By Rory D. Sweeney

WASHINGTON — A group of environmentalists, regulators and public power advocates told the D.C. Circuit Court of Appeals on Tuesday that it should overturn PJM’s Capacity Performance construct, saying it was fast-tracked into implementation without proper review and discriminates against renewable generators and demand response (16-1234, 16-1235, 16-1236, 16-1239).

PJM developed CP in response to increasing generation forced outage rates, which peaked at 22% during the 2014 polar vortex  cold snap, when the RTO had to implement emergency procedures to avoid blackouts. CP phased out seasonal resources and increased both bonuses for overperformance and penalties for nonperformance.

FERC approved PJM’s plan — which was submitted without stakeholder approval — in June 2015, saying the changes were justified by “the combination of deteriorating resource performance and the ongoing change in the resource mix in the PJM region.” (See FERC OKs PJM Capacity Performance: What You Need to Know.)

FERC’s approval is being challenged by a group including the American Public Power Association, National Rural Electric Cooperative Association, New Jersey Board of Public Utilities, Public Power Association of New Jersey, Natural Resources Defense Council, Sierra Club, Union of Concerned Scientists, American Municipal Power and the Advanced Energy Management Alliance.

High Costs, Ignored Alternatives

“The common thread in all of these appeals is that PJM rushed to assemble its Capacity Performance proposal, and FERC rushed to approve it, ignoring any alternative proposals despite the proposal’s high cost to consumers, its discriminatory effect on certain capacity resources and other flaws,” APPA attorney Randolph Elliott said. “This is like getting to the 5-yard line and having the referee push you over the goal line, or hitting a triple and having the umpire wave you home.”

The opponents argue FERC failed to demand sufficient evidence that PJM’s proposal would result in just and reasonable rates, saying that while the increased costs of the new requirements have been estimated, there was no attempt to quantify the reliability benefits it would produce.

They also contend that limiting capacity bidders to year-round resources discriminates against renewables and DR and that FERC unreasonably imposed limits on aggregating resources across locational deliverability areas. Also under dispute are PJM’s default offer cap, its unit-specific operating parameters and the design of its nonperformance penalties.

“It’s undisputed that PJM did not have the authority to make all of these changes unilaterally,” Elliott said. “The proposal was so controversial among the stakeholders that PJM did not even try to get the support they needed to file it unilaterally under [Section 205 of the Federal Power Act], so they elected to file this Section 206 complaint along with the other Tariff changes they filed under Section 205. … FERC said that the unilateral Tariff changes that PJM had made were just and reasonable, but then it turned around and said, ‘Because you did those, you’ve rendered your operating agreement and some other provisions in your Tariff unjust and unreasonable.’ Now how could those both be true at the same time? So they then turned around and granted the complaint, and said, ‘In light of the changes that you’ve made unilaterally, we have no choice but to grant your complaint.’”

Judge Janice Rogers Brown asked if it would have been acceptable for FERC to initiate the Section 206 filing. Elliott argued no. But Matthew E. Price, representing CP supporter Exelon, later argued that it’s well within FERC’s purview to also order parallel revisions when an order is issued.

‘Strange Result’

“It would be a very strange result if the law were somehow different because PJM had initiated the 206 proceeding and pointed out to FERC, ‘Hey, here are some areas where you might want to consider making some changes,’ rather than leaving FERC to hunt around in other tariffs and identify changes that might need to be made,” he said.

Carol Banta, an attorney from FERC’s Office of General Counsel, defended the commission’s order approving CP, saying FERC fairly and carefully weighed PJM’s proposal and is entitled to deference in its conclusion. She noted that the commission found the proposal not unreasonably discriminatory toward any stakeholder.

FERC approved the proposal, she said, because it transferred the risk for performance from consumers to suppliers. The 2014 outages were a “conflation of events that really showed a number of weaknesses in the system,” she said. “It showed that we were already paying for reliability that we weren’t getting.

“When we talk about what are the reliability benefits that customers are getting for what they’re paying, it’s also in the context of what they were getting and not getting before,” she said. “A conventional resource, if it’s unable to guarantee its performance, it can fix something: It can upgrade its equipment; it can firm up its fuel arrangements. It has options, and actually this entire market proposal is to put those risks on suppliers. … If you have a wind farm, you can’t order more wind, so the commission agreed that it’s a reasonable accommodation for resources that couldn’t improve their performance just by making investments to allow them to still participate in these markets.”

Dictating Terms

This exemption for intermittent resources, like wind and solar, to aggregate their production so they can also guarantee year-round performance remained a focus throughout the hearing for Senior Judge David Sentelle. He asked why the commission hadn’t allowed conventional resources, like natural gas- and coal-fired plants, to also aggregate.

“PJM is not supposed to be dictating the terms here,” he said. “I can understand why aggregation would be a good thing, but would it not then be a better thing if they were allowed to cross-aggregate with traditional resources?”

Allowing such aggregation would create opportunities for companies to exercise market power, Price pointed out.

The technical aspects of the case appeared to be a challenge for the judges to hash out beyond the legal questions.

“There are many things in this case I don’t fully understand,” Senior Judge A. Raymond Randolph said. “What exactly is a delivery area, and second of all, why wouldn’t they be allowed to [aggregate] across delivery areas?”

“PJM didn’t provide the level of detail that the commission needs to approve that,” Banta said. “That could still happen.”

Price explained that the delivery areas are defined by transmission constraints, so resources “wouldn’t necessarily be able to deliver energy” to other areas.

Randolph also asked if any stakeholders had challenged that decision, and Banta said that American Municipal Power had made it part of its appeal.

Cost vs. Benefits

Also participating in the nearly hour-long hearing was attorney Katherine Desormeau for the NRDC, who focused on CP’s cost versus the value of its benefits.

“PJM has acknowledged from the outset that this proposal will increase costs on consumers, but it did not support its final proposal with any evaluation of the costs,” she said. “And it didn’t attempt to evaluate the reliability benefit that was the purpose of the Capacity Performance proposal. … [FERC concludes] that the costs will be outweighed by benefits, but we have no way of knowing what FERC thought that was.”

Price replied that the proposal was designed to meet PJM’s reliability objective of no more than one outage every 10 years. “That reliability standard is a bedrock principle of capacity market design that goes back many years and is true in all of the regions under FERC’s authority,” he said. “When you hear petitioners complain about the costs of this program, what they’re complaining about are the costs of achieving that standard. What they’re really arguing to you is that standard is problematic because it costs too much and they’re willing to tolerate more risk, but that standard was not litigated in this proceeding. … Petitioners should not be able to make essentially a collateral attack on this well-settled reliability standard by complaining about the costs of the program.”

In their final brief, the challengers noted that the commission approved CP on a split vote, citing former Chairman Norman Bay’s dissent. (See Norman Bay’s Dissent: ‘Two Carrots and a Partial Stick’.)

FERC’s final brief cited precedents in which the agency’s decisions have been given “great deference,” saying its factual findings should be considered conclusive if supported by “substantial evidence” — “more than a scintilla, but … less than a preponderance of the evidence,” the standard in civil trials.

The D.C. Circuit also has pending before it a challenge to ISO-NE’s similar Pay for Performance rules (New England Power Generators Association v. FERC, D.C. Cir. Nos. 16-1023, 16-1024). Banta noted that in both cases, FERC has said it’s reasonable for all capacity resources to be expected to perform year-round “regardless of technology type.”