FERC issued a show-cause order to PJM on Thursday, saying that the RTO’s tariff appeared to be “unjust and unreasonable” based on the ability of sellers with market power to avoid parameter-limited offers when they should be subject to mitigation (EL21-78).

The commission said it made its preliminary finding that the tariff is “not adequately mitigating against the potential exercise of market power” based on information in the Independent Market Monitor’s 2020 PJM State of the Market Report; the Monitor’s protests of several market-based rate applications; and a PJM proposal to allow sellers to change their unit-specific parameter limits in real time. The commission rejected the RTO’s proposal last month (ER21-1591).

Offers in PJM’s energy market include economic components (price-megawatt pairs, start-up costs and no-load costs) and operating parameters (including notification time, start-up time and minimum run time).

FERC said it was concerned the tariff provisions dictating how PJM determines which offer is least cost are not just and reasonable because the tariff requires the RTO to commit and dispatch resources based on a lowest cost offer rather than selecting the resource offer with the lowest total cost among the parameter-limited offers.

“Sellers may be able to structure their market-based parameter-limited offer strategically to ensure that PJM chooses the market-based offer, which is not subject to parameter limits,” the commission said. “This undermines the purpose of parameter-limited offers, which is to ensure sellers are not able to exercise market power through the use of inflexible operating parameters.”

The commission also said the tariff appeared to lack provisions governing what happens if a seller is unable to meet its unit-specific parameters in real time. It said the tariff outlines “specific processes for exceptions requested in advance of the real-time market,” but it is not clear as to how to “treat sellers who are unable to meet their resource’s unit-specific parameters in real time.”

“While PJM needs accurate, timely information on resources’ operating capabilities, without a clear process for assessing changes to parameter-limited schedules in real time, PJM’s tariff may not adequately mitigate the potential for sellers to submit real-time values to exercise market power,” FERC said.

PJM was directed to show cause as to why its tariff remains just and reasonable or explain what tariff changes would fix the commission’s concerns within 90 days. Interested stakeholders were instructed to respond within 30 days of PJM’s filing.

Monitor Challenge

In its 2020 report, the Monitor said the current implementation of market power mitigation is “not consistent with the purpose of having parameter-limited offers, which is to prevent the use of inflexible parameters to exercise market power.”

Analysis done by the Monitor found that resources failing the three-pivotal-supplier (TPS) test in the day-ahead market were mitigated to market-based offers that were “less flexible than their cost-based offers in 30.3% of hours in 2020 during nonemergency conditions and less flexible than their parameter-limited market-based offers in 34.5% of hours in 2020 during emergency conditions.”

The IMM recommended that PJM always enforce parameter-limited values by “committing resources only on parameter-limited schedules when the TPS test is failed or during high load conditions such as cold and hot weather alerts or more severe emergencies.”

During FERC’s open meeting Thursday, Chair Richard Glick said the Monitor has argued several times in the past that PJM’s rules regarding parameter-limited scheduling enables generators with market power to successfully raise costs. Glick said the show-cause order “concludes that well may be the case.”

“I’m pleased that we’re finally taking a look at this issue,” Glick said. “As I have previously said, much of our regulatory framework depends on the existence of competitive markets. That depends on FERC aggressively overseeing the markets to ensure that those who have market power aren’t able to disrupt the competitiveness of the market. Today’s order is another step in that direction.”

Thursday’s order was the second time this year that FERC has questioned PJM’s protections against market power. In March, the commission ordered PJM to revise its market seller offer cap (MSOC), siding with the arguments made in separate complaints filed in 2019 by the IMM and several consumer advocate groups (EL19-47). The Monitor said the MSOC has been inflated by the “unreasonable and unsupported” expectation of 30 performance assessment hours annually. (See FERC Backs PJM IMM on Market Power Claim.)