By Rich Heidorn Jr. and Michael Brooks

WASHINGTON — A top PJM official sought Monday to quell talk of an exodus from the RTO in response to FERC’s controversial order expanding the minimum offer price rule (MOPR), telling state regulators they shouldn’t lose sight of the RTO’s overall “value proposition.”

During a panel discussion at the National Association of Regulatory Utility Commissioners (NARUC) Winter Policy Summit, PJM Executive Director Asim Haque said the RTO hasn’t done an analysis on the rate impacts of FERC’s Dec. 19 order (EL16-49, EL17-178). Dissenting Commissioner Richard Glick said the MOPR expansion could add $2.4 billion in annual capacity costs.

But Haque said PJM is heartened by the Independent Market Monitor’s conclusion that the MOPR exemptions allowed for existing resources means that the order “may not have as deleterious an impact for state policy endeavors as at least initially perceived” in the short term.

Haque, a former Ohio regulator, said the order is not workable in the long term because it “needlessly frustrates state policy initiatives.” He said the RTO wants to work with stakeholders to “find that sweet spot between balancing those state policy priorities and wholesale market mechanisms.”

Haque downplayed PJM’s role as a policymaker, referring to it repeatedly as a “market administrator” and noted that FERC rejected both of its proposed options for addressing the concerns that state-subsidized resources were depressing capacity market prices.

He said discussions over whether states will leave PJM are “unnecessarily inflammatory,” noting that capacity represents less than 20% of generators’ revenues and that the RTO’s “value proposition” includes its energy and ancillary services markets, transmission planning and reliable grid operations.

“So, when you look at the … chunk that the capacity market takes up within that overall value proposition, we are talking about a portion of a portion of a portion of the overall PJM value proposition,” said Haque.

Christine Tezak, managing director of ClearView Energy Partners, agreed that states are unlikely to exit PJM altogether because of the energy market and the requirement to pay off regional transmission spending obligations. “But we think that the potential to opt out of [the capacity market] is on the table.”

She recalled FERC’s 2017 technical conference on capacity markets, where there was much discussion of “blending” state priorities with competitive market rules. (See RTO Markets at Crossroads, Hobbled FERC Ponders Options.)

“When you look at this order, there’s no blending. It is just a decision that the market comes first; everything else comes later,” Tezak continued. “If you look at this order, you start to wonder if joining PJM means that you have abdicated all resource adequacy authority.”

MOPR Contagion?

Mason Emnett, vice president of competitive market policy for Exelon, said the MOPR will push subsidized resources from the capacity market, leaving fossil fuel-fired generation as the marginal resources and threatening the future of the capacity market construct. If the expanded MOPR survives as is, he said, FERC will also apply it to ISO-NE and NYISO.

He cited the Electric Power Supply Association’s filings in January 2017 and April 2018  seeking expedited action on a complaint by the Independent Power Producers of New York over state subsidies (EL13-62). (The commission has listed the docket for action at the Feb. 20 open meeting.)

Although there is no open docket in ISO-NE, Emnett said, state commissions have asked to re-engage with the RTO on a market design accommodating state policies, with Connecticut seeking an analysis on alternatives like PJM’s FRR. (See Connecticut Weighs Pros, Cons of ISO-NE Markets.)

“If there’s a misalignment between what the states on behalf of their consumers are demanding and what the market is providing, that market does not survive,” Emnett said.

But Travis Kavulla, vice president of regulatory affairs for NRG Energy, an independent power producer (IPP), said the expanded MOPR will have little impact on renewables because of their falling costs. He noted his company’s business in ERCOT, where he said “the people who are placing bets are placing them on solar and demand response and not on combined cycle” plants. “If you were for some reason … to impose a capacity market on the state of Texas and establish some type of minimum offer price rule that will exist in PJM, those renewable resources will clear. They will be in the money.

“I think, ultimately, it’s much ado about nothing for renewables,” he said.

Tezak said the Base Residual Auction may need to shrink to its originally intended “residual” role.

“The problem is that the capacity market is mathematically perfect and politically problematic. And it has been from the beginning. It solves for too much capacity, as we’ve observed. The arguments we’re having are political in terms of: ‘What is the value of the things that aren’t included in the market?’” she said, referring to carbon emissions.

“If the capacity markets survive, I would expect them to change. And I think that we may have to come back to the conversations that we set aside [more than] a decade ago … which is, should you have varied tenors for capacity; should you have varied types of capacity?” said Tezak.

Change in Position for PJM?

Maryland Public Service Commission Chair Jason Stanek, who moderated the panel, asked Haque whether PJM’s “pretty pointed” Jan. 21 rehearing request represented a change in position by the RTO, which welcomed a new CEO, Manu Asthana, at the beginning of the year. (See PJM MOPR Rehearing Requests Pour into FERC.)

“I think it does reflect a change in the tenor of where PJM is situated,” Haque responded. “You have to understand that energy policy in the footprint is happening in the states. And it’s a trend that cannot be ignored.”

Maryland PSC Commissioner Anthony J. O’Donnell said later he wasn’t convinced that PJM has changed. “To now say, ‘We’re just the market administrator,’ I think, is a little rich, though I appreciate the change,” he said prompting laughter from other regulators. “You created this mess.”

Carbon Pricing

Most of the panelists were pessimistic at the prospects for the adoption of carbon pricing, which PJM officials have said could address state environmental concerns within a market construct. (See PJM: Carbon Pricing the Answer to Subsidy Dispute.)

“It sounds pretty straightforward in theory, until you figure that there are 14 different opinions about how it might be applied and the value each particular state … may choose to assign to it,” said Tezak, referring to PJM’s 13 states and D.C. She noted that the states in ISO-NE, which she said are more “homogeneous” on environmental policy than those in PJM, were unable to agree on a way to increase the role of carbon emissions in its markets.

A more realistic approach might be greater reliance on bilateral contracts tailored to individual states’ priorities, Tezak said.

Kavulla acknowledged the difficulty of achieving consensus on carbon pricing, saying that informed NRG’s proposal for FERC-approved, state-run clean energy procurements, “not unlike what the Southwest Power Pool has for resource adequacy, or what exists in the Western Energy Imbalance Market.”

He said a return to bilateral contracts could lead to higher prices because default energy suppliers in restructured states “are not appropriately incentivized to get the best deals. Either they’re affiliates of the people who are generation, number 1, or 2, they’re complete pass-through entities who don’t earn any margin or loss whatsoever on the power they procure.”

Emnett said Exelon, whose nuclear units receive subsidies subject to the MOPR, would support technology-neutral payments for carbon-free generation but that NRG’s proposal is unrealistic. “Instead, we’re trying to work with the states to use the tools that they do have available and avoid the harsh customer impacts of the MOPR,” he said.

Auction Timing

Emnett said Exelon agrees with the Maryland PSC that the capacity auctions should be delayed until 2021 to allow more time for the states to react to the ruling. PJM’s effective reserve margin is above 30%, he said, “so there isn’t a need for new generation at this point.”

Haque said the earliest PJM could run the next capacity auction is December 2020, after receiving an order on its compliance filing, which is due to FERC by March 18. That gives states time to explore their option to abandon the capacity market for the fixed resource requirement (FRR), he said. Delaying the auctions longer could mean default service providers will include a “risk premium” in their bids, increasing prices, Haque said.

Tezak said energy retailers also favor an earlier return to auctions because “they have no ability to forecast what their [capacity] costs are going to be.”

NRG circulated a handout that said customers in FRR markets in Ohio and Virginia have paid up to four times more for capacity than those in the rest of PJM because of reduced economies of scale. Kavulla said FRR also would result in a “re-monopolization” of the power sector that would create barriers for innovative technologies such as demand response and storage.

Changes on Rehearing, Appellate Rulings?

Tezak said her company is advising its institutional investors to exercise “caution” because of the possibility of changes in the rule on rehearing or in the appellate courts.

“There’s probably not a lot of durability to the MOPR order,” she said. “One of the things that we see as a big wild card is whether the position on self-supply, in particular, shifts. That would probably extinguish a lot of the criticism, [though] not all.” (See MOPR Ruling Threatens to Upend Self-supply Model.)

Tezak also noted that FERC has yet to act on rehearing requests on its original June 2018 order that found the existing MOPR unjust and unreasonable. “So, there could be all sorts of cascading legal weirdness that turn up that make assuming that this is as positive for the IPP community as it looks at first blush to be probably less beneficial in reality.”

Chatterjee Defends Order

In a press conference at the NARUC meetings on Tuesday, FERC Chair Neil Chatterjee defended the Dec. 19 order, which he and Commissioner Bernard McNamee supported.

Like Haque, he cited the Monitor Joe Bowring’s support for the ruling. The IMM requested clarification on some points but said the order “defines a clear, consistent and comprehensive approach to the PJM markets and to the role of subsidized resources in the markets.”

Bowring is “someone who’s very well respected in the field. Nobody would question his motivations,” Chatterjee said.

He also expressed skepticism that states will leave PJM. “Let’s see how this shakes out; let’s see how the auctions go; let’s what the impacts on these generators are before anyone makes these kinds of decisions,” he said. “I think when folks do the analysis and see what the benefits of participation in organized markets [are], I would think a state would have to think twice before losing the benefits that their consumers enjoy. …

“I know there’s a lot of focus … on tension between the states and federal regulators, but there are also a number of areas where we are continually and actively cooperating in,” Chatterjee added, listing cybersecurity, innovation, “the energy transition” and the Public Utility Regulatory Policies Act as among the topics he has discussed with state regulators at the conference.