Five PJM states suggest FERC order could prompt exit from regional market

At least five large states raised the prospect January 21 of pulling out from PJM Interconnection or the grid operator's capacity markets as a result of recent changes imposed by the Federal Energy Regulatory Commission, the latest fallout from FERC's December 19 decision to dramatically expand a price floor used in PJM capacity markets.

In filings on January 21 asking FERC to rehear the order, regulators from Maryland, Ohio, New Jersey, Illinois and Pennsylvania all suggested that FERC's decision, unless changed, could cause them or other states to exit PJM or its capacity market.

Importantly, none made immediate threats to do so. Some states were relatively direct in raising the exit possibilities, while others were less so.

In general, protesting states said FERC cast far too wide a net in expanding the price floor to prevent state-subsidized renewables and nuclear plants from making low-ball offers in PJM's capacity auction, thus depressing clearing prices and revenues to generators. The auctions are designed to incentivize generators to build plants or maintain marginal ones to bolster reliability across PJM's 13-state Mid-Atlantic and eastern Midwest grid.

As a practical matter, departing PJM or its capacity markets would require states to direct their regulated distribution utilities to do so. Those load-serving utilities currently are required by FERC to participate in PJM's annual capacity auctions, in which they buy future supply commitments from generators to ensure they can meet projected demand.

Pulling the utilities out of the capacity market would force the states to develop new programs for ensuring adequate generating capacity to serve their customers in future years. It would also drain PJM's capacity market of demand, potentially crippling it.

FERC's order also drew complaints from utilities that said the commission was wrongly classifying many of their plants as subsidized and thus subject to the price floor. For example, while Virginia regulators did not file for rehearing Tuesday, Dominion—the state's largest utility—did. Like other critics of the order, Richmond-based Dominion said FERC's definition of subsidized plants subject to price floors was overly broad.

"If the commission does not narrow the definition, it will prove unworkable," the utility said.

Although FERC's order defines subsidies broadly, the commission's action is aimed mainly at zero-carbon renewables and nuclear plants that states are supporting to combat climate change and meet green energy deployment targets.

FERC's order targets those state-backed plants by expanding a price floor currently imposed only on new gas-fired plants to cover nearly all new generation offered into PJM capacity auctions.

The expansive price floor raises the prospect that a wide range of generators will not win capacity contracts, denying them any auction revenue. Most generators want the flexibility to charge lower prices to ensure their capacity clears the auction and they secure some revenue.

Renewable power generators bitterly oppose FERC's December order along with environmental groups and FERC's only Democratic Commissioner, Richard Glick. They charge the commission is improperly interfering with states' rights under the Federal Power Act (FPA) to set their own generation mixes. The critics also say FERC's two Republican commissioners pushed through the order to aid existing fossil-fired generators that now stand to benefit from higher capacity prices—at the expense of ratepayers footing that bill.

Some states are particularly incensed by FERC's decision to eliminate a state-friendly option that would have let price-mitigated generators withdraw from PJM' s auctions and seek state payments to compensate for lost capacity revenues. To keep markets in balance, a matching amount of demand would have been withdrawn from the market.

Although FERC itself suggested the option in 2018, the commission in its December order concluded it would unacceptably distort prices, including by potentially shrinking PJM's market by spurring withdrawal of states.

Maryland's Public Service Commission (MPSC) singled out that change in Tuesday's request for rehearing, saying FERC was "effectively inviting states to exit PJM's capacity market." The commission's primary concern is that FERC's order would undermine the state's plan to move to carbon-free power generation by 2040.

The Board of Public Utilities (BPU) in New Jersey, a state with similar clean-energy goals, said states will flee PJM unless FERC makes substantial changes to the December 19 order.

If FERC "does not reverse course, state clean energy efforts will be frustrated and the PJM market will be at risk for dissolution," said the BPU in a separate January 21 filing.

The Public Utilities Commission of Ohio (PUCO) said FERC's decision will "strongly motivate states and market participants to take flight from the consequences attributed to the [December 19] order."

PUCO objects because the order would impose a price floor on nuclear plants that the state supports with clean air credits approved in legislation last year. The commission said the order also was problematic because it would impose price floors on plants receiving "stranded cost" repayments stemming from Ohio's deregulation of its power markets over the past decade.

For its part, the Illinois Commerce Commission (ICC) said FERC's decision, if left unchanged, would impermissibly force states to abandon their right to determine in-state generation mix, as guaranteed under the FPA.

"The December 19 order forces states to either leave PJM's capacity market or allow the commission and PJM to usurp the states' FPA protected role regarding capacity resources," said the ICC.

FERC's order may spur action by Illinois legislators, who have been mulling a bill that would pull Illinois utilities out of the capacity auctions and make the Illinois Power Agency responsible for procuring utilities' capacity.

Meanwhile, the Pennsylvania Public Utilities Commission said FERC's decision to expand price floors will only hasten the demise of competitive markets.

"Such efforts may result in states decoupling from capacity markets" and finding other ways to compensate generators, the state agency said. "This will only serve to thin our currently robust wholesale electricity market, in contravention of FERC's market enhancement objectives."

One of Pennsylvania's concerns is that FERC's order would undermine low-carbon plants that enjoy competitive advantage under the Regional Greenhouse Gas Initiative (RGGI), a carbon cap-and-trade program among nine Northeast and Mid-Atlantic states that Pennsylvania is preparing to join. Glick and others say that valuable credits earned through RGGI compliance efforts could be classified as a subsidy under FERC's overly broad order, making those plants subject to the new price floors.

In related news, PJM's Independent Market Monitor (IMM), a firm called Monitoring Analytics, last week urged FERC to clarify that RGGI plants do not count as subsidized under its order. The IMM said its position is that "inclusion of RGGI allowance values in unit offers is not, and does not create, a subsidy under the definition in the order."

Reprinted from The Energy Daily. For more comprehensive daily coverage of US energy policy, regulatory, and business trends from IHS Markit, visit The Energy Daily website.

Jeff Beattie is a reporter for The Energy Daily at IHS Markit.

Posted 30 January 2020.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.