On April 16, 2020, FERC issued two orders in the proceedings related to PJM Interconnection, L.L.C.’s (“PJM”) Minimum Offer Price Rule (“MOPR”). First, FERC denied requests for rehearing and granted limited clarification with respect to its June 29, 2018 order (“Paper Hearing Order”) where it (i) found PJM’s then-existing tariff to be unjust and unreasonable because it failed to address the suppressive effect of resources receiving out-of-market payments on the capacity market, and (ii) implemented a paper hearing to establish a revised MOPR to apply to both new and existing resources receiving out-of-market payments, regardless of resource type (see July 11, 2018 edition of the WER). Second, FERC largely affirmed its December 19, 2019 order arising out of the paper hearing, 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).

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 the Paper Hearing Order, the MOPR applied to only new natural gas-fired combustion turbine and combined cycle resources.

In the 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 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 Base Residual Auction (“BRA”) (to procure capacity for the 2022/23 Delivery Year) until after FERC issued an order on the paper hearing, establishing a replacement rate. That auction has yet to occur.

In the 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 compliance filing on March 18, 2020 (“March 2020 Compliance Filing”). FERC has extended the comment deadline for responses to PJM’s March 2020 Compliance Filing to May 15, 2020.

We discuss below the April 16, 2020 order addressing requests for rehearing and clarification of the Replacement Rate Order (the “Expanded MOPR Rehearing Order”), and the April 16, 2020 order on rehearing and clarification of the Paper Hearing Order (the “Paper Hearing Rehearing Order”).

Expanded MOPR Rehearing Order

In the Expanded MOPR Rehearing Order, FERC largely denied requests for rehearing of the Replacement Rate Order, but granted limited rehearing and provided narrow clarification. Specifically, FERC affirmed that the MOPR should apply to not only existing gas-fired facilities, but also (with limited exceptions), to all new and existing, internal and external, State-Subsidized Resources that participate in the capacity market, regardless of resource type, reasoning that any resource that receives or is entitled to receive a State Subsidy has the ability to distort capacity prices. FERC also affirmed the Replacement Rate Order’s broad definition of “State Subsidy,” which includes:

A direct or indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit that is (1) a result of any action, mandated process, or sponsored process of a state government, a political subdivision or agency of a state, or an electric cooperative formed pursuant to state law, and that (2) is derived from or connected to the procurement of (a) electricity or electric generation capacity sold at wholesale in interstate commerce, or (b) an attribute of the generation process for electricity or electric generation capacity sold at wholesale in interstate commerce, or (3) will support the construction, development, or operation of a new or existing capacity resource, or (4) could have the effect of allowing a resource to clear in any PJM capacity auction.

FERC made clear that the definition of State Subsidy is intended to include forms of state assistance that directly affect wholesale capacity market rates, but that it is not intended to cover every form of state financial assistance that might indirectly affect FERC-jurisdictional rates or transactions. FERC also affirmed its finding that a resource is deemed a Capacity Resource with a State Subsidy if it receives, or is eligible to receive, any of the above subsidies. FERC explained that if a resource needs to rely on a past State Subsidy or a future State Subsidy to justify an offer below the default offer floor in a given auction then that offer must be mitigated, regardless of when the State Subsidy was, or will be, received.

In addition, among other things, FERC further affirmed that:

  • 100% of net cost of new entry (“CONE”) for the resource is an appropriate default offer price floor for new State Subsidized resources;
  • that it is appropriate to base the offer floor for new resources on net CONE, while basing the offer floor for existing resources on their net Avoidable Cost Rate (“ACR”) (i.e., going forward costs);
  • demand response, energy efficiency and capacity storage resources should not be categorically exempt from the MOPR, subject to limited grandfathering;
  • PJM and its Independent Market Monitor should continue to use a resource-specific exemption, expanded to cover existing and new State-Subsidized Resources of all resource types, as a way to avoid over-mitigation of resources that demonstrate their offers are economic based on a rational estimate of their expected costs and revenues (net CONE) without reliance on out-of-market financial support through State Subsidies;
  • the Competitive Exemption (as defined in the order) should not be modified to include an exemption for state procurement processes, or be extended to new natural gas-fired resources, whether State Subsidized or not; and
  • an expanded MOPR without a resource-specific Fixed Resource Requirement (“FRR”) Alternative is just and reasonable.

FERC also provided limited clarification and rehearing in the Expanded MOPR Order. Notably, FERC:

  • clarified that purely voluntary transactions for Renewable Energy Credits (“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;
  • clarified that participation in the Regional Greenhouse Gas Initiative (“RGGI”) does not trigger the MOPR and is not considered a State Subsidy because RGGI does not provide payments, concessions, rebates, or other financial benefits to resources. FERC further noted, however, that while RGGI fees paid by resources are not a State Subsidy, RGGI revenues paid to certain resources would be considered a State Subsidy, assuming it meets the criteria in the definition;
  • 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; and
  • granted rehearing regarding how to calculate the default offer price floor for energy efficiency resources, so that the default offer price floor for new energy efficiency resources is set at Net CONE and existing energy efficiency resources at Net ACR.

To give effect to the rulings, FERC directed PJM to file an additional compliance filing within 45 days of the date of the order, or by June 1, 2020.

Commissioner Glick issued a lengthy dissent from the Expanded MOPR Rehearing Order.

Paper Hearing Rehearing Order

As discussed above, FERC found in the Paper Hearing Order that PJM’s then-existing MOPR tariff rules were unjust and unreasonable, but found that it could not make a final determination regarding a just and reasonable replacement rate based on the record before it. FERC therefore initiated a paper hearing under FPA section 206 to allow parties the opportunity to present additional information on a just and reasonable replacement rate. FERC suggested that the replacement rate should expand the MOPR to cover out-of-market support for all new and existing resources, regardless of type, with few to no exemptions. FERC also sought comment on the potential use of a resource-specific FRR Alternative to accommodate resources that receive out-of-market support while protecting the integrity of the PJM capacity market.

Several parties sought rehearing and/or clarification of the Paper Hearing Order, generally raising issues about FERC’s determination that PJM’s then-effective tariff was unjust and unreasonable, including, among other things, that: (i) the Paper Hearing Order lacked sufficient evidentiary and economic support; (ii) FERC failed to justify its departure from precedent; (iii) the Paper Hearing Order exceeded FERC’s jurisdiction; (iv) the Paper Hearing Order suffered from several procedural issues; and (vi) the Paper Hearing Order outlined a replacement rate that has not been shown to be just and reasonable or otherwise requires clarification.

FERC denied requests for rehearing of the Paper Hearing Order. FERC rejected arguments that the Paper Hearing lacked sufficient evidentiary and economic support, finding it acted within its area of expertise, and applied basic economic principles to explain how out-of-market support to certain resources may permit those resources to offer below their costs in a manner that suppresses the market clearing price. FERC rejected arguments that the PJM capacity market is a robust and well-functioning capacity market based on resource development, a high reserve margin, and the recent clearing prices. FERC noted that the concern with price suppression is a long-run, not a short-run, concern, and found that uncertainty caused by price suppression may discourage competitive new entry in the long run.

FERC also rejected arguments that the Paper Hearing Order contradicts or departs from its prior precedent without explanation. FERC states that it has previously recognized that the MOPR is intended to address price suppression by ensuring resources offer competitively, and that its MOPR precedent has evolved over time. FERC maintains that its findings in the Paper Hearing Order are a part of this evolution, and are necessary to react to state choices to support certain resources or resource types.

FERC also affirmed its jurisdiction to issue the Paper Hearing Order, rejecting arguments that it improperly intruded upon states’ authority to determine their energy resource mix preferences and development of new generation. Rather, FERC found that the FPA provides it with the jurisdiction and authority to regulate rates for wholesale sales by such generation resources, and that FERC is obligated to ensure that such rates are just and reasonable and not unduly discriminatory.

FERC also rejected challenges to the procedural schedule laid out in the Paper Hearing Order. FERC initially set a 60-day comment period, with reply comments due 30 days thereafter; the schedule was later extended by 45 and 35 days, respectively. FERC therefore rejected arguments that parties had insufficient opportunity to provide comments in the proceeding.

Finally, in response to several parties’ objections to the replacement rate that FERC proposed in the Paper Hearing Order, FERC clarified that it did not prejudge the replacement rate in that order. Rather, FERC confirmed that the replacement rate framework set forth in the Paper Hearing Order was merely a proposal about which FERC sought comment. FERC maintains that parties were provided the opportunity, through the paper hearing process, to provide additional proposals for FERC’s consideration.

As with the Expanded MOPR Rehearing Order, Commissioner Glick issued a lengthy dissent from the Paper Hearing Rehearing Order.

Next Steps

PJM stated in its March 2020 Compliance Filing that it will not conduct the next BRA until FERC has acted on its compliance filing and approved the operative Tariff provisions that will govern that auction. PJM also proposed a schedule whereby it will complete all pre-auction activities and open the BRA for the 2022-23 Delivery Year within six and a half months after the date of FERC’s acceptance of the March 2020 Compliance Filing.

Comments on PJM’s March 2020 Compliance Filing are due on May 15, 2020. FERC will set a comment deadline on the supplemental compliance filing in response to the Expanded MOPR Rehearing Order (“Supplemental Compliance Filing”), which is anticipated to be filed on or before June 1st.

In the meantime, several parties have already petitioned for review of the MOPR-related orders. It is likely that more parties will petition the court to review the Paper Hearing Rehearing Order and the Expanded MOPR Rehearing Order as well. Petitions for Review do not stay the effectiveness of a FERC order, which means that unless FERC or an appellate court grants a stay of FERC’s orders (an infrequent occurrence), once FERC acts on the March 2020 and Supplemental Compliance Filings, then PJM will likely conduct the BRA for 2022-23 Delivery Year within six and a half months after FERC’s next order. We await feedback from PJM, but it is possible that the changes to the March 2020 Compliance Filing necessitated by the Expanded MOPR Rehearing Order will not cause incremental delay in PJM’s preparations for the BRA for 2022-23. It is possible some aspects of FERC’s directives will be reversed on appeal. It remains to be seen whether the impacts of reversal, if any, will have only prospective effect.

The Expanded MOPR Rehearing Order is available here and associated Errata Notice here; the Paper Hearing Rehearing Order is available here.