The Federal Energy Regulatory Commission accepted a PJM Interconnection LLC proposal addressing a supply-demand mismatch in its latest capacity auction, finding that the benefits associated with changing the planning parameters of a zone after the auction outweigh the potential costs to market participants.
Commissioner James Danly issued a sharp dissent to FERC's Feb. 21 order, arguing that the majority's action runs afoul of the filed rate doctrine and will undermine confidence in all FERC-jurisdictional wholesale power markets.
But in a separate concurrence, Commissioner Mark Christie emphasized that consumers in the Delmarva Power & Light Co. capacity zone — a small local delivery area covering Delaware and the Eastern Shore regions of Maryland and Virginia — would have paid an estimated $24 per month for excess capacity without PJM's proposed fix.
The order also explained that since the auction results were never finalized and no transactions actually took place, FERC was not engaged in impermissible retroactive ratemaking.
Concurrent with the order, FERC Chairman Willie Phillips announced plans to convene a forum to examine broader questions about the future of PJM's capacity market, which is designed to keep the lights on for 65 million customers in a footprint covering all or part of 13 mid-Atlantic states.
Supply-demand mismatch
PJM holds its capacity auctions three years in advance of when power supplies will be needed. As part of its auction planning parameters, the grid operator sets downward-sloping demand curves that are intended to reflect the actual supply and demand conditions in local delivery areas.
PJM has delayed releasing the results for its capacity auction covering the 2024/2025 delivery year due to a mismatch in supply and demand in the Delmarva Power & Light delivery area, dubbed DPL-S.
The mismatch occurred when approximately 1,000 MW of planned new generation resources, which are not required to participate in capacity auctions, did not offer into the 2024/2025 auction as PJM had expected.
Due to the lack of participation, DPL-S fell short of the 1,505-MW reliability requirement PJM had calculated. According to PJM's estimates, the cost of capacity in DPL-S would clear at a price cap of $426.17/MW-day, or an amount about six times higher than the prior auction's clearing price of $69.95/MW-day, if the results of the 2024/2025 auction were allowed to take effect.
To address the issue, PJM in December 2022 submitted a pair of filings (ER23-729, EL23-19) to FERC under Section 205 and Section 206 of the Federal Power Act.
PJM's Section 205 proposal would adjust the planning parameters for DPL-S to only reflect bids from capacity resources that offered into the 2024/2025 auction. It also would establish a framework for addressing future supply-demand mismatches in smaller local delivery areas such as DPL-S. PJM's Section 206 filing gave FERC the option of crafting its own solution.
FERC approves PJM's preferred fix
In accepting PJM's Section 205 filing, FERC dismissed a range of concerns raised by competitive generation owners and industry trade groups.
NRG Energy Inc., for example, argued that PJM's proposal would prevent the capacity market from sending price signals that additional capacity is needed. FERC disagreed, citing comments in support of PJM's proposal from its independent market monitor.
"As the market monitor notes, the prices resulting from PJM's proposal will accurately reflect supply and demand and, if the prices are accurate, the market incentives will be correct and consistent with reliability needs," FERC said.
The commission also rejected an argument made by the PJM Power Providers Group that capacity sellers should be allowed to revise their offers in response to changes in the DPL-S reliability requirement. "Capacity market offers should be dictated by capacity resource costs and not by expectations of demand," FERC reasoned.
Concerns that PJM's Section 205 proposal violates the filed rate doctrine and FERC's rule against retroactive ratemaking were also shot down by the commission.
"Courts have held that changes to a rate are impermissibly retroactive only where regulated entities or customers have already transacted pursuant to the rate — i.e., where purchases or sales have occurred," FERC explained. Since capacity commitments for the 2024/2025 delivery year have yet to be awarded and no transactions have yet been consummated, FERC found that PJM's solution does not violate the filed rate doctrine or constitute retroactive ratemaking.
"Here we decide only that changes are not retroactive if applied before capacity supply obligations and the corresponding rights and obligations have been awarded," FERC said.
Finally, FERC cited the "significant benefits" of applying the proposed tariff revisions to the 2024/2025 capacity auction, including keeping consumers from being charged unnecessarily high capacity prices "that do not reflect actual reliability needs or supply and demand fundamentals."
Given its acceptance of PJM's proposal, FERC dismissed PJM's Section 206 filing as moot.
In a concurrent Feb. 21 news release, Phillips announced that FERC will convene a forum at a later date to address broader concerns with PJM's capacity market construct.
"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," FERC said in the news release.
Order draws dissent, concurrence
Danly, who has repeatedly raised concerns about retroactive ratemaking, asserted that "the precedent that the majority's order sets will undermine confidence in all FERC-jurisdictional markets — not merely the PJM capacity market — and the entire market-based rate regime."
"The one thing we cannot do is change the score after the game so that our favorite team wins," Danly said in a dissent.
But Christie, a former state utility regulatory who has often focused on ratepayer impacts of actions, noted that "real people" — namely the consumers in the Delmarva zone — may have faced up to $100 million in excess capacity costs if FERC declined to accept PJM's solution.
"In no universe would the results of PJM's most recent capacity auction applicable to the Delmarva Power & Light South local delivery area be considered just and reasonable," Christie said in a concurrence. "Nor is this outcome merely a topic for academic debate."
Christie called the forum on PJM's capacity market construct "a welcome step forward." The time and date of the forum will be announced soon, according to FERC.
In a Feb. 22 email, PJM said it will post the results of the 2024/2025 capacity auction after 4 p.m. ET on Feb. 27.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.