(May 3, 2013) — The Federal Energy Regulatory Commission yesterday handed PJM a split decision on disputed changes to its Minimum Offer Price Rule (MOPR), allowing the RTO to exempt two categories of resources but denying its request to eliminate its current unit-specific review (ER13-535).

In a unanimous decision, the commission approved PJM’s request to exempt certain self-supply and competitive entry resources from the unit-specific review. But it said eliminating the review for generators that don’t meet the exemptions was not just and reasonable.

“… We find that there may be resources that have lower competitive costs than the default offer floor, and these resources should have the opportunity to demonstrate their competitive entry costs,” the commission wrote. “In the base residual auction for 2012, resources that likely would not have qualified for either of PJM’s proposed exemptions were able to justify their net costs through the unit-specific review process.”

The commission also:

• Rejected PJM’s request to extend mitigation from one to three years for units that fail the MOPR review.
• Approved PJM’s proposed increase of its threshold for applying MOPR mitigation to 100% of the net Cost of New Entry (CONE) from the previous 90%.
• Approved an expansion of the MOPR review to the entire RTO from constrained Locational Deliverability Areas.
• Accepted PJM’s request to limit MOPR review to gas-fired combustion turbines, combined cycle and integrated gasification combined cycle (IGCC) units.
• Rejected complaints that PJM’s process for approving the MOPR changes — which included negotiations between generators and load-serving entities to which consumer advocates and state regulators were not invited — meetings violated its Code of Conduct.

“By targeting those resources most likely to raise price suppression concerns (i.e., gas-fired resources), adopting exemptions for competitive entry and self-supply, and retaining the unit-specific review process for resources not eligible for the exemptions, we find that the MOPR as modified herein appropriately balances the need for mitigation of buyer-side market power against the risk of over-mitigation,” the commission wrote.

Regulators’ Reaction

Regulators in Maryland and New Jersey praised FERC for maintaining the unit-specific review.

“Rather than compete based on actual costs, incumbent generators enlisted PJM to try to rewrite the MOPR rules,” Bob Hanna, president of the New Jersey Board of Public Utilities, told PJM Insider. “FERC saw through their brazen attempt to saddle ratepayers with additional costs.  This is an important win for residents and businesses in New Jersey.”

Kimberly Frank, an attorney representing the Maryland Public Service Commission, said she was “hopeful that FERC’s order will provide competitive opportunities for all new entrants, but there is further work to be done.”

Representatives of generators did not immediately respond to requests for comment.

MOPR’s Creation 

MOPR was added to PJM’s capacity market rules — known as the Reliability Pricing Model (RPM) — in 2006 to prevent buyer-side market power.

Large net-buyers —those that buy more capacity from the market than they sell — can offer capacity at suppressed prices in an attempt to reduce the clearing price in PJM’s capacity auction. The strategy reduces the buyer’s overall costs as long as savings from the reduced clearing price exceeds its losses from selling capacity below-cost.

The commission said yesterday that such strategies — in addition to cutting generators’ revenues — are ultimately shortsighted for load as well.

“Ultimately, this strategy will prove more costly as existing generators become unable to recover their costs and therefore choose to exit the market, thus tightening capacity and raising prices,” the commission said. “Similarly, new merchant generators will be reluctant to enter a market in which their expected prices are susceptible to such reduction.”

Previous Rulings

The Commission issued several orders on MOPR between 2008 and 2011. In the 2011 case, generators challenged plans by the states of New Jersey and Maryland to procure 2,000 MW and 1,800 MW, respectively, of new generation to be bid into PJM’s capacity market auction at non-competitive prices.

As a result of the 2011 case, the IMM and PJM created a process for reviewing cost justifications submitted by generators that bid below the net Cost of New Entry.

PJM said some of its members called for changes to MOPR after its May 2012 capacity auction, in which several offers made by new gas-fired, new entry projects managed to clear with capacity price assurances from states. PJM said the 2012 results indicated the unit-specific review lacked transparency, including a lack of objective standards for reviewing sell offers. As a result, PJM said, state initiatives to subsidize new generation were interfering with the ability of the capacity market to send competitive price signals.

Based on recommendations from a report by The Brattle Group, PJM proposed eliminating the review process and instead creating MOPR exemptions for two types of resources:

• Winners of competitive, non-discriminatory requests for proposals that are open to both new and existing resources; and
• Self-supply resources bid into the auction by vertically-integrated LSEs that are:
  • not substantially “net-short” in the RPM; and
  • a resource if the owner (and its contractual counter-party, if relevant) are not substantially net-long in RPM and, as a result, would not benefit from depressed capacity prices.

Competitive-Entry Exemption

New resources built by a state regulated utility would not qualify for the exemption if their costs were recovered from ratepayers through a non-bypassable charge or if the resource received a state subsidy contingent on the resource clearing in the RPM.

A resource obtained through a state procurement process could qualify if the process had objective and transparent requirements and did not give preference to new resources over existing ones or restrict the type of resource that may participate.

Consumer advocates and regulators from Maryland and New Jersey contested the latter requirement, saying states should have the right to select capacity based on fuel diversity, environmental benefits or economic development.

The commission approved the exemption, agreeing that it would remove an “unnecessary barrier to entry.”

It rejected arguments that a procurement process should not be considered uncompetitive for being limited to new resources only.  “An RFP process available only to new resources is discriminatory and will not necessarily procure the lowest cost resources,” the commission ruled. “… Allowing such a resource to bid into RPM as a price taker would violate the intent of the MOPR to protect against the exercise of buyer-side market power.”

But the commission rejected PJM’s proposal that resources petition for FERC certification that the RFPs in which they were selected were competitive and non-discriminatory. The commission said that review should be done initially by PJM and its market monitor. Parties unhappy with the RTO determination can seek commission review.

Self-Supply Exemption

Based on data from the 2012 base residual auction (BRA), PJM proposed a set of net-short and net-long thresholds for eligibility under the self-supply exemption. (See  Thresholds for Self-Supply Resources Eligible for Exemption.)

The commission rejected complaints by consumer advocates and the New Jersey Board of Public Utilities that the self-supply exemption discriminates against restructured states by allowing regulators in traditional cost-of-service states to require their LSEs to build a resource and offer it into the market as a price taker while not allowing a restructured state like New Jersey to do so.

While vertically-integrated utilities in traditional states don’t have incentives to bid below costs, the commission said, “The incentives for uneconomic entry in restructured states differ because, in those market structures, LSEs rely largely on the market to meet their capacity obligations.”

The commission sided with intervenors who said that the thresholds’ accuracy and utility could degrade as market conditions change. While the last BRA benefited from surplus supply that created a relatively elastic capacity supply curve, an auction with tighter supplies would see an inelastic supply curve, so that offering additional capacity below cost will reduce prices at a steeper rate.

As a result, the commission required PJM to review and revise the thresholds periodically to reflect changing market conditions and assumptions.

Unit-specific Review

FERC rejected PJM’s request to eliminate the unit-specific review, saying that some units that fail to qualify for either of the two categorical exemptions may still be able to justify costs below PJM’s CONE threshold.

The commission urged PJM and its stakeholders to consider changing the unit-specific review to incorporate common modeling assumptions for establishing unit-specific offer floors and improvements in the calculation of Net CONE.

Resources Subject to MOPR

The commission approved PJM’s request to limit the MOPR to gas-fired generators, saying that the low construction costs and short development times of combustion turbines and combined cycle generators make them the most capable of suppressing capacity clearing prices. It required PJM to clarify whether cogeneration and combined heat and power facilities are eligible for exemption, even when they receive state and federal incentives.

The commission found, however, that PJM failed to justify limiting the MOPR exemption for Qualifying Facilities (QFs) to those owned by a capacity market seller. The commission ordered PJM provide further justification or modify its tariff to allow the exemption of QFs under contract to capacity market sellers.

PJM also was ordered to define “repowering” to clarify whether it includes both projects that increase capacity and those that don’t. PJM proposed that repowered gas generators be treated as a new resource under MOPR.

Net CONE Percentage Factors

FERC approved PJM’s proposal to raise the trigger initiating mitigation under MOPR from 90% of Net CONE to 100%.

PJM said that sparing sellers from the administrative burdens of the unit-specific process justified eliminating the 10% tolerance.

In addition, the commission “strongly encourage[d]” PJM to begin a stakeholder process to improve techniques for calculating Net CONE.

Mitigation Period

As it had done in its 2011 ruling, the commission again rejected a PJM proposal to increase MOPR mitigation from one to three years.

The commission said it agreed with the Maryland Public Service Commission that such a change could lead to “over-mitigation” by requiring resources to bid substantially above its costs. “The narrowed application of the MOPR to those deemed more likely to present price suppression concerns does not justify an unreasonably prolonged mitigation term,” the commission ruled.

Geographic Scope

The commission approved PJM’s proposal to expand the scope of MOPR — previously limited to constrained Locational Deliverability Areas — to the entire RTO.  The commission said it agreed “that the potential for the exercise of market power exists throughout the PJM region” and said the two categorical exemptions ensured that the larger geographic scope was unlikely to lead to over-mitigation.

Stakeholder Review

The commission rejected complaints that the stakeholder process that led to PJM’s MOPR filing warranted invalidating the filing.

Consumer advocates and state regulators in Maryland and New Jersey were outraged to learn that PJM and the market monitor had participated in confidential settlement negotiations among seven generating companies and five load-serving entities between July and September 2012. The resulting settlement was brought before the full membership in October and November, when it was ultimately approved by an 89% sector-weighted vote.

Kimberly Frank, the attorney for the Maryland PSC said FERC “missed an opportunity to call attention to the importance of an open, transparent, and fair RTO stakeholder process for all participants.  The process followed in this instance disregarded these fundamental principles and the proposal never should have been presented to FERC in these circumstances.”