On November 3, 2020, FERC upheld its May 2020 order finding PJM Interconnection, L.L.C.’s (“PJM”) reserve market design to be unjust and unreasonable, and establishing a replacement market design including, among other elements, a downward-sloping Operating Reserve Demand Cure (“ORDC”) and a $2,000/MWh price ceiling (see May 28, 2020 edition of the WER). FERC also upheld its prior finding that PJM should implement a new, forward looking energy and ancillary services offset (“E&AS Offset”). FERC’s November 3 order addressed rehearing requests filed by PJM’s Independent Market Monitor (“IMM”), the Maryland Public Service Commission, and Old Dominion Electric Cooperative and the PJM Load/Customer Coalition. Commissioner Richard Glick issued a separate dissenting statement in which he concluded that FERC failed to show that PJM’s existing reserve market design is unjust and unreasonable, and that FERC “rubber stamp[ed]” PJM’s proposed replacement ORDC. Commissioner Glick echoed his dissent in the May 2020 order, explaining that the downward-sloping ORDC will force customers to pay billons of dollars in scarcity pricing when no shortage exists and will produce a windfall for generators.

Importantly, the November 3 order was limited to addressing arguments raised on rehearing of the May 2020 order. PJM’s August 5, 2020 filing, proposing tariff revisions to implement a forward-looking E&AS offset in compliance with the May 2020 order (“August 2020 Compliance Filing”), remains pending before FERC. In the proceeding addressing PJM’s revisions to its Minimum Offer Price Rule (“MOPR Proceeding”), FERC recently stated that the revisions proposed in the August 2020 Compliance Filing will have an impact on the default offer price floors and E&AS Offsets that will be used in the Base Residual Auctions (“BRAs”) and Incremental Auctions for Delivery Year 2022-23 and going forward. FERC therefore stated in the MOPR Proceeding that PJM cannot conduct the BRA for the 2022-23 Delivery Year until FERC has issued an order on PJM’s August 2020 Compliance Filing (see October 22, 2020 edition of the WER).

FERC’s November 3 rehearing order first upheld its prior finding that PJM’s existing reserve market is unjust and unreasonable. FERC explained that the totality of the evidence put forward by PJM showed that its reserve market is “systematically failing to acquire within-market the reserves necessary to operate its system reliably, to yield market prices that reasonably reflect the marginal cost of procuring necessary reserves, and to send appropriate price signals for efficient resource investment.” FERC based its conclusion in part on the IMM’s 2018 State of the Market Report, which showed that nearly half of the revenue for procuring reserves is paid through uplift payments. (Uplift refers to out-of-market payments to generation to ensure they are appropriately compensated following PJM’s instructions to produce or reduce power.) On rehearing, the IMM argued that FERC’s reading of its report was incorrect, and that the uplift PJM experienced was solely attributable to the inaccuracy of PJM’s locational marginal pricing (“LMP”) forecasts. However, FERC rejected the IMM’s arguments, concluding that the IMM failed to provide any relevant data to support its assertions and discounted scenarios where LMP forecasts are accurate but PJM operators are still unable to procure resources within the market clearing price.

Second, FERC affirmed its decision in the May 2020 order to adopt PJM’s proposed replacement reserve market design. Pointing to evidence showing that PJM faces operational uncertainties due in part to its large size, FERC explained that PJM’s existing ORDC did not accurately reflect these operational uncertainties and systematically failed to acquire the reserves necessary to operate PJM’s system reliably. FERC concluded that the downward-sloping ORDC established in the May 2020 order, which takes into account the probability that PJM will be short of reserves in real-time despite acquiring a given quantity of reserves in advance, directly addressed this shortcoming by internalizing operational uncertainties into the reserve market.

Finally, the November 3 order upheld FERC’s prior finding that PJM should implement a new, forward-looking E&AS Offset.

Echoing his dissenting opinion to the May 2020 order, Commissioner Glick concluded that FERC’s rehearing order continued to mischaracterize or ignore relevant evidence and would result in a multi-billion dollar increase in consumers’ bills without any commensurate benefit. While Commissioner Glick argued that FERC failed to show that PJM’s existing reserve market design is unjust and unreasonable and failed to show that PJM’s replacement, downward-sloping ORDC is just and reasonable, Commissioner Glick noted his continued support for FERC’s decision to require PJM to run a forward-looking E&AS Offset.

A copy of the order is available here.