February 25, 2024
FERC Rejects Changes to PJM Capacity Performance Penalties
PJM Board Chair Mark Takahashi
PJM Board Chair Mark Takahashi | © RTO Insider LLC
FERC has rejected a PJM proposal to rework the role of performance penalties in its capacity market and how the associated risks can be reflected in seller offers.

FERC on Feb. 6 rejected a PJM proposal to rework the role of performance penalties in its capacity market and how the associated risks can be reflected in seller offers (ER24-98).

The filing was one of two the RTO made in October after the conclusion of the Critical Issue Fast Path (CIFP) process, largely focused on market issues highlighted by December 2022’s Winter Storm Elliott and PJM’s February 2023 “4R’s Report.” The commission approved the second filing last week, greenlighting changes to how PJM measures reliabilities risks, accredits capacity resources and verifies generators’ ability to operate throughout the delivery year (ER24-99). (See FERC Approves 1st PJM Proposal out of CIFP.)

In splitting the changes the Board of Managers sought to make after the CIFP process into two filings, PJM Senior Counsel Chen Lu said staff sought to ensure that components that relied on each other were accepted or rejected as a package and to avoid potentially riskier elements from sinking the entire proposal.

At the heart of the filing was how market sellers can represent the risks they face in taking on a capacity obligation through the Capacity Performance quantified risk (CPQR) component of their capacity offers; how those values are reviewed by the Independent Market Monitor and PJM; and under what circumstances generators can be assigned penalties for underperforming or receive bonuses for overperforming.

During the Market Implementation Committee’s meeting Feb. 7, PJM’s Skyler Marzewski said the RTO does not plan to seek a delay of the 2025/26 Base Residual Auction scheduled to be conducted in June. Both CIFP filings were intended to be effective for the auction, and Marzewksi laid out a timeline for when PJM plans to seek endorsement of several manual changes to implement the proposal approved in ER24-99.

FERC’s Order

FERC said that PJM had not provided enough detail around how it planned to implement the changes and sought to give the RTO guidance on changes that might be beneficial if it sought to refile the proposal.

In rejecting PJM’s plan to largely redefine the market seller offer cap (MSOC) based on CPQR and costs incurred to avoid those risks, FERC said that the proposal failed to define what qualifies as the sort of incremental cost that a generator could include in its offer versus actions that generation owners would have taken in the absence of a capacity commitment.

“PJM does not include in its pleadings or proposed tariff provisions a defining principle to identify and differentiate costs incurred only in the absence of a capacity obligation compared to costs incurred in whole or in part for some other purpose, such as to enhance EAS [energy and ancillary services] revenues,” the commission wrote. “PJM’s proposal seems to require PJM to employ a subjective assessment as to the intentions underlying complex investment decisions of sellers participating in a variety of markets, i.e., the capacity, energy and ancillary services markets, and bilateral transactions.”

The commission also said it saw merit in PJM’s proposal to create a standardized calculation for CPQR that incorporates unit-specific parameters that market sellers could accept or substitute with their own determination. But without FERC, the Independent Market Monitor and stakeholders having access to the proprietary model it sought to utilize, it would not be possible to understand what a valid CPQR value would be, it said.

“Though we have found that PJM has not provided sufficient detail to understand how the model components would be implemented in its proposed standardized CPQR formula, using a probabilistic model with unit-specific data would ensure a CPQR value that is specific to that resource and its risk profile,” FERC said.

PJM sought to provide more certainty of the costs that market participants could include in their CPQR submissions by introducing a third-party review process where sellers could include a review by a qualified, independent party and include that as documentation in support of their submissions. The commission found that the existing tariff language already supports that process and that the proposal would create a requirement that PJM and the Monitor accept the results of that outside review. FERC also raised questions of how PJM would define the qualifications that the third party must possess and how to ensure independence from the market seller whose offer it is reviewing.

“In other words, it would require PJM to automatically accept any third-party consultant justification regardless of reasonableness. We find that such a requirement would not be just and reasonable because it would delegate responsibility that belongs to PJM and the Market Monitor to third parties. The commission has found it is inconsistent with the principles of mitigation to allow sellers with market power to determine their own costs without review.”

PJM CEO Manu Asthana | © RTO Insider LLC

FERC rejected PJM’s proposal to allow it to calculate an alternative MSOC using the information submitted by the market seller if the RTO determined that the one submitted after the review process conducted by the Monitor did not conform to the tariff. The tariff only empowers PJM to accept or reject the offer cap submitted by market sellers, which the RTO argued leaves its hands tied when it agrees with parts of an offer, but not the entirety.

The Monitor argued that granting PJM the ability to calculate its own offer cap would impinge on its prerogative in reviewing offers for market power, a position the commission cited in denying the filing. FERC pointed to Order 719 in finding that external monitors have the expertise and means to identify and mitigate market power and provides them with the sole authority to make market power determinations.

“We share commenters’ concerns that under PJM’s proposal, the Market Monitor would not be able to provide meaningful feedback because PJM would replace the Market Monitor’s role in calculating offer caps, which could undermine the Market Monitor’s duty to ensure competitive markets,” it said.

The proposal also would have created a new exception generation owners could claim to avoid being assigned Capacity Performance (CP) penalties by exempting generators not dispatched during a performance assessment interval (PAI) on a market-based offer that exceeded their cost-based offer. PJM argued that resources following dispatch instructions should not be penalized, but the commission sided with protests arguing that the change would allow generators to avoid being subject to CP by submitting offers that are unlikely to be committed.

“We agree with the Market Monitor that, with respect to nonperformance charges, there is no meaningful difference between resources that choose to submit market-based offers using relatively less flexible parameters than their cost-based offer or market-based parameter-limited offer, and those that choose to submit market-based offers using relatively higher economic parameters than their cost-based offers. Both strategies would constitute a capacity resource failing to meet its obligation to perform during an emergency and, therefore, require appropriate penalties,” the commission wrote.

FERC also rejected PJM’s proposal to limit eligibility for CP bonus payments, which are paid out from the pool of penalties collected following PAIs, to committed capacity resources. It pointed to comments from the PJM Industrial Customer Coalition, which said that about 40% of the overperformance seen during Winter Storm Elliott came from market sellers lacking a capacity commitment. Making such resources ineligible would remove an incentive for all resources to be prepared to operate during emergencies and limit the solutions available to maintain reliability during stressed system conditions.

Clements Partially Dissents

In a partial dissent, Commissioner Allison Clements said she agreed with the bulk of the order but disputed the majority’s reading of Order 719 in relation to PJM’s proposal.

Rather than making market power determinations, she said that the changes would have given PJM flexibility in considering whether an offer complies with the tariff, arguing that the “Monitor plays an important but circumscribed and advisory role under PJM’s offer cap rules.”

FERC Commissioner Allison Clements | © RTO Insider LLC

Clements also disagreed with the majority in rejecting PJM’s request to eliminate the physical replacement option for fixed resource requirement (FRR) entities that underperform. Instead of incurring financial penalties, such entities can choose to procure additional capacity for one year. PJM argued the option lacks the teeth of immediate financial penalties by deferring the costs and results in a smaller economic impact.

Clements wrote that PJM’s difficulty incentivizing resources to perform during extreme weather makes it reasonable to create FRR penalties that are more in line with those used in the Reliability Pricing Model.

Capacity MarketPJM

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