In a 3-2 decision that drew sharp dissent from two commissioners, the Federal Energy Regulatory Commission late Friday rejected both of PJM Interconnection's proposals to address failures in its capacity markets due to state subsidies supporting preferred generation resources.

Whether to add more renewable energy or to keep struggling emissions-free nuclear online, many states are increasingly supporting power plants that might not be economic but provide the clean energy needed to meet renewable portfolio standards and other policy goals.

State policies that support these plants are intruding into wholesale markets, ultimately depressing capacity prices, opponents argue. But a solution has been hard to come by. In March, FERC approved capacity market reforms proposed by ISO-New England, setting the stage for contentious decisions over similar proposals from other grid operators in the months to come.

FERC's order rejecting the various proposals to update PJM's capacity market exposed a commission sharply divided over several issues, including how much control states will have on their generation mixes. The decision sets PJM Interconnection on a rapid course to adjust its market to find an equitable method of incorporating all of these resources.

As renewables and cheap gas threaten not just coal plants but also nuclear facilities, how wholesale markets incorporate preferred resources could mean the difference between retirement and availability for some plants, as well as the extent of renewables development.

The decision

The commission sided with Calpine Corp. and found PJM's current tariff to be unjust and unreasonable — because it failed to mitigate the price-suppressive impacts of out-of-market payments to generators. But regulators also rejected solutions proposed by PJM and Calpine, and instead called for an expedited paper hearing to consider a fix that would include expansion of the Minimum Offer Pricing Rule (MOPR) to apply to new and existing resources that receive support.

In a paper hearing, FERC limits its reviews to the paper record. The minimum offer rule is intended to prevent the exercise of buyer-side market power and ensures resources are offered on a competitive basis. But, the argument goes, the state's out-of-market payments are distorting that offer price.

The commission rejected both proposals filed by PJM — a two-part capacity repricing scheme and revisions to the MOPR that aimed to mitigate capacity offers from new and existing resources, subject to certain proposed exemptions (MOPR-Ex). Regulators also rejected proposed interim tariff revisions proposed by Calpine to extend the MOPR to a "limited set of existing resources," but said they were unsure of the best solution.

"We are unable to determine, based on the record of either [the Calpine or PJM] proceeding, the just and reasonable rate to replace the rate in PJM’s Tariff," FERC wrote. But the commission said the problem is clear: "Over the last few years, the integrity and effectiveness of the capacity market administered by PJM ... have become untenably threatened by out-of-market payments provided or required by certain states for the purpose of supporting the entry or continued operation of preferred generation resources that may not otherwise be able to succeed in a competitive wholesale capacity market."

Commissioners Cheryl LaFleur and Richard Glick, the two Democrats on the commission, each dissented for a variety of reasons, including FERC's fundamental rejection of PJM's rates and the expedited way in which it proposes to replace them.

Expedited alternative review

The commission consolidated PJM's proposal docket with Calpine's complaint and set the proceeding for a paper hearing under Docket No. EL18-178-000. In that proceeding, stakeholders will, on an expedited basis, consider a proposed solution where PJM would modify two existing aspects of the tariff, including adjustments to the grid operator's MOPR to address price suppression.

The hearing will consider adjusting the MOPR to apply to new and existing resources that receive out-of-market payments, regardless of resource type, and the commission said it "would include few to no exemptions."

FERC's order explains that the proposal would also establish an option in PJM's tariff to allow, on a resource-specific basis, resources receiving out-of-market support to choose to be removed from the PJM capacity market,
along with a commensurate amount of load, for some period of time.

"That option, which is similar in concept to the Fixed Resource Requirement (FRR) that currently exists in the
Tariff, is referred to this order as the FRR Alternative," FERC said. "Unlike the existing FRR construct, the FRR Alternative would apply only to resources receiving out-of-market support."

Initial testimony, evidence and other filings in the paper hearing are due to the commission within 60 days of the order. Reply testimony will be due 30 days after that, with the commission working to issue an order establishing replacement rates by Jan. 4, 2019.

The schedule was one point of contention in Commissioner Glick's dissent.

"Requiring interested parties to decipher today's order, develop testimony, gather evidence, and meaningfully respond within 60 days is irresponsible," he wrote, and "essentially guarantees that PJM will not be able to work with the states to develop a proposal that aligns with state policies."

Interfering with states

Glick had plenty else to say, however, as did LaFleur.

Glick argued that the Federal Power Act is clear that state development of these generation supports is clearly within states' authority, and FERC's order is "interfering with the states’ exclusive jurisdiction."

"The state programs of which the commission disapproves are precisely the sort of actions that Congress reserved to the states when it enacted the FPA," he wrote. "The Commission’s role is not — and should not be — to exercise its authority over wholesale rates in a manner that aims to mitigate, frustrate, or otherwise limit the states’ exercise of their exclusive authority over electric generation facilities.

"As contemplated, the commission’s proposal would effectively force state-sponsored resources out of the capacity market, depriving them of a payment for capacity that they will actually provide and leaving it to the states to pick up that tab," Glick wrote.

The commissioner also sided with the argument made by several states who have proposed payments to preferred resources, that those payments are for the clean energy attributes of the energy and not the energy itself.

"The commission fundamentally misunderstands that the state policies that it targets compensate resources for their environmental attributes, not their capacity," Glick wrote in his dissent.

On Twitter, Glick was more succinct. "The commission should not use its authority to limit state efforts to address the threat of climate change," he wrote. "Doing so puts the commission on the wrong side of history in the fight against climate change."

LaFleur wrote that rather than reject PJM's MOPR-Ex proposal, she would have liked to see the commission provide guidance to PJM and its stakeholders "to further refine that concept as a workable market reform."

"I write separately primarily to explain my disagreement with the Commission's companion decision to find the PJM capacity market unjust and unreasonable and pursue a significant overhaul of that market without adequate stakeholder engagement, particularly with the states," LaFleur wrote.

LaFleur also hit on the schedule, criticizing the commission for using a 90-day paper hearing to adopt "the most sweeping changes to the PJM capacity construct since the market's inception more than a decade ago. If ultimately adopted, this proposal would fundamentally rebalance the resource adequacy responsibilities of the states, the commission, and PJM."

PJM itself struck a more upbeat tone than the dissenting regulators, saying that despite rejection of its two proposals it is "pleased that the Commission is taking action."

"The Order appears to be a positive step to change competitive electric market design while recognizing the important role states play in influencing the resource mix through retail energy policies," PJM said in a statement. "We will begin work immediately to develop the kind of bifurcated capacity construct envisioned by the Commission and actively engage stakeholders, including the states, within the timetable laid out by the Commission."