On March 26, 2009, FERC issued an order accepting in part and rejecting in part revisions to PJM Interconnection Inc.’s (“PJM”) Reliability Pricing Model (“RPM”) that were proposed in a February 9, 2009, settlement agreement. As part of the order, the Commission increased the cost of new entry (“CONE”), conditionally accepted PJM’s proposed redesign of the incremental auction process, and included new provisions to enable energy efficiency resources to participate in the capacity market.

In early 2008, several parties asked FERC to evaluate the RPM and hold a technical conference regarding RPM. At the request of PJM, the Commission withheld action pending a report by the Brattle Group, which deemed the RPM a success but recommended several changes. The Commission issued an order in September 2008 encouraging PJM to initiate a stakeholder process regarding RPM and file revisions by December 15, 2008. On December 12, 2008 (“December 12 filing”), PJM filed a report and unilaterally proposed changes to the RPM. On February 9, 2009, PJM filed a settlement with various parties related to issues in the December 12 filing (“February 9 settlement”).

The CONE has been an important issue for the RPM market because of higher construction costs for new capacity. The December 12 filing argued for a 69%-88% increase across PJM’s three service areas. Some parties felt these increase where insufficient, while others, including the Illinois Commerce Commission and the Maryland Office of People’s Counsel, found the increases too high. The February 9 settlement reduced the increase by 10%.

The Commission accepted the February 9 settlement rates and rejected arguments that no increase in the CONE was justified because the previous RPM auction resulted in the procurement of the required capacity. Instead, FERC found that the new CONE rates are just and reasonable.

PJM also proposed to initiate stakeholder outreach to develop an automated CONE adjustment process, which FERC accepted. Furthermore, the Commission requested that PJM file a new CONE adjustment by September 1, 2009, regardless of whether an agreement is reached with stakeholders, so that any revisions will be in place by the May 2010 auction.

As to enabling energy efficiency resources to participate in the RPM market, FERC stated that “energy efficiency is a critical part of efficient energy markets, and should be treated comparably to other resources.” Under the order, energy efficiency resources will be allowed to bid, and if accepted, receive capacity payments for up to four years.

A copy of the order can be found at: http://elibrary.ferc.gov/idmws/nvcommon/