By Rich Heidorn Jr. and Rory D. Sweeney

FERC last week again rejected PJM’s 2012 compromise on the minimum offer price rule (MOPR), saying that eliminating unit-specific exemptions and subjecting generators to the offer floor for three years is unreasonable (ER13-535-004).

The commission originally rejected PJM’s proposal in 2013, saying it discouraged new entry because the exemptions were too narrow and the mitigation period was too long. However, it indicated it would accept the proposal if the unit-specific review were retained and the mitigation period remained unchanged. PJM agreed in a compliance filing adopting FERC’s changes, but a handful of stakeholders petitioned the D.C. Circuit Court of Appeals to review the order.

In July, the D.C. Circuit said the commission had overstepped its authority in undoing the compromise. The court determined that FERC exceeded its “passive and reactive role” under Section 205 of the Federal Power Act, which requires it to accept proposed rate changes if they are just and reasonable and suggest only “minor” changes. (See PJM MOPR Order Reversed; FERC Overstepped, Court Says.)

PJM’s proposal would have replaced the unit-specific MOPR exemption with two new categorical exemptions and extended the mitigation period from one to three years before a unit could bid below the price floor. The change was prompted by generators’ concerns that the unit-specific review, which allowed units to prove confidentially to PJM that its costs were below the required minimum offer, lacked transparency and allowed below-cost bids.

In exchange for eliminating the exemption, load-serving entities won an agreement for two new exemptions: a competitive-entry exemption for units that are unsubsidized or subsidized through a nondiscriminatory, state-sponsored procurement process; and a self-supply exemption for units intended to meet a portion of an LSE’s needs.

The compromise proposal was widely supported by PJM stakeholders — the first time that a significant MOPR revision had won a two-thirds sector-weighted vote, the court noted.

Following the court ruling, the RTO asked FERC in October to “simply accept PJM’s original Section 205 proposal, unchanged, as just and reasonable.” (See PJM Stakeholders Split on Request to OK MOPR Compromise.)

Although the commission’s membership has changed since 2012, its opinion of the PJM proposal did not.

“We continue to find that PJM has failed to show that its proposed categorical exemptions, standing alone, are just and reasonable … because there would be no means for nonexempted resources with lower costs than the MOPR offer floor to have a competitive bid considered in the auction,” Commissioners Cheryl LaFleur, Neil Chatterjee and Richard Glick wrote in the 3-0 order. “We also continue to find that PJM failed to show that extending the mitigation period from one year to three years is just and reasonable. … Accordingly, we reject PJM’s December 2012 filing in its entirety and reinstate its previously approved market design, i.e., a MOPR without categorical exemptions but with a unit-specific review process and a one-year MOPR mitigation period.”

Chairman Kevin McIntyre and Commissioner Robert Powelson did not participate in the ruling.

The commission said a unit-specific exemption was necessary because “the benchmark price that is used to set the MOPR is an estimate of the net [cost of new entry]. This derived price may exceed the actual costs of individual generators and such generators should have an opportunity to demonstrate as much.”

The fact that unit-specific reviews are more complicated than categorical exemptions did not justify their elimination, the commission said. “We concur with the [Independent Market Monitor], and we disagree with the notion that the unit-specific review is an unworkable method to prevent buyer-side market power, as evidenced by its effective use in ISO-New England Inc. and NYISO.”

It said the three-year mitigation period was improper because it would prevent resources from bidding based on their going-forward costs.

“Before a resource is built, its incremental cost would reflect the unit-specific net CONE, but once the resource has cleared in one auction, its developer would need to begin construction to meet its obligation three years later in the delivery year. At that point, the construction costs incurred prior to subsequent auctions become sunk costs, and they are not part of the resource’s incremental costs going forward,” the commissioners said. “But under a three-year mitigation period, developers whose offers are mitigated and clear in the auction would be prevented from offering at their going-forward costs for at least two years beyond the first auction in which they clear and would instead have to offer at … an artificially inflated price.”

The commission said, however, that it would not order PJM to rerun its capacity auctions under the rules in effect before the 2012 filing, saying it “would cause significant disruption and burdens that are not warranted.”

The situation may soon become moot as PJM completes its yearlong examination of its capacity construct. A proposal from the Monitor to extend the current MOPR process — the only plan to receive endorsement by the task force investigating the issue — is set for a vote at the Dec. 21 meeting of the Markets and Reliability Committee.

The proposal would expand the MOPR to all units indefinitely but would include exemptions for self supply, competitive entry, public power and state renewable portfolio standards programs.

The Monitor is holding a question-and-answer session following Tuesday’s Operating Committee meeting to address stakeholder questions ahead of the vote.

PJM has not confirmed it would file the proposal for FERC approval should it win endorsement, but Monitor Joe Bowring confirmed he would file it himself if the RTO refuses. (See related story “Stakeholders Have Questions Before Approving MOPR-Ex,” Markets and Reliability/Members Committees Briefs: Dec. 7, 2017.)