By Rich Heidorn Jr.

PJM ended an era in 2018 with the retirement of Chairman Howard Schneider, who had served on the Board of Managers since the RTO’s inception in 1997. But in many ways, the year was much like those before, with capacity and energy market rules under constant redesign. Some stakeholders have grown weary of the churn.

The year also saw battles between transmission owners and load interests and the biggest default in PJM history, which raised questions about the RTO’s credit practices.

Here’s a review of some of the biggest PJM stories of 2018, and a look at what’s ahead in 2019.

Capacity

2017 ended with PJM and its stakeholders at odds over the best way to insulate the capacity market from state-subsidized generation. RTO officials had rejected the Independent Market Monitor’s proposal, endorsed by stakeholders, to extend the minimum offer price rule (MOPR) to all units indefinitely, with carve outs for states’ renewable portfolios and public power self-supply.

PJM’s board responded by asking FERC to choose between the IMM plan and staff’s capacity repricing proposal, under which the RTO would have accepted bids from subsidized resources in its capacity auctions but then isolate them during a second stage and reset the price without them (ER18-1314).

FERC rejected both proposals and ordered PJM to expand the MOPR — which now covers only new gas-fired units — to all capacity receiving out-of-market payments, including renewable energy credits. The commission recommended creating an “alternative” fixed resource requirement allowing states to pull subsidized resources and associated loads from the capacity auction. The 3-2 ruling, which partially granted a 2016 complaint led by Calpine (EL16-49), initiated a Section 206 proceeding in a new docket (EL18-178).

PJM responded with an Oct. 2 brief outlining its proposal for an “extended resource carve out” that would allow subsidized resources to obtain capacity commitments without clearing the capacity market, while creating a mechanism to restore prices to “the theoretically correct competitive level.”

“Making room, outside the auction, to accept subsidized generation as a PJM ‘capacity resource’ ineluctably will degrade auction prices,” PJM said. “Unless the commission is prepared to accept a mechanism to adjust prices to their ‘correct’ level, this trade-off must be understood as an unavoidable consequence that comes once uneconomic resources are relieved from having to participate in the market.” (See Little Common Ground in PJM Capacity Revamp Filings.)

Stakeholders offered at least seven other alternatives for the MOPR and numerous modifications on FERC’s FRR concept and PJM’s carve out. In initial filings and reply comments filed in November, the stakeholders generally fell into two camps. One argued for a rejection of any carve out, calling instead for a “clean,” MOPR-only construct that extended to all resources. The other generally supported the concept of the FRR Alternative but argued that because of the repricing mechanism, PJM’s extended resource carve out would inflate capacity prices. (See PJM Stakeholders Hold Their Lines in Capacity Battle.)

The stakes are large, as illustrated by two of the most recent filings in the docket. On Dec. 6, eight generation developers, including Calpine and Tenaska, warned that the FRR Alternative “would in fact end the competitive PJM capacity market as we know it,” without a mechanism to avoid price suppression of competitive resources.

Public power and renewable advocates, including the American Public Power Association, the National Rural Electric Cooperative Association and the Natural Resources Defense Council, responded with a Dec. 21 letter to the commission. “We agree that states and locally governed utilities have the authority to make resource choices, and that it is not the role of the Regional Transmission Organization (RTO) to shield market participants from the effect of those policies,” they said.

BRA Results ‘Not Competitive’

In 2018, the second Base Residual Auction, in which all resources had to meet the Capacity Performance requirements, saw prices jump 83% in most of the RTO. But the IMM reported in August that the results of the auction were “not competitive” because prices were not capped at the net avoidable cost rate. The analysis said offers exceeding net ACR, while permitted by current rules, amounted to “economic withholding” and boosted total auction revenue by 41.5%. PJM insisted the rules had been followed, saying “the proper forum for such concerns about competitiveness of offers is the Federal Energy Regulatory Commission.”

In April, the commission held a technical conference to consider whether the RTO should move from a year-round to a seasonal capacity construct. Although it has yet to issue an order on the merits of the issue, FERC signaled its concerns in denying rehearing requests in the docket in August (EL17-32, EL17-36). “Given that PJM is a summer peaking system, … the move to a single, annual capacity product may have pushed valuable summer-only resources out of the capacity market and thereby increased capacity costs with little or no reliability benefit,” it said.

While it’s not known when or how FERC will rule on these issues, one thing is clear: State officials will be upset with any rules that make their initiatives more difficult or more costly.

States’ efforts to preserve their nuclear fleets continued in 2018, with New Jersey approving zero-emission certificates (ZECs) in May. In September, a federal appellate court upheld a similar program in Illinois, ruling the initiative did not violate the Federal Power Act.

After a year in which some state regulators threatened to leave the RTO or end the capacity market, RTO officials are in a very difficult spot.

“Almost nobody is happy with the state of [PJM and ISO-NE’s] capacity markets,” APPA CEO Sue Kelly observed at a conference in September. (See ‘Almost Nobody is Happy’ with Capacity Markets at Conference.)

Aiding Coal, Nuclear Generation

In the energy market, PJM officials are trying to win stakeholder approval for a plan to allow large, inflexible generators such as coal and nuclear plants to set market prices. PJM’s board told stakeholders in December that it will make a unilateral FERC filing supporting its price formation proposal if they do not act by Jan. 31. Stakeholders have heard first reads on three alternative proposals.

“We feel we are correctly criticized as a region for not addressing known price anomalies,” CEO Andy Ott told the Markets and Reliability Committee’s Dec. 20 meeting. “There is a very strong opinion by the board that we are long overdue for these changes.”

PJM also is pushing to compensate generators for their “fuel security,” another initiative that could benefit struggling coal and nuclear generators. PJM released a report on the issue in December, saying that while there is no imminent threat, “fuel security is an important component of reliability and resilience — especially if multiple risks come to fruition.”

PJM said the compensation could be achieved through the capacity market or through a winter reserve product in the energy market.

Regardless of what the RTO decides, the proposal is likely to be viewed skeptically by stakeholders representing load, who have long complained of the costs of PJM’s large reserve margins and increasingly restrictive Capacity Performance rules.

Transmission Owners vs. Load

Load interests spent much of 2018 battling with transmission owners over their supplemental projects, which address individual planning criteria and are not subject to competition or PJM’s analysis for inclusion in its Regional Transmission Expansion Plan. In September, FERC approved TOs’ compliance filing in response to the commission’s February show cause order requiring them to increase stakeholder engagement in the development of supplemental projects (EL16-71, ER17-179). (See FERC Upholds PJM TOs’ Supplemental Project Rules.)

FERC also weighed in on a highly charged cost allocation issue, saying the solution-based distribution factor (DFAX) method is unjust and unreasonable for projects that address stability-related reliability issues. (See FERC Rethinking DFAX for Stability Transmission Projects.)

In May, PJM stakeholders endorsed a proposal requiring PJM to evaluate cost commitments — including construction costs, return on equity and capital structure — in its analysis of competitive bids for transmission construction.

Western Market

In February, PJM and Peak Reliability, the reliability coordinator (RC) for the Western Electricity Coordinating Council (WECC), proposed creating an energy market as an alternative to the Western Energy Imbalance Market (EIM) managed by CAISO. But the effort quickly unraveled after CAISO said it would begin offering its own RC services at costs much lower than Peak’s. Seeing its customers defect to CAISO and a competing RC offering from SPP, Peak abruptly announced in July it would cease operations.

Ott said in October that PJM remains interested in the idea but that the pace of talks has slowed since Peak’s announced departure. (See Q&A: PJM’s Ott Still Looking West.)

GreenHat Default

In the cross fire between load and supply, PJM officials often take shrapnel over their policy choices. But the RTO rarely faces the kind of questions about its competence that followed the default of FTR trader GreenHat Energy.

The company — run by two traders who were involved in a scheme to manipulate the CAISO and MISO markets between 2010 and 2012 — amassed 890 million MWh of FTRs (the largest FTR portfolio in PJM) with only about $600,000 of collateral.

The company’s collapse in June was the biggest default in PJM history. The incident led to calls for changes to PJM’s credit policy and questions about the RTO’s failure to respond promptly to warnings from other FTR traders, which allowed GreenHat’s $10 million loss in 2017 to grow to more than $100 million.

An investigative committee of the Board of Managers is expected to issue a report on what went wrong as soon as February.

Market Monitor: New Contract, More Oversight

The year also brought a new contract for Monitoring Analytics, PJM’s Independent Market Monitor, led by Joe Bowring.

The contract, which was extended through 2025, requires the Monitor to submit to an annual independent audit. In addition, the Board of Managers announced in December that it had hired former FERC General Counsel Michael Bardee as an external liaison to receive direct member feedback on the Monitor and report it to the board’s Competitive Markets Committee.