On July 28, 2022, FERC upheld changes to PJM Interconnection, L.L.C.’s (“PJM”) Reserve Market that it first required in a December 2021 order on voluntary remand from the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”). FERC’s July 28 order continues to require PJM to: (1) consolidate its Tier 1 and Tier 2 Synchronized Reserve Products; (2) align reserve procurement in the day-ahead and real-time markets by establishing two 10-minute reserve requirements and one 30-minute reserve requirement in each market; (3) revert back to a stepped Operating Reserve Demand Curve (“ORDC”) and $850/MWh Reserve Penalty Factors; and (4) revert to a backward-looking Energy & Ancillary Services (“E&AS”) Offset in the Net Cost of New Entry calculation. The July 28 order also addressed challenges to the December 2021 order on the basis that the motion for voluntary remand was not filed in the D.C. Circuit pursuant to FERC’s tradition of polling the Commissioners for major litigation decisions. The order makes certain clarifications on the Chairman’s role to oversee the executive and administrative operation of FERC, including the direction of litigation. Commissioner James Danly filed a separate dissenting statement.

The July 28 order begins with background on PJM’s Reserve Market. Regional transmission organizations and independent system operators (“RTOs/ISOs”) are required by the North American Electric Reliability Corporation to maintain sufficient reserves to respond within 15 minutes to the loss of the single largest contingency on its system. RTOs/ISOs set additional requirements to address other real-time operational uncertainties, such as deviations of load, generator availability, and performance from forecast values. In PJM, reserve products generally are divided between the reserve capability of resources that can be converted fully into energy within 30 minutes or less, and the reserve capability of resources that can be converted into energy within 10 minutes or less. 10-minute reserves are sub-divided into Synchronized and Non-Synchronized Reserves, depending on whether the supplying resource is synchronized to the transmission system. Prior to these proceedings, Synchronized Reserves were sub-divided into: (1) Tier 1 reserves, representing the headroom on online resources that could be converted to energy within 10 minutes; and (2) Tier 2 reserves, provided by resources that, absent the need for additional reserves, would be dispatched to their profit-maximizing output for energy.

In 2008, FERC issued Order No. 719, which required RTO/ISOs to ensure that market prices for energy reflected the value of energy during an operating reserve shortage. In compliance with Order No. 719, PJM implemented a step-function ORDC (i.e., a demand curve with horizontal segments) to represent the demand for reserves in its markets. The horizontal segments represent the maximum price that the market is willing to pay for the associated quantity of reserves. These maximum prices are known as Reserve Penalty Factors. PJM’s ORDCs have two steps: (1) a step at a Reserve Penalty Factor of $850/MWh that extends to the minimum requirement for the particular reserve requirement (Step 1); and (2) a step at a Reserve Penalty Factor of $300/MWh that extends 190 MW beyond the minimum reserve requirement quantity (Step 2A). In certain circumstances, PJM can extend the second step of the ORDCs beyond 190 MW (Step 2B).

FERC’s July 28 order is the latest in a series of orders since May 2020 making changes to PJM’s Reserve Market, and follows the December 2021 order on voluntary remand from the D.C. Circuit (“Remand Order”) (see May 28, 2020 edition of the WER and January 18, 2022 edition of the WER for additional background on these prior orders). The July 28 order addressed requests for rehearing of the Remand Order filed by both PJM and certain market participants. The rehearing requests argued that the Rehearing Order failed to consider evidence in the record showing that PJM’s $850/MWh Reserve Penalty Factors and stepped ORDC are unjust and unreasonable. They also argued that PJM is only able to attract sufficient reserves though out-of-market actions that manually supplement the demand for reserves driven by PJM’s ORDCs and Reserve Penalty Factors.

In rejecting these arguments, FERC clarified as an initial matter that the issue before it was not whether PJM is failing to meet its reserve requirements. FERC noted that PJM’s own calculations demonstrate that it is procuring reserves well in excess of the levels needed to maintain reliability. Rather, FERC clarified that the question before it was whether the shortcomings of PJM’s ORDCs and Reserve Penalty Factors result in market prices that fail to reflect the value of energy during an operating reserve shortage, such that PJM’s Tariff no longer meets the criteria established in Order No. 719.

FERC held that PJM did not demonstrate that its existing tariff no longer meets this standard. In particular, FERC found that PJM failed to meet its burden under section 206 of the Federal Power Act to demonstrate that the stepped ORDC and $850/MWh Reserve Penalty Factors are unjust and unreasonable. FERC also upheld the Remand Order’s requirement to revert to the backward-looking E&AS Offset, finding the Reserve Market reforms that FERC accepted in the Remand Order did not require the imposition of a forward-looking E&AS Offset. FERC clarified that a forward-looking E&AS Offset is not inherently unjust and unreasonable, but stated that it lacked the basis to impose such an offset on the record before it. FERC also clarified that the Rehearing Order does not preclude PJM or other RTOs/ISOs from pursuing improvements to their ORDCs, Reserve Penalty Factors, or a forward-looking E&AS Offset.

In addition, FERC dismissed requests for rehearing that argued that the Remand Order was unlawful because the FERC Chairman did not adhere to the tradition of polling other Commissioners before directing the Solicitor’s Office to file a motion for voluntary remand in the D.C. Circuit. FERC clarified that when parties seek judicial review of an order, the Chairman is responsible for the direction of litigation on behalf of FERC, pursuant to both historical tradition and the Department of Energy Organization Act. FERC found that the decision to move for voluntary remand appropriately falls within the Chairman’s responsibilities. While FERC acknowledged that the Chairman often consults with fellow Commissioners on a wide range of decisions including litigation decisions, it observed that there is no statutory requirement for either internal polling or a majority vote for litigation decisions. FERC also observed that its motion for voluntary remand in the D.C. Circuit was unopposed.

Commissioner James Danly issued a separate dissenting statement in which he explained his objection to both the process by which the proceeding came before FERC and the merits of FERC’s decision. As to process, Commissioner Danly stated that the FERC Solicitor’s Office was directed by the Chairman to seek voluntary remand “without the knowledge or acquiescence of the other Commissioners, which at least violated longstanding Commission practice and may have been unlawful.” As to the merits, Commissioner Danly stated that the June 28 order is “reckless” because it arbitrarily retained certain of FERC’s prior findings while reversing others, absent further briefing or supplementation of the record, with the effect of changing a fundamental element of PJM’s market design.

The June 28 order is available here.