On September 2, 2021, FERC accepted a new Market Seller Offer Cap (“MSOC”) in the PJM Interconnection, L.L.C. (“PJM”) capacity market that will require all capacity market sellers that fail PJM’s market structure test and offer above $0/MW-day to, at their election, obtain approval for their offer from PJM’s Market Monitor or utilize a default MSOC equal to the resource’s applicable net Avoidable Cost Rate (“ACR”)—i.e., its annual operating costs—less the resource’s net energy and ancillary services (“E&AS”) revenues (“ACR Proposal”). Commissioner James Danly issued a separate dissenting statement in which he argued that the ACR Proposal will lead to over-mitigation, in part because it will require the Market Monitor to review a higher number of capacity offers than under PJM’s previously-effective MSOC. In a compliance filing on FERC’s September 2 order, PJM asked for a 55-day delay of its upcoming capacity auction (currently scheduled to begin December 1, 2021) in order to allow time for the Market Monitor to perform the required unit-specific review under the new MSOC. As of this writing, FERC has not yet acted on PJM’s request.
Under PJM’s previously-effective MSOC, offers set below a set default offer cap were deemed competitive, while offers above the cap were subject to review by the Market Monitor and PJM to ensure that the offer is based on legitimate costs and reasonable estimates of unit-specific performance and system parameters. The default offer cap was previously calculated as a hypothetical reference resource’s net cost of new entry (“Net CONE”) times a Balancing Ratio (a measure of the average fleet-wide performance during the review period). In March 2021, FERC granted two consolidated complaints, finding that the MSOC was too high and would prevent PJM and the Market Monitor from appropriately reviewing offers. In the March 2021 order, FERC ordered additional briefing to determine a replacement rate (see March 25, 2021 edition of the WER).
FERC’s September 2 order addressed several different proposals but ultimately accepted the Market Monitor’s ACR Proposal. The ACR Proposal requires all capacity market sellers offering above $0/MW-day to, at their election, undergo unit-specific review by the Market Monitor and PJM or cap offers at the generation resource’s default unit-specific ACR (i.e., gross ACR minus forward-looking net E&AS revenues). FERC explained that the ACR Proposal would best ensure the capacity market’s overall competitiveness and would enable the Market Monitor and PJM to review and mitigate offers to prevent the exercise of market power. While FERC acknowledged that eliminating the previously-effective default offer cap would “likely create more work for the Market Monitor and sellers by requiring the individual review of a higher number of capacity offers,” FERC found that such review is needed to address potential market power abuses. FERC also found that the ACR Proposal would not excessively burden the Market Monitor after considering the Market Monitor’s statements that its staff is capable of conducting the additional review.
Commissioner Danly explained in his dissenting statement that the ACR Proposal would empower the Market Monitor to substitute its judgment on each resource’s capacity market offer for the judgment of the seller. Commissioner Danly also pointed out that FERC’s acceptance of the ACR Proposal comes in conjunction with PJM’s replacement Minimum Offer Price Rule, which went into effect by operation of law on September 29, 2021. Commissioner Danly stated that “[t]his will crater capacity market prices” and “PJM’s market design is becoming increasingly discriminatory against existing generators.”
In addition to adopting the ACR Proposal effective September 2, 2021, FERC also directed PJM to submit a compliance filing establishing new deadlines for the 2023-24 capacity auction, currently scheduled to begin December 1, 2021. As noted, PJM subsequently submitted a compliance filing requesting a 55-day extension to open the auction on January 25, 2022. PJM also proposed to move the 2024-25 capacity auction from June 15, 2022 to August 9, 2022; the 2025-26 capacity auction from January 4, 2023 to February 28, 2023, and the 2026-27 capacity auction from March 17, 2023 to August 29, 2023. As of this writing, FERC has not yet acted on PJM’s request.