PJM and its Independent Market Monitor must consider generator operating lives of more than 20 years under the  unit-specific review process, FERC said Friday, partially granting a complaint by the developer of a combined cycle plant under construction in Illinois (EL21-62). The ruling came less than a week before PJM’s long-delayed Base Residual Action, scheduled to begin May 19.

Jackson Generation, a unit of J-POWER USA, filed a complaint in March challenging PJM’s and the Monitor’s rejection of its request to use an asset life of more than 20 years in calculating the plant’s unit-specific exception to the minimum offer price rule (MOPR).

The RTO’s tariff requires generators seeking the exception to provide supporting documentation for project costs including “the bases and support for the claimed capitalization ratio, rate of return, cost-recovery period, inflation rate or other parameters used in financial modeling.”

PJM and the Monitor contended that an asset life longer than 20 years is inconsistent with a “competitive offer,” citing language in Manual 18.

The commission sided with J-POWER, whose 1,200-MW plant is expected to go into service in the second quarter of 2022.

“There is no tariff provision requiring the use of a 20-year asset life for the unit-specific exception process,” FERC ruled. “Jackson has put forth documentation that it claims shows that its particular facts and circumstances warrant an asset life longer than 20 years. PJM and the Market Monitor do not contend that Jackson’s specific circumstances do not warrant a longer asset life. Rather, they argue that they only use a 20-year asset life to ensure that all comparable resources are evaluated on a comparable basis, and to do otherwise would not be consistent with the tariff’s requirement of ‘competitive, cost-based’ offers. The tariff, however, contemplates the possibility of a longer asset life, as Jackson points out, and PJM cannot rely on a reference to a 20-year asset life in a manual to contradict these Tariff provisions.”

The commission directed PJM and the Monitor to review Jackson’s information and documentation to determine if a different asset life is warranted based on Jackson’s circumstances.

PJM spokeswoman Susan Buehler said Monday that the RTO “will be able to incorporate the implications of the FERC ruling on Jackson in time for the upcoming auction.”

Affidavit from Former PJM Economist

J-POWER included an affidavit from Paul Sotkiewicz, president of E-Cubed Policy Associates and PJM’s former chief economist, who said the RTO permitted an asset life longer than 20 years twice while he oversaw the MOPR unit-specific offer floor process.

“In each case, the developers of these two generation resources were able to show their business plans, communication to their investors and method of financing that showed an asset life and cost recovery period of more than 20-years was warranted,” Sotkiewicz said, adding that both resources, which were not subsidized, cleared the BRA.

The PJM Monitor, Monitoring Analytics, told FERC that it was improper for Sotkiewicz to “disclose information that should be kept confidential” and said the commission should ignore his testimony.

“Witness Sotkiewicz references two out of the many cases that were reviewed by the Market Monitor for MOPR compliance, cases that occurred in 2012 or before, but fails to state whether he knows what the final offers were or what asset life they incorporated or what the distinguishing characteristics were,” Monitoring Analytics said. “This vague and unsubstantiated testimony should be given zero weight.”

Joe Bowring, president of Monitoring Analytics, told RTO Insider he doesn’t recall the incidents Sotkiewicz described, and that the FERC ruling would not change the Monitor’s view of Jackson’s offer.

J-POWER has “not demonstrated that they have a competitive advantage [because of Jackson’s] asset life. Their combined cycle plant isn’t going to last any longer than anybody else’s combined cycle,” he said Monday. “If we’re going to allow [Jackson] to use 35 years, then we should allow everybody to use it and not just them. And that should be publicly announced and made clear as a matter of policy.”

J-POWER did not respond to a request for comment.

Sunk Cost Argument Rejected

While FERC supported J-POWER’s ability to make its case for a longer lifespan, the commission rejected the company’s contention that it should be able to exclude from consideration construction costs it spent over the past 18 months.

J-POWER had offered its Jackson unit in 2019 for the 2022/23 BRA scheduled for May 2020. Although the auction was delayed because of uncertainty following FERC’s December 2019 order requiring PJM to expand the MOPR to state-subsidized resources, the company decided to proceed with construction.

“Jackson’s decision to construct its resource prior to clearing the auction is not a competitive advantage ‘resulting from the capacity market seller’s business model, financial condition, tax status, access to capital or other similar conditions affecting the applicant’s costs,’ as required by the tariff,” FERC said. “Therefore, it was reasonable for PJM to consider those costs as part of the sell offer.”

The commission acknowledged that it has previously stated that “construction costs incurred prior to subsequent BRAs are sunk costs; they are not part of its going-forward costs that will affect its future decisions because competitive offers are based on going-forward costs, not sunk costs.”

But it said it did so only in explaining why it was appropriate to remove the MOPR floor after a resource had cleared its first BRA. “The same logic does not apply for new resources that have not yet cleared an auction. To the contrary, the commission has expressed concern that a resource could submit an initial offer based on its full costs, not clear the auction and then submit a lower offer in subsequent years when its going-forward costs are lower,” it said. “The commission therefore required that the MOPR be applied ‘until the resource demonstrates that its capacity is needed by the market at a price near its full entry cost — by clearing one of the PJM capacity auctions.’ Since Jackson had not yet cleared a BRA, its offer price must reflect its full entry costs, which include the construction costs incurred during the hiatus in conducting the auction.”