On December 22, 2021, FERC issued an order on voluntary remand from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) directing changes to PJM Interconnection, L.L.C.’s (“PJM’s”) reserve market design. FERC’s December 22 order reverses certain changes it previously ordered in May 2020 (“May 2020 Order”). The December 22 order affirmed FERC’s decision in the May 2020 Order to accept PJM’s proposal to consolidate its Tier 1 and Tier 2 Synchronized Reserve Products. However, the December 22 order required PJM to revert back to its currently-effective Reserve Penalty Factors, two-step Operating Reserve Demand Curve (“ORDC”), and a backward-looking Energy and Ancillary Services (“E&AS”) Offset. FERC directed PJM to apply the backward-looking E&AS Offset to the 2023/24 Base Residual Auction (“BRA”), which was previously scheduled to run in January 2022, notwithstanding any resulting delay to the auction schedule. FERC required PJM to submit a revised BRA schedule on compliance. Commissioner Christie issued a concurring opinion, and Commissioner Danly dissented in part.

As explained in the May 28, 2020 edition of the WER, the May 2020 Order accepted PJM’s proposals to, among other things: consolidate its Tier 1 and Tier 2 Synchronized Reserve Products into a single product; establish Reserve Penalty Factors of $2,000/MWh; revise the shape of the ORDC to a downward-sloping curve; and adopt a forward-looking E&AS Offset. After FERC issued the May 2020 Order, FERC affirmed its decision in a rehearing order issued November 2020. The case was subsequently appealed to the DC Circuit. However, prior to briefs being filed, FERC submitted an unopposed motion for voluntary remand. The DC Circuit granted FERC’s motion, remanding the case to FERC for further proceedings.

Although the May 2020 order adopted PJM’s proposed Reserve Penalty Factor of $2,000/MWh for all reserve products, the December 22 order directed PJM to revise its tariff to reflect the currently-effective Reserve Penalty Factors of $850/MWh for certain reserve products and $300/MWh for others. In so doing, FERC rejected PJM’s arguments that the $850/MWh Reserve Penalty Factor is no longer just and reasonable because FERC previously directed PJM to increase its energy market offer cap to $2,000/MWh. FERC pointed to evidence submitted by PJM’s Independent Market Monitor indicating that short-run marginal costs in PJM have rarely exceeded $850/MWh, and concluded that PJM failed to demonstrate that its operators routinely incur costs greater than $850/MWh in dispatching emergency resources to maintain reserves.

In addition, the December 22 order found that PJM presented insufficient evidence to demonstrate that PJM’s vertical-stepped ORDC is unjust and unreasonable, reversing the May 2020 Order’s acceptance of a downward-sloping ORDC. Among other things, FERC pointed to the fact that the vertical-stepped ORDC has not caused PJM to fall short of the North American Electric Reliability Corporation-specified minimum reserve requirement.

The December 22 order also required PJM to implement a backward-looking E&AS Offset. FERC explained that, absent the fundamental changes to the Reserve Penalty Factors and ORDC that were accepted in the May 2020 Order, there was insufficient evidence to find that E&AS revenues will increase to such an extent as to render the backward-looking E&AS offset unreasonable.

Finally, FERC directed PJM to implement the revised E&AS Offset in the 2023/2024 BRA, and recognized that PJM would need to delay the auction to implement the change. FERC therefore directed PJM to submit a compliance filing within 30 days proposing a new BRA schedule. However, FERC stated that it would not require PJM to re-run actions that used the forward-looking offset.

Commissioner Christie issued a separate concurring statement in which he explained that he agreed that PJM failed to meet its burden under section 206 of the Federal Power Act to show that certain aspects of its reserve construct are unjust and unreasonable. Commissioner Christie stated that certain changes to PJM’s reserve market that were approved in 2020 pose an unacceptable risk that hundreds of millions of dollars of additional costs could be placed on consumers without a commensurate increase in reliability.

Commissioner Danly dissented in part, with a separate statement to be issued at a later date.

The December 22 order is available here.