Tuesday, May 7, 2013

FERC’s Ruling on PJM’s Minimum Offer Pricing Rule Exempts Self-Supply LSEs



By Andrea I. Sarmentero Garzón

On May 2, 2013, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order partially accepting PJM Interconnection, LLC’s (“PJM”) proposed Tariff changes to its Minimum Offer Price Rule (“MOPR”) subject to further compliance filings (“MOPR Order”).  

The current MOPR was adopted in 2011 in order to mitigate what PJM calls “buyer-side” market power by requiring all new, non-exempted resources to bid at a floor price (i.e. ninety percent (90%) of the Net Cost of New Entry) or higher, unless the resource can demonstrate, through a unit-specific review process, that a lower bid is justified based on the economics of that unit. Last December, PJM submitted revisions to its MOPR rule proposing to replace the unit-specific review process with two broad exemptions: one for “competitive entry” and one for self-supply LSEs.  Under the PJM proposal, a resource would be subject to the MOPR unless it fit within one of the exemptions. 

While the Commission accepted the two broad exemptions, it rejected PJM’s proposal to eliminate the unit-specific review.  The Commission reasoned that, “[t]here may be resources ineligible for any MOPR exemptions that have lower competitive costs than the default offer floor, and these resources should have the opportunity to demonstrate their competitive entry costs. See MOPR Order at P 26.

PJM must now go back to its stakeholders to discuss possible improvements to the alleged deficiencies of its unit-specific review in tandem with possible enhancements to the calculation of the Net Cost of New Entry. See MOPR Order at P 144.

A core issue in the case was whether certain revisions to the MOPR are necessary to ensure that mitigation applies to resources with incentives to submit bids below their actual entry costs.  FERC rejected arguments suggesting that vertically-integrated utilities should satisfy their capacity needs though Fixed Resource Requirements (“FRR”) mechanisms instead of participating in the capacity market with a MOPR self-supply exemption. On this, the Commission stated, “At issue here, however, is not the adequacy, or inadequacy, of the FRR option for vertically-integrated utilities. Rather, the issue is whether PJM’s proposed tariff changes are just and reasonable. We find that PJM has met this burden because entities that self-supply a sufficiently large portion of their capacity requirement do not have an incentive to use uncompetitive entry to lower capacity prices. See MOPR Order at P 110. The Commission made clear that the effectiveness of the self-supply exemption depends “critically” on LSEs meeting the net-short and net-long proposed thresholds and directed PJM to make adjustments to its net-long threshold’s assumptions to accommodate winter-peaking LSEs. The Commission further recognized that the underlying assumptions used in the calculation of self-supply thresholds are subject to change and required PJM to submit tariff language memorializing its obligation to review  these thresholds on a periodic basis.

FERC also rejected PJM's proposal to increase the mitigation period by applying the MOPR to a planned generation capacity resource in two successive auctions after the one in which the new entrant's resource clears. The current rules apply the MOPR until the planned resource clears the capacity auction once.  The Commission found that, “applying the MOPR offer floor to a resource already determined to be economic would be unreasonable and could inefficiently discourage the entry of new capacity that is economic.” See MOPR Order at 211. The Commission reasoned that a resource that has cleared capacity auction has to begin building in order to provide capacity in the corresponding delivery year (three-years ahead) for which it has cleared and that no developer would reasonably commence construction without the certainty that the project has been accepted as a new capacity resource in the PJM’s capacity auction.

You may see the MOPR Order by clicking here.
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