On June 9, 2015, FERC conditionally approved significant reforms to PJM Interconnection LLC’s (“PJM”) capacity market framework.  In doing so, FERC stated that PJM had demonstrated that the reforms were needed in order to ensure the long-term reliability of the electric supply within the PJM region.  Meanwhile, Chairman Norman Bay dissented, stating that PJM’s proposal was seriously flawed, and may “result in billions in additional costs for consumers without achieving its intended aim.”

PJM designed its existing capacity market framework, referred to as the Reliability Pricing Model, to ensure that the PJM region had adequate resources at a reasonable cost through the use of an annual auction.  In its proposal to reform that framework, PJM stated that the Reliability Pricing Model had not adequately kept pace with the level of commitments that PJM required.  PJM further noted that the Reliability Pricing Model applied inadequate penalty charges for sub-par performance while failing to adequately ensure actual performance.  As a result, PJM stated that the Reliability Pricing Model threatened the reliable operation of PJM’s system and had the potential to require consumers to pay for capacity without receiving commensurate benefits.

To address these concerns, PJM proposed an entirely new capacity product, the Capacity Performance Resource.  According to PJM, this new product would be developed to provide sustained and predictable operation, and would be able to reliably provide energy and reserves in the event of an emergency condition within PJM.  Among its more significant features, PJM noted that its proposal included more significant charges for poor performance, increased credits for superior performance, and a must-offer requirement for any qualifying “Capacity Performance Resources.”  PJM proposed a phased-in approach in order to transition to the new product, with an interim “Base Capacity Resources” product, characterized by a lower performance expectation and exposure risk, for the 2018-19 and 2019-20 delivery years.  During that time, PJM anticipates that it will procure at least 80 percent of the region’s capacity requirements in the form of Capacity Performance Resources, with the remainder composed of Base Capacity Resources.  For the 2020-21 delivery year and beyond, PJM proposed to procure all of the region’s capacity requirements in the form of Capacity Performance Resources.

In issuing its order, FERC explained that PJM had demonstrated that its existing framework “fails to provide appropriate incentives and penalties.”   FERC conditionally accepted PJM’s reformed capacity market framework, stating that under the revised rules, “capacity resources in PJM will face new and substantial penalties for non-performance that we conclude will help ensure the reliability of the PJM system.”  FERC also noted that several other significant pieces to PJM’s proposal were modeled after ISO New England Inc.’s framework, which was previously accepted by the Commission.  FERC further noted that it will continue to actively monitor PJM’s implementation, and “will act where necessary to modify it to ensure the proper alignment of performance obligations, incentives, and penalties.”

Chairman Bay dissented, arguing against the need for the level of reform requested by PJM, and questioning the prudence of engaging in an extensive alteration of the Reliability Pricing Model.  In his dissent, Chairman Bay characterized PJM’s proposal as “a flawed, complex, highly technical market construct in which there is a potential mismatch between incentives and penalties, in which mitigation has largely been eliminated in a market characterized by structural non-competitiveness, and in which there may be billions in additional capacity market costs borne by consumers.”  Chairman Bay also generally warned that it would be difficult to unwind PJM’s market construct after it is fully implemented and suggested that “a more sustainable, efficient, and cost-effective design” should be used instead.

To view the order, click here.