In May 2011, the New Jersey Board of Public Utilities (BPU) stated that it “is concerned by the apparent inability of PJM’s RPM [reliability pricing model base residual auction or capacity auction] to successfully encourage new generation.”1 In April 2012, Maryland’s Public Service Commission (PSC) similarly stated, “We cannot rely on PJM’s Reliability Pricing Model to deliver new generation to Maryland.”2 In response to the states’ dissatisfaction with the level of new capacity built after implementation of the PJM Interconnection LLC (PJM) capacity auction, they enacted programs to incentivize new generation. Critics have characterized the programs as unnecessarily subsidizing certain generation, leaving others at a competitive disadvantage. These criticisms led to significant reform of the PJM capacity auction and the Minimum Offer Price Rule (MOPR). The results of the May 2012 capacity auction, where three New Jersey-mandated projects cleared despite the reforms, was viewed as encouraging by state representatives, cautiously neutral by the PJM independent market monitor (IMM), and negatively by those who argued that the results were affected by unfair subsidies. In light of these reactions, it seems reasonable to expect continued state incentives for new generation and further efforts to reform the PJM capacity auction to respond to their perceived market impacts.
Incentives and Reforms at PJM
Incentives and Reforms at PJM
Vol. 52 No. 1
By
Candice Castaneda is an associate in the Corporate Department of Paul Hastings LLP in Washington, D.C.
State Pograms. In response to concerns over a lack of capacity, New Jersey enacted the Long-Term Capacity Agreement Pilot Program (LCAPP).3 Under LCAPP, the BPU contracted for 2,000 MW of generation, through standard offer capacity agreements (SOCAs), under which the utilities are entitled to a standard payment for their facilities’ capacity so long as the resources clear the PJM Market. If the capacity payments received through the PJM capacity auction is lower than the standard price set in the SOCA, New Jersey rate payers pay the difference. Four SOCAs have been entered into with different entities, but the state continues to express concerns that more generation may be necessary. On May 16, 2011, the BPU initiated a proceeding investigating capacity procurement and transmission planning, in which BPU staff submitted a report criticizing the RPM as incentivizing continued existence of old, inefficient resources over new, efficient ones.4
In April 2012, the Maryland PSC directed three utilities to enter into a contract for differences (CFD) with CPV Maryland, LLC (CPVM), under which CPVM is to construct a 661 MW natural gas-fired combined-cycle generation plant. The generation resource must be offered on the PJM Market and clear the capacity auction to be paid under the COD. If the supplier’s revenue from the PJM capacity payments is lower than the fixed contract capacity price, the three utilities must pay the supplier the difference. If the PJM capacity payments are higher than the fixed contract price, the supplier owes the utilities the excess.5
PJM Market Reform. PJM Market participants have been concerned with the market impacts of these programs. At the Federal Energy Regulatory Commission (FERC), the PJM power providers group (P3) submitted a complaint asserting that the PJM MOPR needed reform in light of the New Jersey and Maryland programs. On February 11, 2011, in response to these concerns, PJM filed revisions to its open access transmission. In a series of orders issued between 2011 and 2012, FERC approved the PJM tariff revisions, as modified.6 Key reforms and clarifications included the following:
- Updating the MOPR reference values as they relate to gross cost of new entry (CONE), revenue requirements, tracking changes to construction costs, energy, and ancillary service revenue offsets, recognizing locational differences in capital costs, and replacing PJM’s real levelized model with a nominal levelized model.
- Raising the MOPR conduct screen from 80 percent to 90 percent. A sell offer is mitigated if it is within 90 percent of net CONE.
- Eliminating the previously existing exemption for any planned resource being developed in response to a state mandate to resolve capacity shortfalls.
- Implementing a process under which entities could submit a sell offer to the IMM for review, with a right to seek PJM’s review if the IMM’s findings were adverse.
- Clarifying that PJM should not require generators to use the nominal levelized cost recovery methodology in the unit specific review, and that entities may provide specific data to justify a cost-based offer lower than the MOPR floor.
- Applying the MOPR only to resources that have not yet cleared the PJM Market. FERC stated “we conclude that clearing in one auction, . . . and committing to provide capacity for a full year, reasonably demonstrates that a new resource is needed by the market at a price near its full cost of entry and that it is reasonable not to subsequently apply the MOPR to such a resource.”
The Capacity Auction after Reform. These last two clarifications in the MOPR reform orders were seen as a saving grace by the BPU, who stated that it “provides the potential for relief from a stifling MOPR application that could strand new capacity by forcing price offers above the levels of resource clearing prices.”7 Others viewed them as providing a dangerous loophole to the MOPR. In May 2012, prior to the PJM capacity auction, four IMM and PJM members filed complaints against an unnamed participant with a contract under the state programs in FERC Docket No. EL12-66 and Docket No. EL12-63. The IMM stated that the participant submitted a unit-specific offer price relying on nonmarket revenues from a state procurement process, using levelized net revenues, residual value, and exclusion of sunken costs as modeling assumptions. The IMM argued that entities should not be able to seek unit-specific costs below MOPR by relying on nonmarket payments. After the PJM capacity auction was held, however, the IMM and PJM complainants withdrew their complaints as moot, as the IMM determined there was no current danger to the markets. Nonetheless, the IMM in its notice of withdrawal in Docket No. EL12-63 stated that it was working with PJM to address issues with the unit-specific offer process before the 2013 capacity auction.
In the 2012 PJM capacity auction, three of New Jersey’s four LCAPP projects cleared. New Jersey’s director of the Division of the Rate Counsel, noted that not all of the LCAPP projects cleared the auction. However, critics of the state programs argued that the projects with state contracts had unfair advantages. GenOn Energy, Inc.’s CEO Edward Muller, for example, stated that although it did participate, the market was manipulated by the state sponsored projects “get[ting] rich capacity payments . . . and then bid[ding] in the RPM auction at substantially lower prices.” Muller added that the company is pursuing bright-line tests for MOPR.8
Conclusion. Significant reform of the PJM Market’s capacity auction has already resulted from New Jersey’s LCAPP and Maryland’s Contract for Differences programs. These state efforts to incentivize generation are seen by their state commissions as key towards ensuring necessary capacity. Opponents view the programs as disruptive subsidies. Regardless, however, of whether these state programs are incentivizing or disruptive, it seems likely that further reform to the PJM RPM to mitigate the perceived dangers of the state programs will likely be filed before the next capacity auction.
Endnotes
1. NJ Bd. of Pub. Util., Docket No. EO 11050309, I/M/O the Board’s Investigation of Capacity Procurement and Transmission Planning, 5 (May 16, 2011).
2. Pub. Serv. Comm’n of Md., Case No. 9214, I/M/O Whether New Generating Facilities Are Needed to Meet Long-Term Demand for Standard Offer Service, 22 (April 12, 2012) (“Maryland COD Order”).
3. Codified at N.J.S.A., 48:3-51, 48:3-98.3-98.4.
4. BPU Staff Report, Docket No. Eo 11050309, at 5 (Dec. 14, 2011) ( “BPU Staff Report”).
5. Maryland COD Order, at 4–5, 18–23, 29.
6. PJM Interconnection, L.L.C. submits tariff filing per 35.13(a)(2)(iii: MOPR Reform, Docket No. ER11-2875-000 (filed Feb. 11, 2011). Accepted in PJM Interconnection, LLC, 135 FERC ¶ 61,022, order granting reh’g for further consid. and estab. tech. conf., 135 FERC ¶ 61,228 (“MOPR Order I”), order on reh’g and tech. conf., 137 FERC ¶ 61,145 (2011) (“MOPR Order II), order rej. clarif., 138 FERC ¶ 61,160, order on reh’g, 138 FERC ¶ 61,194, order on compl. filing, 139 FERC ¶ 61,011, order accepting compl. filing, 140 FERC ¶ 61,123 (2012) (together, the “MOPR Reform Orders”).
7. BPU Staff Report at 25.
8. Dan Testa, GenOn CEO blasts market ‘manipulation’ from PJM rule, other participants feel impacts, SNL FERC Power Report (Aug. 15, 2012).
