power.

Shanker said it’s not sustainable to maintain a “supply-side paradigm” with one segment of the market receiving no subsidies and another segment offering prices lowered by subsidies.

There is currently no “midpoint” between the full MOPR and cost-of-service regulation, Shanker said.

“In the middle, you’re going to be stuck with somebody making subjective judgments and expressing their favoritism, picking winners and losers in one way or another,” Shanker said.

Such a change would make the market “untenable,” Shanker said. “I can’t say two years or 10 years, but I know that’s where we’re going.”

Elise Caplan, a consultant for the Sustainable FERC project, called for “extreme caution” in developing a targeted MOPR. Referring to buyer-side market power, she said, “I don’t think we know what that looks like.”

Ohio’s Conway said that whatever changes are made must recognize that “reliability is not subservient to decarbonization.”

“If we improperly value resources and, as a result, we end up having reliability problems or cost shifting, there’s going to be hell to pay,” Conway said. “And you can just look to Texas to see what’s happened when not enough attention is paid to that primary point.”

Other Capacity Market Issues

Witnesses said the shortcomings of the capacity markets don’t end with the MOPR.

PJM’s Asthana cited a need to strengthen qualification and performance requirements for capacity resources and to re-evaluate the appropriate level of capacity procurement.

Bowring spoke about the importance of defining key elements of the capacity market for it to work correctly and to function while accommodating state authority over the resource generation mix.

The Monitor called for addressing market power and tighter definitions of reliability. “If we’re going to have the right mix and a reliable mix of renewable resources and traditional thermal resources, it’s essential we define reliability and the reliability contribution of each resource correctly, otherwise we will end up building an unreliable system,” he said.

Stefanie Brand, director of the New Jersey Division of Rate Counsel, said the states view capacity markets as a “backstop” and not the only way to ensure adequacy in the region. States are making policy decisions on what resources to rely on, Brand said, resulting in a capacity market that doesn’t determine entry and exit of generation units as they did in the past, she said.

D.C. Public Service Commission Chairman Willie Phillips said capacity markets can be useful, but he’s concerned with the cost to customers. “If we cannot do this affordably, we will not do it successfully,” Phillips said.

New Jersey’s Silverman said the markets won’t be just and reasonable until they internalize the costs of carbon emissions.

ISO-NE: Markets Must Evolve

ISO-NE CEO Gordon van Welie said in his opening remarks that he believes that while capacity markets “ensure both the clean energy transition and reliability,” he also acknowledges “they must evolve” to address concerns about state-sponsored resources that do not clear the market because of the MOPR.

Eliminating the MOPR, however, creates risk for investors in unsponsored resources because increasing numbers of renewable resources will tend to reduce energy prices, and capacity prices will fall as well without the rule.

“Accordingly, we believe it is important to identify market rule changes that will eliminate the MOPR and thereby give capacity created to sponsored resources, while appropriately compensating merchant resource investment for that higher level of risk,” van Welie said.

New Hampshire Public Utility Commissioner Kathryn Bailey said she fears that eliminating MOPR would disrupt momentum toward her state’s preferred solution, such as a Forward Clean Energy Market.

“So rather than just throw out the MOPR, I think we need to focus on creating market reform that values carbon reduction, while at the same time, some market reform to compensate for the reliability that we need to shore up from the intermittent resources that we expect the system to add in the future,” Bailey said.

Katie Dykes, commissioner of the Connecticut Department of Energy and Environmental Protection, said her state is frustrated that New England’s capacity market is thwarting state policies.

“Connecticut is not contracting for clean energy resources to manipulate the market; we’re doing so because our state laws and policies require us to reduce emissions,” Dykes said.

Connecticut is not receiving credit for contracted resources within the capacity market, she said. The Competitive Auctions with Sponsored Policy Resources mechanism has cleared only 54 MW of the “hundreds” that Connecticut and other New England states have contracted in recent years.

Dykes said capacity markets have the potential to shield consumers from volatile prices, and they have a role to play in the evolving electric sector. Still, they are also administrative constructs that require heightened scrutiny for the “assumptions and preferences that underlie them, and special consideration for the views and policies of the states these markets are intended to serve.”