[co-author: Jessica Lynch]

PJM Interconnection, L.L.C. (“PJM”) postponed its May 2019 annual capacity auction (known as a Base Residual Auction or “BRA”) pending further FERC orders over the expansion of PJM’s Minimum Offer Price Rule (“MOPR”) to cover all resources receiving “State Subsidies.” In an October 15, 2020 order (“October 2020 Order”) addressing arguments on rehearing, PJM’s MOPR-related compliance filings, and PJM’s proposed May 2019 BRA implementation schedule, FERC largely upheld its April 16, 2020 order on rehearing (“April 2020 Order”) (see April 22, 2020 edition of the WER) of its December 19, 2019 order in which it directed PJM to apply the MOPR to all state-subsidized capacity resources (“Replacement Rate Order”) (see December 20, 2019 edition of the WER). In the October 2020 Order, FERC also largely accepted PJM’s March 2020 and June 2020 MOPR-related compliance filings; directed PJM to submit a further compliance filing on certain issues; and set aside its April 2020 Order on limited grounds.

Most notably, FERC:

• Set aside its finding in the April 2020 Order that state default service auctions meet the definition of State Subsidy, and accepted in PJM’s proposal to exclude independently evaluated, non-discriminatory, fuel-neutral, competitive state-directed default service auctions from application of the expanded MOPR;
• Directed PJM to submit a compliance filing:
  • proposing further revisions to the provisions governing which resources are eligible to elect the Competitive Exemption from the MOPR;
  • modifying its proposal regarding the gaming provisions that dictate under what circumstances a resource that elects the Competitive Exemption and then accepts a State Subsidy will forfeit its capacity revenue; and
  • modifying its tariff to provide 30 days for sellers to notify PJM of a material change in subsidy status unless such material change occurs within 30 days of the auction, in which case sellers will have five days to notify PJM of the change; and
• Granted PJM’s proposed implementation schedule for the 2019 BRA and subsequent BRAs, but found that PJM could not commence the BRA schedule until FERC has issued a subsequent order on compliance filing in another case in which FERC directed PJM to adopt operating reserve demand curves and to calculate forward looking energy and ancillary service off-sets reflecting this market rule change (“Reserves Proceeding”) (see May 28, 2020 edition of the WER).

Background

The MOPR is intended to prevent the exercise of buyer-side market power and ensure that resources are offered on a competitive basis. Prior to PJM’s delayed 2019 BRA, the MOPR applied to only new natural gas-fired combustion turbine and combined cycle resources.

In its June 29, 2018 order (“Paper Hearing Order”), however, FERC found that the MOPR rules were unjust and unreasonable because they failed to consider the impact of state subsidies on PJM’s wholesale markets. Finding that it could not adopt a replacement rate on the record before it, FERC initiated a paper hearing and directed PJM to propose an expanded MOPR to cover out-of-market support for all new and existing resources, regardless of resource type, with few to no exemptions. In July 2019, FERC issued an Order directing PJM not to conduct the 2019 BRA until after FERC issued an order on the paper hearing, establishing a replacement rate.

In the December 2019 Replacement Rate Order, FERC directed PJM to submit a revised replacement rate applying the MOPR to all new and existing resources receiving state subsidies. FERC also provided limited grandfathering for four types of capacity resources, and directed PJM to apply one effective exemption and one modification to the default offer floor. PJM submitted its filing to comply with the Replacement Rate Order on March 18, 2020 (“March 2020 Compliance Filing”).

On April 16, 2020, FERC issued two orders relating to the MOPR, including the April 2020 Order, in which it largely upheld its Replacement Rate Order. In the April 2020 Order, FERC largely denied requests for rehearing of the Replacement Rate Order, but granted limited rehearing and provided narrow clarification. FERC directed PJM to file an additional compliance filing to give effect to its rulings in the April 2020 Order, which PJM submitted on June 1, 2020 (“June 2020 Compliance Filing”).

October 2020 Order

In the October 2020 Order, FERC accepted in part, rejected in part, specified modifications to the tariff revisions proposed in PJM’s Compliance Filings, and directed PJM to submit a further Compliance Filing no later than November 16, 2020. Additionally, FERC addressed arguments raised in requests for rehearing; it largely reached the same result as in the April 2020 Order, but set aside the order with respect to limited issues.

Resources Subject to the Expanded MOPR

In the Replacement Rate Order, FERC directed PJM to submit a revised replacement rate, referred to here as the “Extended MOPR,” applying the MOPR to all new and existing resources receiving state subsidies. FERC also provided limited grandfathering for four types of capacity resources, and directed PJM to apply one effective exemption and one modification to the default offer floor. In the Compliance Filings, PJM proposed tariff revisions that will apply the MOPR to Capacity Resources with a State Subsidy, while continuing to apply the pre-existing MOPR to new natural gas-fired combustion turbines and combined cycle resources. PJM also identified three other scenarios in which a capacity resource will be subject to the Extended MOPR: (i) a resource that previously received a State Subsidy and has not cleared a capacity auction since that time, regardless of whether the resource is still receiving or entitled to receive a State Subsidy; (ii) a capacity market seller that does not own the underlying generation facility, but nonetheless benefits from any State Subsidy received by the resource’s owner, including, for example, where a renewable resource sells Renewable Energy Credits (“RECs”) to one buyer and capacity rights to another; and (iii) jointly owned resources which do not allocate rights and obligations among owners pro rata based on ownership share (i.e., pari passu) and have at least one owner entitled to a State Subsidy (such resources will be known as Jointly-Owned Cross-Subsidized Capacity Resources). PJM further proposed that only the cleared portion of a New Entry Capacity Resource with State Subsidy is eligible to become a Cleared Capacity Resource with State Subsidy. Finally, PJM proposed tariff revisions related to the must-offer requirement, and specifically proposed to make clear that a resource will lose its status as a Cleared Capacity Resource with a State Subsidy if no available MW from the resource is offered into a BRA or included in a Fixed Resource Requirement (“FRR”) capacity plan at the time of the BRA. Reiterating its prior holding that only the portion of the resource receiving a State Subsidy will be subject to mitigation, FERC accepted in part and modified in part PJM’s proposed tariff revisions to apply the MOPR to all new and existing resources receiving or being entitled to receive state subsidies, and directed a further compliance filing consistent with the discussion above.

Definition of State Subsidy

In the Replacement Rate Order, FERC directed PJM to include a specific definition of State Subsidy, which PJM incorporated verbatim in the Compliance Filings. FERC accepted this aspect to the Compliance Filings. In addition, PJM proposed several programs that are categorically not State Subsidies:

General Industrial Development and Local Siting Support

FERC accepted PJM’s proposal, consistent with the Replacement Rate Order, to exclude general industrial development and local siting support form the types of support that will be treated as a State Subsidy under the Expanded MOPR. These include Generic industrial development subsidies, including payments (including payments in lieu of taxes), concessions, rebates, subsidies, or incentives designed to promote, or participation in a program, contract or other arrangement designed to incent or promote general industrial development in an area. Local siting support includes payments, concessions, rebates, subsidies or incentives designed to promote or encourage participation in a program, contract or arrangements from a county or other local government authority using criteria design to incent siting facilities in that county or locality.

State-Directed Default Service Auctions

In the April 2020 Order, FERC found that state-directed default service auctions meet the definition of State Subsidy. Several parties sought rehearing of this aspect of FERC’s order. In the Compliance Filings, PJM proposed to exclude from the definition of State Subsidy transactions or obligations associated with a state-directed default service auction where the underlying state auction is competitive and fuel-neutral. In the October 2020 Order, FERC set aside its findings in the April 2020 Order related to state-directed default service auctions. FERC found that competitive and non-discriminatory state-directed default service auctions do not require mitigation at this time. FERC therefore accepted PJM’s proposal to excluded independently evaluated, non-discriminatory, fuel-neutral, competitive state-directed default service auction from the application of the Expanded MOPR.

Bilateral Contracts with Self-Supply

In the Compliance Filings, PJM proposed to allow self-supply entities to be on the buying end of a bilateral contract without being mitigated if the transaction is: (1) one year or less or (2) long term but “the result of a competitive process that was not fuel-specific and is not used for the purpose of supporting uneconomic construction, development, or operation of the subject Capacity Resource, provided however that if the Self-Supply Entity is responsible for offering the Capacity Resource, the specified amount of installed capacity purchased by such self-supply entity shall be considered to receive a State Subsidy in the same manner, under the same conditions, and to the same extent as any other Capacity Resource of a Self-Supply Entity.” FERC accepted this aspect to the Compliance Filings, finding that under these circumstances, the payment the resource receives from the self-supply entity does not transfer the self-supply entity’s ability to offer into the capacity below cost to the other party.

FRR Revenue

PJM proposed that revenue for providing capacity as part of an FRR capacity plan or through bilateral transactions with FRR entities will not be included as a State Subsidy. FERC accepted this aspect of the Compliance Filings as consistent with the Replacement Rate Order.

Market Seller Offer Cap Provisions

In the Compliance Filings, PJM proposed to allow sellers to choose to offer at either the default offer price floor or resource-specific level determined through the Resource-Specific Exception process, regardless of the applicable market seller offer cap, to avoid a disincentive to sellers seeking a resource-specific offer price floor. PJM further proposed that, in the event it must mitigate a sell offer down to the applicable market seller offer cap, PJM would only mitigate the offer to the higher of the applicable market seller offer cap or offer price floor. FERC rejected this aspect of the Compliance Filing as outside the scope of the proceeding and the compliance directive. FERC nonetheless acknowledged PJM’s concern that sellers may be left without a valid offer in circumstances where the default or resource-specific offer floor for a resource is higher than the market seller offer cap for such a resource. FERC explained that in such a case, the resource should submit an offer using the Resource-Specific Exception process and directed PJM to revise its tariff to clarify that where the MOPR floor offer Price is higher than the applicable Market Seller Offer Cap, the Capacity Resource with State Subsidy must seek a resource-specific value determined in accordance with the resource-specific MOPR Floor Offer Price process to participate in an RPM Auction.

Self-Supply, RPS, Demand Response, Energy Efficiency, and Capacity Storage Resource Exemptions

In the April 2020 Order, FERC granted rehearing regarding the qualification criteria applicable to the RPS Exemption, Demand Response, Energy Efficiency, and Capacity Storage Resource Exemption, and Self-Supply Exemption, which extended exemptions to resources that satisfied at least one of three milestones: (1) has successfully cleared an annual or incremental capacity auction prior to the date of the Replacement Rate Order; (2) has an executed interconnection construction service agreement on or before the date of the Replacement Rate Order; or (3) has an unexecuted interconnection construction service agreement filed by PJM for the resource with FERC on or before the date of the Replacement Rate Order. FERC granted rehearing to amend the second and third criteria to include interconnection service agreements, interim interconnection service agreements, and Wholesale Market Participant Agreements, as well as interconnection construction service agreements. In the Compliance Filings, PJM modified the tariff as required by the April 2020 Order. In addition, PJM proposed: (i) to clarify that the Self-Supply Exemption applies only to capacity resources that were owned or bilaterally contracted for by a self-supply entity as of December 19, 2019 and that remain owned or bilaterally contracted for by the same self-supply entity and (ii) several clarifications related to the Demand Response, Energy Efficiency and Capacity Storage Resource Exemptions. FERC accepted most of PJM’s proposed revisions, but rejected one proposal related to Demand Response, and specifically FERC rejected PJM’s arguments that tracking end-use customer locations is burdensome or inefficient. Additionally, FERC directed PJM to modify the proposed Tariff language related to the eligibility for the RPS, Self-Supply and Capacity Storage Exemptions to state that a capacity resource may qualify for the exemption if it is subject to an interconnection service agreement that is executed by the interconnection customer on or before December 1, 2019.

Competitive Exemption

In the Rate Replacement Order, FERC directed PJM to include a Competitive Exemption for both new and existing resources, other than new gas-fired resources, that certify to PJM that they will forego any State Subsidies. In the April 2020 Order, FERC clarified that the Competitive Exemption is available to State-Subsidized Resources receiving or entitled to receive a State Subsidy that certify they will forego the State Subsidy, noting that all resources seeking to employ the Competitive Exemption must certify whether or not they receive, or are entitled to receive, a State Subsidy. In order to ensure that resources could not game the Competitive Exemption, FERC directed PJM to include in its compliance filing provisions stating that: (1) if an existing resource claims the Competitive Exemption in a capacity auction for a Delivery Year and subsequently elects to accept a State Subsidy for any part of that Delivery Year, then the resource may not receive capacity market revenues for any part of that Delivery Year; and (2) if a new resource claims the Competitive Exemption in its first year, then subsequently elects to accept a State Subsidy, that resource may not participate in the capacity market from that point forward for a period of years equal to the applicable asset life that PJM used to set the default offer price floor in the auction that the new resource first cleared. Additionally, FERC clarified in the April 2020 Order that purely voluntary transactions for RECs are not considered State Subsidies and do not trigger the MOPR. Rather, new and existing resources, other than new gas-fired resources, that apply for the Competitive Exemption may certify that they will only sell their RECs through voluntary REC arrangements, i.e., that such arrangements are not associated with state-mandated or state-sponsored procurement. PJM’s Compliance Filings included proposed tariff language to address these FERC holdings.

In the October 2020 Order, FERC accepted in part, rejected in part, and modified in part PJM’s compliance filing and directed PJM to submit a further compliance filing. Specifically, FERC directed PJM:

• to modify its tariff to account or a situation in which a self-supply entity could own a resource that may be sufficiently isolated from that self-supply entity’s rate-based cost recovery, such that the resource could be considered to not receive a State Subsidy, regardless of whether it is owned or controlled by a self-supply entity;
• to modify its proposal regarding the gaming provisions that dictate the circumstances under which a resource that elects the Competitive Exemption but later accepts a State Subsidy will forfeit its capacity revenue; and
• accepted PJM’s proposal to comply with its finding that resources receiving Voluntary RECs may apply for the Competitive Exemption and certify that they will only sell their RECs through Voluntary REC arrangements and ensure that no broker or direct buyer will resell them for state purposes.

Resource-Specific Exception

In the Replacement Rate Order, FERC directed PJM to maintain the Unit-Specific Exemption (which it renamed the “Resource-Specific Exception”), but directed PJM to expand it to cover existing and new State-Subsidized Resources of all resource types, to permit any resource that can justify an offer lower than the default offer price floor to submit such offers for review. FERC clarified in the April 2020 Order that PJM should not necessarily use a 20-year asset life as the default depreciation period when including capital expenditures in setting resource-specific offer price floors for existing resources. In the Compliance Filings, PJM proposed to allow sellers to submit a justification for asset life other than the default 20-year assumption, but capped asset life terms at 35 years. In the October 2020 Order, FERC accepted PJM’s proposal regarding asset life.

FERC also directed PJM in the Rate Replacement Order to provide more explicit information about the standards that will apply when conducting the resource-specific review, and held that the factors PJM proposed as part of the paper hearing process appeared to represent a reasonable objective basis for this analysis. In the Compliance Filings, PJM proposed language to require that the resource-specific review process be open and transparent as between the seller, Market Monitor, and PJM, in order to ensure that PJM and the Market Monitor are kept apprised of each other’s review. FERC found in the October 2020 Order that PJM’s proposal is consistent with its prior orders, and therefore accepted PJM’s proposed language dictating how PJM will evaluate new resource requests for the Resource-Specific Exception.

Certification

PJM proposed in the Compliance Filings to require each seller to inform PJM whether its resource is State Subsidized during the pre-auction registration process. Specifically, PJM proposes to require each seller (other than demand response and energy efficiency resources) to notify PJM no later than 120 days prior to the BRA, whether each capacity resource the seller intends to offer qualifies as a Capacity Resource with a State Subsidy. PJM proposes to impose on sellers a continuing obligation to notify PJM and the Market Monitor of changes in their status. FERC generally accepted PJM’s tariff proposals related to the certification process. Additionally, PJM proposed that a resource will be deemed State Subsidized if the seller offering it into the auction fails to timely certify whether or not the resource is entitled to a State Subsidy, unless the seller receives a waiver from FERC or the capacity resource previously received a Resource-Specific Exception.

FERC generally accepted PJM’s proposals regarding the certification, including the timing and ongoing obligation requirements. Additionally, FERC directed PJM to clarify the proposal that if a seller fails to certify a resource, the resource cannot elect the Resource-Specific Exception unless the seller receives a FERC waiver or the resource “previously received a resource-specific exception.” FERC explained that sellers must submit a Resource-Specific Exception request each year, and the deadline for applying for the Resource-Specific Exception is 120 days prior to the auction, the same time that most sellers are required to certify the status of their resources. FERC directed PJM to clarify its proposed to tariff language so that if a seller submitted a Resource-Specific Exception request 120 days prior to the auction, but failed to timely certify the status of its resource, and PJM subsequently approves the resource-specific offer price floor, then the resource could use such floor regardless of whether it timely certified.

Waiver Request and Auction Schedule

In its Compliance Filings, PJM proposed that the date for the 2019 BRA (for the 2022/23 Delivery Year) be tied to the date of FERC’s order on the March 2020 Compliance Filing, such that the 2019 BRA will run six and a half months after FERC’s acceptance of the compliance filing. PJM proposed a four and a half month pre-auction schedule for the three Delivery Years following the 2022/23 Delivery Year, with six weeks between posting the results of one auction and beginning the schedule for the next. PJM requested a waiver of several tariff provisions relating to the timing of auction activities and the BRA in order to effectuate its proposed schedule.

In the October 2020 Order, FERC granted PJM’s request for a waiver of the tariff provisions relating to the timing and pre-auction processes for the BRAs and incremental auctions for the following Delivery Years: 2022/23, 2023/24, 2024/25, and 2025/26. With respect to the timing of the 2019 BRA for the 2022/23 Delivery Year, however, FERC noted that the Reserves Proceeding pending before it will influence default offer price floors and E&AS Offsets. FERC therefore stated that the auction date cannot be established until FERC has issued an order on PJM’s Compliance Filing in the Reserves Proceeding, and rejected PJM’s proposal to start the pre-auction processes contingent on the issuance of the October 2020 Order.

A copy of the October 2020 Order is available here.