FERC late Tuesday approved PJM’s request to revise the reliability requirement for the DPL South zone to avoid an artificial fourfold increase in capacity prices for delivery year 2024/25, rejecting complaints that it was changing its rules retroactively (ER23-729).

PJM asked for authority to exclude planned generation capacity resources from the calculation of a locational deliverability area’s reliability requirement if the addition of such resources increases the requirement by more than 1% and the resources do not enter a sell offer into the auction.

The commission ruled that PJM’s proposal will ensure competitive outcomes that conform to the actual reliability needs and fundamentals of supply and demand.

“If we failed to act today, the rate impact of this error would be $24/month for the average customer,” Chairman Willie Phillips said in a statement. “This substantial burden would fall disproportionately on the Delmarva Peninsula, where the average weekly wage of workers is $1,170 — $168 below the national average — and whose ratepayers in Delaware, Virginia and Maryland are among the least able to absorb such dramatic bill increases. This is not only the just and reasonable outcome, it also happens to be the right thing to do.”

But acknowledging the controversy over PJM’s request, Phillips also announced the commission will hold a forum to consider potential changes to the RTO’s capacity market. “The continuing disputes and frequent complaints about how PJM operates its capacity markets from an array of stakeholders throughout the region merit a general review outside the constraints of a particular proceeding,” the commission said. The forum has not yet been scheduled.

PJM said in a release following the commission’s order that it will post the Base Residual Auction results on Feb. 27. The RTO sought the rule changes through separate Federal Power Act Section 205 and 206 filings Dec. 23, with the latter made to offer the commission expanded flexibility.

The order rejected challenges by generation owners who said the tariff change violates precedent against retroactively changing rates and sends inadequate price signals for additional capacity required for reliability. The protesters also said the change would upset transactions made based on the reliability requirement, which is published months ahead of the auction. (See Generators Oppose PJM Filing to Change Capacity Auction Parameters.)

Protesters also argued that PJM’s tariff required it to close the auction and post the results as soon as possible, granting no discretion to hold the auction open awaiting an order from FERC.

‘Mismatch’ in Capacity Resources

PJM announced Dec. 21 that it would delay the release of the 2024/25 BRA results because of a “mismatch” between the capacity resources included in the calculation of the reliability requirement for the DPL-S LDA and the resources that entered into the auction. In small zones like DPL-S — particularly one with a higher winter load that does not align with solar output — disproportionately large generators or intermittent resources can cause the reliability requirement to increase to account for the transfers needed when those units are not available. (See Capacity Auction ‘Mismatch’ Roils PJM Stakeholders.)

When those resources push the reliability requirement higher, but those generators are not entered into the auction, PJM argued, it results in an artificial inflation of capacity prices for the LDA.

This would have led to capacity prices in DPL-S being four times higher than in 2023/24. In its comments supporting PJM’s proposal, Old Dominion Electric Cooperative said the existing rules could lead to cost increases of up to $144 million, while the Maryland Office of People’s Counsel estimated it would constitute an increase of $24/month for the average consumer.

Order Sides with PJM

Contrary to challenges that PJM’s proposal ran afoul of the filed rate doctrine and rule against retroactive ratemaking, FERC said that where the rates in question are a set of procedures, those operations can be revised “at least up until that point at which the obligation is actually incurred.”

“Protesters point to no precedent in which a change to a rate or non-rate term has been determined to be retroactive before a transaction has been made pursuant to it,” the commission said.

FERC rejected a request to allow generators to alter their capacity offers in response to changes to the reliability requirement. The commission noted that PJM and its Independent Market Monitor argued that competitive capacity offers should not account for demand and so should not be affected by the reliability requirement.

Protesters also stated that changing the parameter would impact bilateral transactions made before the opening of the auction. In its protest, NRG Energy (NYSE:NRG) stated that it had made “irreversible commercial decisions,” including rejecting capacity purchase offers, because it expected the reliability requirement would produce higher prices.

The commission noted that it has rejected proposals — at the cost of significant financial hardship — to preserve the stability and predictability in the markets. In this case, however, the balance favored of PJM’s proposal, it said.

“Accordingly, weighing the totality of the evidence before us, we conclude that the benefits associated with accepting the tariff revisions for the 2024/25 BRA outweigh any disruption to settled expectations that may exist on this record,” the commission wrote.

Danly Dissents

In a lengthy dissent, Commissioner James Danly predicted that the order will be challenged and struck down by the courts. He said the majority has distorted the filed rate doctrine, precedent formed by the commission and courts and the functioning of FERC-jurisdictional markets. He argued that the commission’s order has the effect of defining the filed rate for a capacity auction to be set after RTOs have unilaterally decided they are happy with results.

Likening the commission’s approval to a casino that allows the rules to be changed after the cards are drawn, Danly said the order is a misguided attempt at protecting consumers, which will be outweighed by the costs of market dysfunction as participants and investors lose confidence.

“The house saves a bit of money on one hand, but no one ever plays blackjack at the Federal Energy Regulatory Casino again. That is this case. The only difference is that the capacity market is not a game but rather the mechanism by which we ensure sufficient generation resources are built and maintained to keep the lights on,” Danly wrote.

He pointed to an affidavit by former FERC Chair Joseph Kelliher in support of the PJM Power Providers’ protest.

“Instead, despite what … Kelliher warns in the record, the majority ‘not only ignore[s] the limits that the FPA places upon it but also upwards of 100 years of court precedent’ by approving a plainly retroactive rate change that will almost certainly be overturned by the appellate courts in ‘a stinging and embarrassing court defeat,’” Danly wrote.

Christie Applauds Forum

Commissioner Mark Christie concurred with the order, saying that the auction’s outcome for DPL-S cannot be considered just and reasonable based on the cost estimates from PJM, ODEC and the Maryland OPC.

While he supported PJM’s proposal to fix the issue at hand, Christie said a wider discussion about the functioning of the RTO’s capacity market needs to be had and applauded the order’s announcement that a forum would be opened on the subject.

“As I wrote in my concurrence just last week to PJM’s Quadrennial Review filing, the elephant in the room must be addressed: whether PJM’s capacity market construct can still ensure sufficient power supplies to deliver reliability at just and reasonable rates,” Christie said. (See FERC Approves PJM Quadrennial Review.)

The Electric Power Supply Association slammed the ruling.

“When properly designed and administered, there is no question the competitive electricity markets deliver better outcomes than a cost-of-service monopoly model,” EPSA CEO Todd Snitchler said. “Yet this decision is another in a growing list where FERC actions undermine the workability and value proposition of markets only to then raise concerns about whether parties would be better off returning to a cost-of-service regime where, naturally, regulators would have more say over the decisions of market participants’ investments and decisions.”

“Looks like FERC will put everything on the table regarding PJM’s capacity market,” Tom Rutigliano, senior advocate for the Sustainable FERC Project, tweeted regarding the promised forum. “And it’s hard to not see this as a proxy trial for capacity markets in general.”