Background
This dispute arose over a significant change in the way PJM Interconnection, LLC (PJM) conducts its capacity market.
PJM is a large regional transmission organization (RTO) spanning 13 states and the District of Columbia. Among the many tasks it performs pursuant to its Federal Energy Regulatory Commission (FERC or the Commission) tariff, PJM oversees annual capacity auctions to ensure adequate supplies of power going forward. In capacity markets, power suppliers commit to produce electricity at some agreed-to point in the future (three years in the case of PJM’s capacity market). In return, the suppliers are compensated for the costs associated with participating in the market. A major modification to how that compensation is determined led to this dispute.
FERC changes the rule
Under PJM’s pre-existing default “market seller offer cap” rule, a supplier’s capacity offer that fell at or below the market-wide cap was admitted and deemed competitive. In 2021, FERC responded to complaints brought by PJM’s Independent Market Monitor, Monitoring Analytics (as well as by state ratepayer advocates and large electric power end-users) finding that a key component of PJM’s default offer cap rule – the Performance Assessment Intervals – resulted in cleared capacity prices that were “excessively high,” and thus not “just and reasonable” under the Federal Power Act.
In response, FERC adopted Monitoring Analytics’ recommendation – the Unit Specific Avoidable Cost Rate Proposal. FERC then dispensed with the market cap rule and implemented a unit-specific review that relies on individualized calculations and requires power plant owners to get the Market Monitor’s unit-specific approval for bids above zero (unless the planned offer meets certain specific conditions). Several suppliers objected to FERC action, requesting that the cap should be recalibrated, not discarded. FERC rejected this approach and these appeals followed.
The petitions for review
Vistra Corp. and several other electricity suppliers, including Constellation Energy, Calpine, LS Power Associates, Talen Energy Marketing and the PJM Power Providers Group (P3), filed a petition for review of the underlying FERC orders that implemented unit-specific review (consolidated with five other petitions) with the D.C. Circuit, raising three principal arguments:
- The Commission’s actions were arbitrary and capricious when it discarded the default offer cap without explanation, and failed to address the reasonable alternatives the suppliers presented to avoid jettisoning the cap.
- The Commission failed to meaningfully account for supplier concerns that capacity offers must adequately reflect the risks suppliers undertake when they participate in capacity market auctions.
- Under the current setup, the Independent Market Monitor’s role encroaches on the Section 205 rights of suppliers to set their own rates.
The D.C. Circuit decision
On August 15, 2023, in Vistra Corp. v. FERC, the U.S. Court of Appeals for the D.C. Circuit rejected the petitions.
The court was not persuaded by the petitioners’ arguments. First, the court found that the Commission adequately explained its choice to rely on unit-specific review rather than a default offer cap, concluding that the petitioners’ recalibrated alternative would not have sufficiently mitigated anti-competition concerns, going so far as to state that the Commission’s “decision was profoundly rational.”
Next, the court found that the Commission adequately addressed its assessment of the risks associated with acquiring a capacity commitment, risks that it explained are limited to participation in a capacity market: “As clear as day, the Commission’s prior orders expressly stated that energy-market risks were ‘not intended to [be] permit[ted]’ in capacity market offers, because such risks are already generally assumed by all PJM market participants.”
The court also agreed with FERC that allowing suppliers to “price every possible adverse outcome” would “unreasonably shift all risk” from suppliers to consumers, “effectively holding sellers harmless at the expense of ratepayers.”
Finally, the court decided that the petitioners’ Section 205 rights remain intact, stating that the Commission reasonably interpreted supplier offers in capacity markets to be merely inputs into obtaining the market-clearing price, but that these inputs are not the ultimate rates that come out of the market. It is only these final rates that are subject to Section 205.
In response, one of the petitioners, the Electric Power Supply Association, which represents competitive power suppliers owning more than 50,000 MW of generation capacity in PJM, immediately expressed its disappointment with the court’s decision. Its president and CEO, Todd Snitchler, stated, “We are disappointed by today’s outcome, which is another blow to the health of PJM’s competitive markets and the RTO’s ability to retain the resources needed in the short and longer terms.”
Key takeaways
- The decision will have an immediate impact on the capacity market reform stakeholder process at PJM.
- The need for capacity market certainty is more urgent given that PJM has substantial amounts of generation at risk of retirement.
- The decision represents a significant challenge to suppliers, who will have to quickly adapt to the new capacity market regime.
Client Alert 2023-191
