On January 6, 2017, FERC accepted PJM Interconnection, L.L.C.’s (“PJM”) proposal to change its pricing methodology for the release of excess capacity in its upcoming Third Incremental Auction for the 2017/18 Delivery Year. FERC concluded that PJM will be permitted to use the revised pricing rules to release excess capacity exclusively for PJM’s Third Incremental Auction for the 2017/18 Delivery Year.

PJM established a new capacity market product (the “Capacity Performance Resource”) in June 2015. To implement the Capacity Performance Resource, PJM conducted transition auctions for the 2016/17 and 2017/18 Delivery Years. In the transition auction for the 2017/18 Delivery Year, PJM procured 10,017 MW of excess capacity. According to PJM, under the existing pricing methodology at the time of the transition auction, it would have offered $0/MW-day for all or most of the excess committed capacity, which would result in no revenue flowing back to load.

PJM proposed a three-step revision to the pricing rules to better reflect the potential benefit to load of retaining excess committed capacity. First, PJM will apply the existing pricing methodology to determine the quantity and price at which it will release capacity in the Third Incremental Auction. Second, PJM will release the excess capacity as a PJM sell-offer using an upward-sloping curve connecting two points. According to PJM, one point will reflect the cost to procure the excess capacity divided by the quantity of load across which the load will be allocated, while the other point represents the maximum price that a market seller would be expected to pay to replace a resource commitment made in the base residual auction. Third, PJM will exclude any uncleared excess quantity offered under step two when determining excess commitment credits.

American Municipal Power opposed PJM’s proposal, arguing that it would be unjust and unreasonable for PJM to eliminate the awarding of excess commitment credits to load-serving entities (“LSEs”). PJM responded that retaining, rather than allocating, the excess capacity and its attendant resource requirements and obligations provides a benefit to load.

FERC accepted, subject to condition, PJM’s revised pricing methodology. FERC found that it is just and reasonable for “PJM’s sell-back procedure to place a higher value on excess capacity than the current auction procedure does,” and for PJM to “alter the shape of its sell-back offer curve to a straight line, eliminating the potential that the relevant Incremental Auction could clear at or near $0 per MW-day.” However, with regard to PJM’s proposed excess capacity release curve, FERC found PJM’s proposed end point parameters to be “arbitrary and inconsistent with the established way PJM’s markets represent the value of excess capacity to load.” FERC instead prescribed the end points for PJM’s proposed excess capacity release curve by indicating that the use of PJM’s Variable Resource Requirement Curve (“VRR Curve”) would represent a just and reasonable approximation for the end points. PJM’s VRR Curve places the end points at the lowest price point on PJM’s existing sell-back offer curve and the base residual auction clearing price.

Additionally, FERC conditioned its acceptance on PJM allocating the uncleared excess capacity to LSEs as commitment credits. FERC reasoned that continuing to allocate excess commitment credits would allow LSEs to assert their own value of excess committed capacity. Finally, FERC conditioned its acceptance on PJM conducting a single auction by which PJM will sell back excess capacity acquired through the transition auction and excess capacity resulting from an updated load forecast.

The Order on Proposed Tariff Changes is available here.