On January 30, 2014, the Federal Energy Regulatory Commission (FERC) issued an order approving rule changes proposed by PJM Interconnection, L.L.C. (PJM) to the clearing of its capacity market, referred to as the Reliability Pricing Model (RPM).¹  FERC explained that PJM’s proposal was “intended to correct for the unintended adverse market and reliability impacts of certain capacity market rule changes adopted by PJM in 2011, when PJM first introduced its existing menu of demand response [DR] product alternatives.”²

The purpose of PJM’s 2011 rule changes was to accommodate the participation of DR providers in RPM auctions.  The 2011 rule changes established a minimum procurement target for the highest availability capacity product, so-called “Annual Resources.”³  The 2011 rule changes left in place the pre-existing limited DR product (renamed “Limited DR”) and added two less-limited DR products, referred to as “Extended Summer DR” and “Annual DR.”

Significantly, PJM’s 2011 rules established a floor under the higher-availability products rather than placing a ceiling on the lower-availability products.  PJM subsequently acknowledged that this decision had unintended, yet significant adverse consequences.  In particular, PJM concluded that placing a floor on the procurement of Annual Resources and Extended Summer DR effectively created a vertical demand curve for Annual Resources that imposes a cap on Annual Resources, with the result that only lower-availability products will clear once the minimum requirements for the higher-valued products are met.  PJM therefore proposed in November 2013 to revise the RPM rules to permit the more-limited resources to clear the RPM auctions only up to a pre-determined ceiling. 

FERC accepted PJM’s proposal as just and reasonable, finding it reasonable for PJM to distinguish between classes of resources when designing its capacity market rules.  FERC concluded that there is no undue discrimination when the products are not similarly situated given their markedly different availability requirements.  FERC also concluded that PJM’s proposal would help encourage the development of Annual Resources, including generation capacity, which PJM relies on to meet at least 90% of its capacity needs.