This story was updated at 10:25 a.m. EDT.
Federal regulators rejected two capacity market reform proposals from Eastern grid operator PJM Interconnection in a Friday decision divided along partisan lines, setting aside concerns that the move could undermine state energy policies.
The Federal Energy Regulatory Commission decision, which one industry lawyer called "seismic," argues that PJM's current tariff is unjust, unreasonable and unduly discriminatory because it fails to protect competition in the region's wholesale capacity market from state policies to subsidize renewable resources and nuclear power.
PJM, which oversees the grid in 13 states in the Mid-Atlantic and eastern Great Lakes region, operates a capacity market that allows utilities and other electricity suppliers to purchase power to meet demand three years in advance.
PJM had sent two proposals to FERC earlier this year in an attempt to address the suppression of prices in that market, which it has said could limit investment (E&E News PM, April 9). The grid operator has argued in recent months that state clean energy subsidies allow renewable and nuclear generators to enter into capacity auctions at prices below their operating costs, pushing down overall market prices and potentially forcing other plants to shut down.
In its order Friday, the commission instead opened a 90-day "paper hearing" to consider an alternative approach: expanding the "minimum offer price rule" (MOPR) and implementing a similar mechanism to PJM's "fixed resource requirement" (FRR) tool.
The MOPR requires some capacity suppliers to meet minimum price bids. Currently, it only applies to new natural gas plants, but the expansion would apply it to all subsidized resources "with few to no exemptions."
And the FRR concept essentially allows resources that are getting out-of-market support to choose to be removed from the capacity market, while remaining in PJM's energy and ancillary services markets.
Comments are due on the proposal in 60 days, with 30 more days following that for reply comments.
"To us, the email equivalent of this is 'Please redesign and repair the capacity market by the end of the summer. Thanks!'" Raymond Gifford, managing partner at the Denver office of law firm Wilkinson Barker Knauer LLP, said in an email.
In a statement, a PJM spokesperson said the grid operator is "pleased that the Commission is taking action to address the price-suppressive impacts of resources that receive out-of-market payments on competitive wholesale markets."
"The Order appears to be a positive step to change competitive electric market design while recognizing the important role states play in influencing the resource mix through retail energy policies. We will begin work immediately to develop the kind of bifurcated capacity construct envisioned by the Commission and actively engage stakeholders, including the states, within the timetable laid out by the Commission," PJM said.
The two Democrats on the commission both dissented from FERC's order, calling it a hasty fix and an "act of regulatory hubris."
Commissioner Richard Glick said that the proposed changes would force state-supported resources to make a "false option" between participating in the capacity market with the expanded MOPR, which would mean a significant risk that they would not clear the market, or choosing the FRR and forfeiting any chance of receiving a capacity payment.
To put it another way, in the words of University of Richmond energy law professor Joel Eisen, "FERC's aim is clear: force subsidized resources to compete without the subsidies, or leave the markets altogether."
"Rather than interfering with state policies that address externalities associated with electric generation, such as greenhouse gas emissions that contribute to the existential threat of climate change, the commission should be striving to accommodate and give effect to those state initiatives," Glick said.
His fellow Democrat, Cheryl LaFleur, acknowledged that the increase in state subsidies does challenge the capacity market ability to deliver benefits.
But, she said, "I am concerned that the desire for action has led the commission to pursue a flawed and rushed process that could do more harm than good."
One of the Republicans who voted to approve the order, Commissioner Robert Powelson, will be leaving the agency in mid-August. If his seat is not filled quickly, the vacancy could lead to 2-2 ties on a broad variety of issues, potentially stalling FERC's agenda (see related story).
Reporter Rod Kuckro contributed.