An Overview of FERC’s Order on Rehearing and Clarification of the PJM Expanded MOPR Order

By: Emma Nicholson, Senior Project Manager

In December 2019, the Federal Energy Regulatory Commission (“FERC” or “the Commission”) issued an order[1] (“December 2019 Order”) directing the PJM Interconnection, LLC (“PJM”) to significantly expand its application of the Minimum Offer Price Rule (“MOPR”) in the PJM capacity market. The MOPR was initially created to address buyer-side market power by creating an administratively determined offer floor for certain resources in the capacity market. Over time, its purpose was expanded to address the market impacts of state support for capacity resources, such as Zero Emissions Credits for nuclear units and Renewable Energy Credits (“RECS”) for renewable facilities. FERC defined these and other out-of-market payments as a “State Subsidy.” The MOPR is designed to remove the impacts of State Subsidies from capacity resource supply offers. Since it is a price floor, applying the MOPR is expected to raise the supply offers of certain capacity resources that receive a State Subsidy and risk their ability to clear in the capacity auction.

On April 16, 2020, Concentric Energy Advisors hosted a webinar on PJM’s proposal to comply with the December 2019 Order, which PJM filed with FERC on March 18, 2020. The webinar contains more detail about FERC’s directives to PJM, including the resources the MOPR should apply to, categorical exemptions from the MOPR, and how the MOPR should be calculated. Among other things, the December 2019 Order directed PJM to apply MOPRs to all resources, new and existing, that receive or are entitled to receive a State Subsidy. FERC also created five categorical exemptions to the newly expanded MOPR[2] (“Expanded MOPR”), which exempted self-supply, renewable, demand response (“DR”), energy efficiency (“EE”), and capacity storage resources that had previously cleared the PJM capacity market or were sufficiently far enough along in the development process. FERC also re-instituted a Competitive Entry Exemption that exempts a resource from the MOPR if that resource affirms it will forego a State Subsidy it is entitled to receive.

Forty-four parties, including PJM itself, requested rehearing and clarification of the December 2019 Order on a wide range of issues. Many parties, including state entities and public utility commissions, generally argued that the Expanded MOPR impermissibly obstructs state policy objectives and raises costs to loads.[3] FERC issued an Order on Rehearing and Clarification on April 16, 2020 (“Rehearing Order”). This article provides a high-level summary of that 190-page order. This article highlights some of the essential points and clarifications the Commission made. Chairman Neil Chatterjee, Commissioner Bernard McNamee, and Commissioner James Danly voted for the Rehearing Order. Commissioner Richard Glick dissented and explained his rationale in a 54-page statement. As described below, the Rehearing Order largely denied the rehearing requests, but granted rehearing and clarification on certain issues.

Expanded MOPR does not obstruct state policy objectives

In the Rehearing Order, the Commission found FERC had the authority to expand the MOPR in a manner that attempts to strip out the impact of State Subsidies. FERC found the Expanded MOPR was necessary because FERC has a duty to protect PJM’s capacity market “from the price-suppressive effects of resources receiving out-of-market support by ensuring that such resources are not able to offer below a competitive price.”[4] FERC explained that its focus is “on ensuring that the capacity market price is reflective of competitive offers.”[5] FERC also found that the expanded MOPR, even if it raises the cost to load[6] or results in an oversupply of capacity[7] did not obstruct state policy goals because, “Nothing in the December 2019 Order forecloses states from sponsoring resources of any type, including new, renewable, or zero-emission resources.”[8]

Self-Supply will be subject to the Expanded MOPR

Several parties argued that vertically-integrated utilities and public power entities – “Self-Supply Entities” – should be exempt from the Expanded MOPR because they do not receive State Subsidies. FERC rejected these arguments and reaffirmed its finding that Self-Supply Entities should be subject to the Expanded MOPR.[9] The Commission reasoned that “Because self-supply resources have guaranteed cost recovery, they are able to offer into the capacity market below their costs and suppress prices below the competitive level… Since these self-supply resources receive State Subsidies that support the entry or continued operation of preferred generation resources, regardless of intent, we affirm our determination that these resources should be subject to the expanded MOPR, just as are other State-Subsidized Resources.”[10] The Rehearing Order also denied rehearing and clarification requests to exempt a Self-Supply Entity’s bilateral capacity contracts from the MOPR and clarified that “public power self-supply entities cannot engage in voluntary, arms-length bilateral contracts with unaffiliated third parties without triggering the MOPR.”[11] As noted above, existing self-supply resources and those sufficiently far along in the development process qualify for a categorical exemption from the MOPR, so these findings apply to new self-supply resources and self-supply bilateral capacity contracts with third parties.

State Default Service Auctions

The Order on Rehearing also denied rehearing and clarification requests to exempt state default service auctions (e.g., New Jersey Basic Generation Service Auctions) from the MOPR. The Commission found that “State default service auctions meet the definition of State Subsidy to the extent they are a payment or other financial benefit that is a result of a state-sponsored or state-mandated process and the payment or financial benefit is derived from or connected to the procurement of electricity or electric generation capacity sold at wholesale, or an attribute of the generation process for electricity or electric generation capacity sold at wholesale, or will support the construction, development, or operation of a capacity resource, or could have the effect of allowing a resource to clear in any PJM auction.”[12] FERC reasoned that if the state default service auctions were “truly competitive,” this could be demonstrated by the winning resources through the Unit-Specific process, which enables the resource to offer below the default MOPR for its resource type, or another applicable exemption.[13]

Energy Efficiency and DR will be subject to a MOPR

Several parties argued that DR and EE should be exempt from the Expanded MOPR because they do not produce energy. FERC denied these requests finding that DR and EE resources that receive subsidies should be subject to a MOPR if they offer into the capacity market because their offers impact the clearing price.[14] For EE resources, the Commission found that “Under PJM’s current rules, energy efficiency resources permanently reduce demand for electricity. Decreased demand resulting from a State Subsidy will suppress prices just as a State Subsidy to supply will suppress prices.[15]”

PJM also requested rehearing of the December 2019 Order’s requirement that PJM calculate default MOPR values for DR and EE on the grounds that PJM lacked the information to do so. FERC granted PJM’s request and required any DR and EE resources that receive State Subsidies to request a Unit-Specific Exemption and justify their unit-specific offers floors through the review process.[16] FERC directed PJM to submit a compliance filing within 45 days of issuance of the order to effectuate this directive. Like self-supply, existing DR and EE resources and those sufficiently far along in the development process qualify for a categorical exemption from the Expanded MOPR.

FERC is not an environmental regulator

Exelon argued in its rehearing request that the December 2019 Order did not sufficiently consider environmental externalities when it directed PJM to adopt the Expanded MOPR. The Commission rejected this argument and found “[t]he Commission’s express statutory authority to set just and reasonable rates does not require consideration of the climate or other externalities of particular resources. Exelon cites no precedent, and we are aware of none, interpreting FPA section 206 as requiring the Commission to consider environmental externalities.”[17] The Commission added that “When acting under FPA sections 205 and 206, the Commission operates as an economic regulator, not an environmental regulator.”[18]

Voluntary RECS

Large corporations and institutions often purchase RECs voluntarily to meet environmental goals, which are often called “voluntary RECs” and distinguished from the “compliance RECs” purchased to comply with state mandates (e.g., state Renewable Portfolio Standard). In response to requests, the Commission clarified that sales of voluntary RECs would not be considered a State Subsidy.[19] The Rehearing Order found that facilities that only sell voluntary RECs can apply for the Competitive Entry Exemption from the Expanded MOPR.

 

All views expressed by the author are solely the author’s current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The author’s views are based upon information the author considers reliable. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.

 

[1] Calpine Corp. v. PJM Interconnection, L.L.C., 169 FERC ¶ 61,239 (2019) (“December 2019 Order”).

[2] Prior to the December 2019 Order, PJM’s MOPR only applied to new natural gas resources in constrained Local Delivery Areas.

[3] The MOPR can raise costs to loads because applying the MOPR administratively raises a resource’s offer into the capacity market, which can cause the resource to not clear the auction. If this happens, loads will have to “double pay” for capacity, first with the original subsidy to the resource and then having to purchase that capacity from another resource through the PJM capacity market.

[4] Id. at P 35.

[5] Rehearing Order at P 142.

[6] “While we recognize the replacement rate could increase costs to consumers, particularly the customers in states that have chosen to enact State Subsidies, we nevertheless find the replacement rate is necessary to protect the integrity of the capacity market, which, in turn, ensures that investors will continue to be willing to develop resources to meet current and future reliability needs.” Id. at P 140.

[7] Id. at P 142.

[8] Id. at P 21.

[9] Id. at P 220.

[10] Id. at P 225.

[11] Id. at P 243.

[12] Id. at P 386.

[13] Id. at P 386.

[14] Id. at P 255.

[15] Id. at P 257.

[16] Id. at P 191.

[17] Id. at P 41.

[18] Id. at P 41.

[19] Id. at P 381.

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