The PJM Board of Managers on Tuesday rejected a stakeholder-endorsed proposal to lower the penalties for nonperformance in the RTO’s capacity market but said it would propose to FERC to redefine when a performance assessment interval (PAI) can be triggered.

The proposal endorsed by the Members Committee on May 11 would have changed the formula for the penalty rate ($3,177/MWh) and stop loss ($142,952/MW-year) to be based on capacity auction clearing prices for the locational deliverability area (LDA) the resource is in, rather than resources’ net cost of new entry (CONE). (See PJM Members Committee Approves Performance Penalty Reduction.)

It also included tightening the conditions under which PJM could declare a PAI, limiting when generators can be subject to performance charges.

In a letter to stakeholders, board Chair Mark Takahashi wrote that by only proposing changes to the PAI trigger, the RTO can align penalties with when generators’ performance is critically needed while having the best chance of the proposal being accepted by FERC for implementation in the 2023/24 and 2024/25 delivery years.

“During the quick-fix process, PJM articulated concerns that the endorsed changes to the penalty rate and stop-loss may contribute to reliability concerns absent additional paradigm enhancements such as stricter winterization, testing and fuel security requirements, due to the reduced incentive for generators to respond in emergencies,” Takahashi said.

Takahashi also noted that three letters had been written to the board arguing that the proposal would reduce the incentive for generators to perform during emergencies and potentially violated FERC’s filed-rate doctrine. PJM staff agreed, he said, having raised concerns throughout the stakeholder process about lowering penalties without adding requirements for capacity resources with the aim of ensuring reliability.

Stakeholder Reaction

Steve Lieberman, American Municipal Power’s (AMP) vice president of transmission and regulatory affairs, told RTO Insider he was disappointed the board did not side with the majority of stakeholders in supporting the proposal and instead was swayed by unsubstantiated claims that it would harm reliability. AMP brought the proposal before the Markets and Reliability Committee, where it was endorsed May 4. (See PJM MRC Endorses Proposal to Reduce Performance Penalties.)

Lieberman said AMP would not support a package that undermined reliability and noted that PJM had indicated support for LS Power’s proposal, which would have reduced the stop-loss limit to $24,659/MW-year. He said that is nearly as low as AMP’s proposal, which contained a $17,744/MW-year stop loss.

The main difference between the proposals was that the LS Power package would have retained the status quo penalty rate derived from net CONE, while AMP would have shifted to basing it off the Base Residual Auction clearing price to yield a $394/MWh rate. By keeping a high rate and reducing the stop loss, Lieberman said the LS Power proposal posed a reliability risk by potentially clustering penalties in a small number of hours, which if reached would effectively exempt generators from penalties for the remainder of the delivery year.

“Imagine a generator during a Capacity Performance event July 1 and the generator fails to perform and it accumulates all these penalties if it reaches the stop loss limit. … For the rest of the delivery year, if there’s another capacity performance event, the generator would be more or less excused from any penalties,” he said. Under the AMP proposal, reaching the stop loss would take about 45 hours of penalties, the same as the status quo, while under LS Power’s package it would take about 7.5 hours, he said.

By focusing only on the penalty triggers, Lieberman said the board missed the problem the quick-fix issue charge was meant to address: aligning penalties with the revenues generators receive from the capacity market. Under the current rules, as much as two years worth of capacity market revenue could be lost because of penalties. While he said PJM will likely pursue penalty rate and stop-loss changes through the ongoing Critical Issue Fast Path process, he said that could take years to unfold, and more immediate changes are needed.

“The reason that we went down this path around a month ago is still unaddressed,” he said. “It’s very troubling that the board is ignoring the solution and willing to kick out a fix for years.”

Marji Philips, senior vice president of wholesale market policy at LS Power, said the changes to the PAI triggers were necessary to avoid the “irrational and nontransparent” situations that arose during December 2022’s Winter Storm Elliott, during which generators were subject to penalties while LMPs were low and PJM was exporting.

LS Power initially brought the issue charge and problem statement before stakeholders through the quick-fix process but revised it based on PJM feedback. AMP’s proposal was LS Power’s as originally issued.

“You need to align the pricing with what is needed operationally, and that’s what this fix for the triggers will do,” Philips said.

While she lauded the changes to the triggers, she said more work is needed to address imbalances between the penalties and capacity market revenues. “The stop loss really needs to be fixed so there’s some balance between your capacity payment revenues.”

“PJM did the right thing, and we’re relieved to see such a swift response to such a reckless proposal,” Tom Rutigliano, senior advocate at the Natural Resources Defense Council, said in a statement. “There should not be a public bailout of bad investment decisions, and we hope FERC takes the same tack on the questions before them now. There should be a clear message to industry that you must be able to keep the promises you are paid to keep.”

Letters to the Board

In a Tuesday letter to the board hours before Takahashi’s letter was released, several environmental groups urged the board to reject the MC-endorsed proposal, saying the CP construct had preserved reliability through Elliott and reducing its penalties would undermine PJM’s markets and risk reliability as generators make decisions about how to prepare for next winter.

“In the coming months, generation owners and demand-side suppliers will make decisions on winter readiness preparations,” the groups said. “The 60% to 90% reduction in penalty rates contemplated under the May 11 proposal would be an explicit signal to reduce spending on those preparations. It would also render the capacity prices to be paid in the 2024/25 delivery year unjust and unreasonable, as they reflect the status quo level of Capacity Performance risk.”

State regulators and consumer advocates said in a May 22 letter that PJM deliberately included high penalties when it proposed CP to FERC in 2014 in order to incentivize investments to improve reliability. Stakeholders had been asked to consider changes to that paradigm through an expedited quick-fix process in under a month, they said. They noted that PJM has stated that it plans to release a report on the impact of Elliott in mid-July; without that, they cannot come to an informed decision.

“Modifying one component without an opportunity to discuss other aspects would be a mistake,” the state officials said. “It has been stated that consumers have paid billions of dollars for the enhanced reliability measures afforded by the existing Capacity Performance construct. While the stakeholder-approved proposal modifies the risks for resources, it does nothing to ensure reliability or ensure consumers are getting fair value for the overall construct.”

Several generation and transmission owners also sent a letter to the board on May 17, saying CP has encouraged investments, such as winterization or upgrades to reduce startup times, which would be undermined by the proposed penalty reductions. Introducing those changes in delivery years for which auctions have already been run would amount to retroactive ratemaking.

“To provide adequate incentives for performance during emergencies, PJM imposed a carrot-and-stick approach, penalizing resources that failed to perform and rewarding those that exceeded expectations,” the GOs and TOs said. “The proposed penalty reductions severely mute the incentives of that framework resulting in capacity market incentives similar to those in place prior to the 2014 polar vortex events. … However, as a result of Winter Storm Elliott and the penalties assessed to generators for failure to perform, some stakeholders are now seeking to shift resource performance risk back to retail and wholesale suppliers and customers who have little ability to manage that risk.”