On May 31, 2016, FERC rejected PJM Interconnection, L.L.C.’s (“PJM”) proposal to excuse a Capacity Performance Resource from Non-Performance Charges during emergency conditions. PJM proposed to excuse such resources from Non-Performance Charges when the resource followed PJM’s dispatch instructions and operated at a ramp rate PJM had previously approved. In refusing to allow the proposed exemption, FERC emphasized that “[i]t is critical that the capacity market rules send the proper long-term investment signals to ensure capacity that can meet the reliability needs of the region.”

Under PJM’s capacity market rules, Capacity Performance Resources can be penalized for failure to be available when dispatched. PJM’s proposed tariff revisions to Attachment DD of its Open Access Transmission Tariff (“OATT”) specifically sought to exempt Capacity Performance Resources from Non-Performance Charges during any full or partial hour after an Emergency Action is declared (“Performance Assessment Hour”) to the extent those resources followed a “PJM-acceptable ramp rate,” which PJM defined as at least the unit’s average historical ramp rate performance over a three-month period. PJM argued that these tariff revisions were necessary because, without such an exemption, resources may seek to self-schedule their capacity before the Performance Assessment Hour, regardless of whether the resource was needed to meet demand, in order to avoid the risk of Non-Performance Charges.

PJM further claimed that such behavior could pose operational or reliability issues for PJM operators, particularly during the emergency conditions for any expected Performance Assessment Hour. PJM expressed concern that generators would unilaterally ramp their resources to maximum capacity before a system emergency condition occurred in order to avoid Non-Performance Charges. In describing its concern, PJM pointed to the Polar Vortex conditions in January 2014 to demonstrate how unilateral action before system emergency conditions could have a negative impact on system operations and reliability. Finally, PJM noted that the acceptable ramp rate as proposed would be a temporary solution for the upcoming 2016-17 delivery year, after which it would discuss with stakeholders a longer-term solution.

FERC concluded in its order that PJM had not met its burden to demonstrate that the proposed tariff revisions were just and reasonable and, therefore, rejected the proposed tariff revisions. FERC explained that it weighed the operational concerns associated with a Capacity Performance Resource attempting to self-schedule in advance of an anticipated Performance Assessment Hour to avoid Non-Performance Charges against the negative impact that the proposed penalty exemption would have on the penalty structure’s ability to encourage performance incentives. Ultimately, FERC concluded that the proposed exemption contradicted the goal of the Capacity Performance design—namely, the exemption would dampen the long-term incentive for retention and entry of flexible capacity resources.

FERC also reasoned that because Performance Assessment Hours often occur when the PJM system is under stress, most units in PJM will be needed to meet demand leading up to a Performance Assessment Hour. FERC added that in the event that economic units are not needed to meet demand in PJM during such circumstances, PJM operators can ramp down various flexible units and reject self-scheduling requests in order to avoid reliability issues. Thus, FERC concluded that, with regard to PJM’s concerns regarding self-scheduling in advance of a Performance Assessment Hour, such a problem should be offset by additional resource availability and flexibility, which FERC indicated is also one of the reasons the Capacity Performance construct in PJM was created.

A copy of FERC’s order can be found here.