FERC on Friday clarified that its Dec. 22 order on remand partially reversing a May 2020 decision on PJM’s proposed energy price formation revisions did not remove the RTO’s reserve price caps (EL19-58).
On remand from the D.C. Circuit Court of Appeals in December, the commission 3-1 reaffirmed its previous decision directing PJM to consolidate its tier 1 and tier 2 reserve products, but it said it had erred in its approval of changes to the shape of the RTO’s operating reserve demand curve (ORDC), requiring tariff and Operating Agreement revisions within 60 days. (See FERC Reverses Itself on PJM Reserve Market Changes.)
PJM uses an ORDC and transmission constraint penalty factors to establish LMPs. Under its current rules, the maximum price the energy component of an LMP can reach is $3,750/MWh. But the “downward sloping” ORDC, approved by FERC in May 2020, allowed the RTO’s LMPs to reach or exceed $12,050/MWh in cases of extreme reserve shortages.
PJM Request
PJM requested FERC action by Feb. 11 so that it could reflect the commission’s clarification regarding how it should address the reserve price caps in its scheduled Feb. 22 compliance filing. It specifically requested clarification as to whether the remand order retained the May 2020 order’s acceptance of the removal of price caps in the reserve markets, or that it should maintain the price caps.
The RTO said in its filing that it would include tariff provisions removing the reserve price caps if the commission didn’t make a clarification. It said it would include capping provisions in its compliance filing that are “consistent with its existing reserve capping provisions but reflect the addition of a new 30-minute reserve requirement.”
It also said that its footprint will have five reserve requirements with the proposed reserve market changes. Without the price capping provisions, PJM said, the maximum energy component of the LMP could reach approximately $6,250/MWh, a price equal to the sum of the $2,000/MWh energy offer cap and five $850/MWh reserve penalty factors.
“PJM states that the removal or continuation of the price capping provisions has implications on the reserve market clearing prices and energy prices,” the commission said in its order last week. “PJM explains that when a reserve zone or sub-zone is short on reserves, the reserve and energy market clearing prices will reflect the need for additional reserves, where the maximum willingness to pay to meet any reserve requirement in any location, independent of the other reserve requirements, is the reserve penalty factor.”
The commission said that while its December remand order didn’t “explicitly address” the current reserve price caps, it directed the RTO to maintain its currently effective reserve penalty factors. FERC said PJM didn’t specifically allege that the reserve price caps are unjust and unreasonable, but rather “proposed only to remove the reserve price caps as part of PJM’s replacement rate.”
“While the May 2020 order accepted PJM’s proposed replacement reserve penalty factors and PJM’s proposal to remove the price caps by extension, it did not find the reserve price caps unjust and unreasonable under the currently effective ORDCs and reserve penalty factors,” FERC said. “Because the remand order reversed the determinations regarding the ORDCs and reserve penalty factors, the underlying predicate for removing the price caps no longer exists. Moreover, PJM did not present any evidence that the reserve price caps are unjust and unreasonable under its currently effective ORDC and reserve penalty factors. Accordingly, we clarify that the remand order did not remove the reserve price caps.”
Stakeholder Input
In response to PJM’s request for clarification, the PJM Load Coalition and the Independent Market Monitor both argued that FERC’s December remand order directed the RTO to maintain the current reserve price caps.
The coalition requested that the commission confirm that PJM must submit a compliance filing maintaining the current approach to the reserve penalty factors and the cap on the energy component of LMP at $3,750/MWh.
FERC said PJM’s governing documents don’t specify the latter, only the caps on prices for synchronized and non-synchronized reserves.
“Because the remand order maintained the May 2020 order’s directive that PJM adopt a new 30-minute reserve requirement and secondary reserve product, PJM may propose revised reserve price caps to reflect the addition of this new product, but we note that the commission will review PJM’s proposal with the benefit of parties’ comments submitted as part of the compliance proceeding,” FERC said.
The Monitor argued that while the overall energy and reserve price cap is not explicitly in the PJM tariff, the commission’s approval of the $850/MWh penalty factors and an overall $2,700/MWh combined energy and reserves price cap make it “clear that the cap is included in PJM’s market design.”
It also argued that the remand order did not direct PJM to increase the synchronized and primary reserve prices or the LMP to reflect the new 30-minute reserve requirement, even though it directed the RTO to implement a reserve penalty factor for the requirement.
“The IMM’s analysis of price formation during instances of reserve price capping underscores the complexity of the issue at hand and the need to develop a further record,” FERC said.
Danly Dissents
FERC Commissioner James Danly | © RTO Insider LLC
Commissioner James Danly rebuked the decision, saying the remand order had “profound and unforeseen consequences” on PJM’s market design. Danly said the “majority rushed to issue” in the remand order, discounting objections from PJM and other litigants.
“Through a tortured reading of the voluntary remand order, the majority ‘clarifies’ that the reserve price caps were not removed and admits that mere reinstatement of the reserve price caps fails to account for PJM’s new reserve product,” Danly said. “This is quite a significant ‘clarification.’”