On February 21, 2023, FERC accepted PJM Interconnection, L.L.C.’s (“PJM”) proposed tariff revisions governing the Locational Deliverability Area Reliability Requirement (“LDA Reliability Requirement”) calculation, effective December 24, 2022, and applicable to the 2024/2025 Base Residual Auction (“BRA”), which was in progress at the time that PJM submitted its filing. Specifically, FERC accepted tariff changes that would allow PJM, during the BRA process, to exclude Planned Generation Capacity Resources from the LDA Reliability Requirement calculation if the addition of such resources materially increases the reliability requirement and such resources do not participate in the capacity auction. The February 21 Order also dismissed as moot a complaint filed by PJM challenging the justness and reasonableness of the existing LDA Reliability Requirement. Finally, the February 21 Order stated that FERC would soon convene a forum to examine the functioning of the PJM capacity market. Commissioner Danly issued a separate dissenting statement.

As background, PJM clears the BRA using a supply curve consisting of the supply offers submitted by sellers and administratively determined demand curves. PJM establishes demand curves for the PJM region as a whole, as well as for certain LDAs. PJM calculates the demand curves for LDAs using the LDA Reliability Requirement, which is the projected internal capacity of the LDA (including Planned Generation Capacity Resources) plus the Capacity Energy Transfer Objective (“CETO”) (in essence, the CETO is the amount of imports required to meet reliability needs) less the minimum internal resources required for all Fixed Resource Requirement entities in the LDA.

By including Planned Generation Capacity Resources as projected internal capacity, PJM explained that it assumes that such resources will offer into the relevant auction. Thus, increases in projected internal capacity values are generally offset by the corresponding decrease in the CETO value. However, PJM explained that if certain Planned Generation Capacity Resources are included as projected internal capacity and modeled in the CETO but do not offer into the auction as anticipated, the LDA Reliability Requirement is overstated. PJM explained that it realized this flaw in the tariff when it attempted to clear the 2024/2025 BRA, when a large amount of Planned Generation Capacity Resources in the Delmarva Power & Light – South LDA that were expected to participate but then chose not to do so. PJM stated that, should it complete the 2024/2025 BRA under the current rules, the increase in capacity market clearing prices would not reflect the actual reliability needs of the Delmarva LDA and would force load-serving entities to procure more capacity than is needed (at a cost of over $100 million).

PJM’s December 23, 2022 filing, therefore, proposed changes to allow PJM to exclude from the calculation of LDA Reliability Requirement any Planned Generation Capacity Resources that do not participate in the relevant auction if including them would increase the LDA Reliability Requirement by more than one percent. PJM argued that its proposed revisions should become effective one day after filing, such that the new rules would apply to the 2024/2025 BRA (for which bidding had already closed at the time of PJM’s filing). PJM concurrently filed a complaint alleging that the existing LDA Reliability Requirement, absent PJM’s proposed tariff revisions, would result in an unjust and unreasonable auction outcome.

FERC accepted the tariff revisions, finding they help ensure a competitive outcome for capacity auctions by more closely aligning the LDA Reliability Requirement with actual reliability needs, and will ensure that load-serving entities pay capacity charges that reflect supply and demand fundamentals. FERC found that applying these changes to the 2024/2025 BRA does not violate the filed rate doctrine or the rule against retroactive ratemaking because, at the time of filing, no capacity seller had received a capacity award or been required to take on a capacity obligation, the price for such capacity had not yet been established, and no charges had been billed or collected. FERC also found that the benefits of applying PJM’s proposed tariff revisions to the 2024/2025 BRA—namely protecting consumers from what it termed “unnecessarily high capacity prices”—outweighed any disruption to the settled expectations or reliance interests of market participants on the previously-effective LDA Reliability Requirement rules.

Finally, FERC acknowledged that there have been continuing disputes and complaints about the operation of PJM’s capacity market from a wide spectrum of stakeholders. FERC stated that it will convene a forum to consider these issues outside the parameters and constraints of a particular proceeding, including how best to ensure that the capacity market achieves its objective of ensuring resource adequacy at just and reasonable rates.

In his dissent, Commissioner Danly opined that the February 21 Order is “facially unlawful,” as it violates the filed rate doctrine by seeking to invalidate and reset the prices cleared for a portion of the 2024/2025 BRA. Commissioner Danly warned that the February 21 Order ignores longstanding court precedent “by approving a plainly retroactive rate change that will almost certainly be overturned by the appellate courts,” and, as a result, “will undermine confidence in all FERC-jurisdictional markets.” Commissioner Danly went on to state that the majority distorts, among others, markets, precedent, and the PJM tariff in a misguided effort to protect consumers. Commissioner Danly recommended the Commission pursue remedies against PJM to counteract the destabilizing implications of rerunning the 2024/2025 BRA or restoring the original auction prices. Specifically, Commissioner Danly recommended instituting a proceeding under Section 206 of the Federal Power Act into the continued justness and reasonableness of the PJM capacity market.

The February 21 Order, issued in Docket Nos. ER23-729-000 and EL23-19-000, can be found here.