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FERC, CFTC, and State Energy Law Developments

The Federal Energy Regulatory Commission (FERC) on December 19, 2019, directed PJM Interconnection to extend its minimum offer price rule (MOPR) from new natural gas–fired electric generators to also cover any generator that receives or is entitled to receive certain types of state subsidies. The rule aims at preserving competitive capacity auctions by preventing resources that receive subsidies from submitting bids that would otherwise be uneconomical—and therefore likely to “capture” a PJM capacity award based on a below-market capacity rate—if not for state support. The order means that existing or planned resources that expected to clear capacity markets with rates made economical by state subsidies will have to identify alternate strategies to generate revenue; so too will states seeking to promote the development or prevent the retirement of preferred but noncompetitive resources.

Background

PJM operates the largest competitive wholesale market in the country and must ensure its system maintains sufficient generating capacity. PJM pays electric resources for providing electric capacity, granting capacity payments to eligible resources—typically, resources that can be dispatched when needed—that clear a competitive auction covering a multiyear forward period. The clearing price represents the minimum bid at which generators have promised to provide capacity to the PJM market for the duration of the award. These capacity payments exist separately from payments to generators for actual energy delivered, which is separately priced on an hourly basis (and is not affected directly by FERC’s PJM MOPR order). PJM’s MOPR sets a floor price for bids into the capacity market, avoiding market distortion by preventing resources from bidding artificially low prices to clear the capacity market. Previously, the MOPR only applied to newly constructed natural gas resources, and required those resources either to offer capacity at or above the net cost of new entry or to undergo a unit-specific review to justify their offer price. This permitted zero-priced bids by nuclear, coal, combined cycle, wind, solar, and hydroelectric resources.

The creation of a competitive wholesale electric market and low natural gas prices have subjected higher-priced resources to economic risk. States and local governments have sought with increasing frequency to mitigate risk with subsidies to resources that advance state policy goals, such as by providing credits to resources for promoting generation reliability or having low carbon emissions. These subsidies can, for example, be paid to eligible generators as part of a state-regulated retail utility’s rates, a portion of which would be directed to the state-subsidized generator. These subsidies permit noncompetitive resources to lower their bids and potentially clear the capacity auction. FERC has found that state subsidies have increased to the point of distorting price signals in the capacity market by depressing artificially the capacity market clearing price—a distortion that FERC believes could dissuade the development of the nonsubsidized resource.

FERC’s December 2019 order is the culmination of a process that began in June 2018, when FERC found PJM’s tariff to be unjust and unreasonable for failing to protect the wholesale capacity market from price distortions cause by state support for otherwise uneconomic resources. FERC found that state support had reached a point where it was distorting clearing prices and the integrity of price signals, permitting new and existing resources to submit low or zero-priced bids not reflective of their actual cost. At that time, FERC could not determine a just and reasonable basis for an expanded MOPR, and initiated a hearing, with participation from numerous stakeholders such as generators, utilities, organizations, and customers, to make such a determination.

FERC’s Direction to PJM for Expanding Its MOPR

Finding that “accommodation of state subsidy programs would have unacceptable market distorting impacts that would inhibit incentives for competitive investment,” the Commission affirmed its June 2018 finding and directed PJM to implement an “expanded MOPR with few or no exemptions” to prevent state-subsidized resources from bidding below a competitive price. FERC, however, has not required PJM to review all offers below the MOPR’s offer price floor; only the offers that implicate state subsidies are subject to scrutiny under the order.

The order requires PJM to submit within 90 days a replacement rate that retains the existing review of natural gas resources. Additionally, FERC has required PJM to extend the MOPR to both new and existing resources that receive or are eligible to receive certain out-of-market payments, i.e., state subsidies. For new resources, the default offer floor must be the net cost of new entry for the resource class. For existing resources, the floor must be the net avoidable cost rate for the resource class. FERC expressly extended the MOPR to those existing resources that are not otherwise excluded, due to state subsidies designed to prevent retirement of noncompetitive resources, such as nuclear resources. In effect, FERC’s order counteracts the ability of subsidized resources to use those subsidies to lower their capacity market offers. Subsidized resources can, however, continue to sell energy and ancillary services, and at rates that reflect state subsidization. Direct state support that enables resources to remain in service in the PJM market also is not impacted. And, FERC’s order does not extend to resources receiving federal subsidies or economic benefits, as the Commission found it lacks authority to counteract congressional actions.

The Commission has defined state subsidies for purposes of its order to include any direct or indirect payment, commission, rebate, consumer charge, subsidy, or other financial benefit that results from an action or process by a state, political subdivision, or electric cooperative that meets one of three categories:

  1. Where the subsidy derives from or connects to procurement of generation capacity to be sold at wholesale
  2. Where the subsidy supports the construction, development, or operation of a new or existing capacity resource.
  3. Broadly, where the subsidy takes any action that would allow a resource to clear a PJM capacity auction.

FERC has exempted three categories of resources: existing self-supply resources; existing demand response, storage, and energy efficiency resources; and existing renewable resources participating in renewable portfolio standard programs. Resources that do not qualify for one of these three categorical exemptions may submit below-floor bids if they can justify the rate through a unit-specific review process. FERC will also exempt new and existing resources that that are not state subsidized, apart from natural gas resources that will remain subject to an MOPR.

While the order applies only to PJM, the Commission can be expected to require other FERC-regulated, organized capacity markets to operate similarly. And as a potential hint regarding further interest in addressing state support for uneconomic resources, FERC noted that the expanded MOPR will not “solve every practical or theoretical flaw in the PJM capacity market” and that “stark divisions among stakeholders” remain.