By Suzanne Herel

FERC ordered PJM last week to change its method of calculating capacity market offer caps, saying it was inconsistent with its practice in the energy market.

“We find that PJM’s Tariff is unjust and unreasonable because it allows the cost-based energy offer cap to be used as the sole measure of short-run marginal cost in calculating capacity market offer caps,” it said (EL14-94).

“In the energy market, when a generation resource fails the three pivotal supplier test and submits a non-zero market-based offer less than its cost-based offer cap, PJM uses the lower, market-based offer, not the cost-based offer, as the basis for determining the resource’s commitment and dispatch,” FERC said. “When a resource is not subject to market power mitigation, PJM uses its offer as the basis for the resource’s commitment and dispatch. In both cases, PJM’s energy market relies on the offer, not the cap, as reflecting the resource’s short-run marginal cost.”

The ruling stemmed from a 2014 petition by FirstEnergy, which said PJM’s Independent Market Monitor was violating the Tariff by calculating marginal cost using the lower of the market-based offer and the cost-based offer.

But the commission ruled that the Monitor’s interpretation was appropriate and that the Tariff, which dictated use of cost-based offers only, was improper.

Joining FirstEnergy in support of the petition were PJM, Duke Energy, the PJM Power Providers Group and the Electric Power Supply Association. Opposing the petition were the Organization of PJM States, the Public Utilities Commission of Ohio, PJM Consumer Representatives, the Office of the Ohio Consumers’ Counsel and the Monitor.

FirstEnergy contended that cost-based offers are an accurate, transparent method for estimating marginal cost, and that market-based offers reflect factors other than marginal cost.

But the Monitor said using only cost-based offers could lead to the exercise of market power. For example, units that can use multiple fuels could base their higher, cost-based offers on their secondary fuel and their lower market-based offers on the primary fuel, the Monitor said.

The commission ordered PJM to submit a compliance filing specifying a new procedure using a resource’s non-zero market-based offer as proxy for marginal costs in most cases.

The cost-based offer would be used when the resource is mitigated and its market-based offer is above the cost-based offer cap, “as the market-based offer in this circumstance may reflect the exercise of market power,” FERC said.

The cost-based offer also would be used when the market-based offer is less than its fuel and environmental costs, “since the generator is losing money for each megawatt produced, a reasonable projection of its energy and ancillary services revenue should reflect such a reduction.”