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Key Takeaways | Developments in the PJM Market

On June 18, 2020, McDermott partners Neil Levy and David Tewksbury were joined by Paul M. Sotkiewicz, PhD, of E-Cubed Policy Associates, LLC, to discuss recent developments in the markets operated by PJM Interconnection (PJM).

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Below are key takeaways from this week’s webinar.

  • In December 2019, the US Federal Energy Regulatory Commission (FERC) issued an order requiring PJM to expand its Minimum Offer Price Rule (MOPR). Under the expanded MOPR, a capacity resource that receives a state subsidy will be subject to a minimum offer floor price in PJM’s capacity auctions, unless it is entitled to one of the exemptions set forth by FERC.
  • The expanded MOPR is not expected to have significant impacts on the results of PJM’s capacity auctions, particularly in the near term. There are at least three reasons for this: First, there are various exemptions to the expanded MOPR, including, but not limited to, exemptions for existing renewable resources, as well as for resources used for self-supply. Second, default offer floors are determined based on the technology of the resource, and certain of these default offer floor prices are low enough to allow resources to continue to clear in PJM’s capacity auctions. Third, and most importantly, a resource can submit offers below the default minimum offer floor price if it can demonstrate that its costs are below the default price.
  • FERC acted relatively quickly on requests for rehearing of its December 2019 order, and issued an order on rehearing in April 2020. Petitions for review of FERC’s orders are pending in the US Court of Appeals for the Seventh Circuit and the US Court of Appeals for the District of Columbia Circuit, and are expected to be consolidated in the Seventh Circuit.
  • PJM has made two compliance filings in response to the December 2019 and April 2020 orders. Given the speed with which FERC acted on rehearing, there is the possibility that FERC could also act quickly on the compliance filings. PJM has indicated that it intends to hold the Base Residual Auction for 2022/2023, which was originally scheduled to take place in May 2019, six and a half months after FERC issued an order accepting the compliance filings.
  • Various states are considering opting out of PJM’s capacity markets by using the Fixed Resource Requirement (FRR) alternative. The FRR alternative could give state regulators more control over the mix of resources in the state, but has historically resulted in higher costs for ratepayers in the FRR states.
  • FERC also recently approved modifications to PJM’s rules to provide additional compensation for operating reserves. At the same time, FERC also required PJM to adopt a forward-looking, rather than historical, methodology to calculate the energy and ancillary services offset (E&AS Offset) that is used in the capacity market. Notwithstanding the expected increase in energy and ancillary services revenues as a result of the operating reserves rule change, using a forward-looking methodology may not result in significant changes to the E&AS Offset in [...]

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Following Recent Maryland Ruling, Federal Court Declares New Jersey Scheme to Promote Investment in In-State Generation Unconstitutional

by Ari Peskoe

A Federal District Court Judge for New Jersey struck down the state’s incentive program to encourage construction of in-state generation capacity.  New Jersey’s scheme was similar to Maryland’s scheme that was the subject of a District Court ruling last month.  The Judges in both cases found that the state intruded on Federal ratemaking authority in violation of the Supremacy Clause of the Constitution.

New Jersey regulators concluded that insufficient transmission and increasing demand could lead to reliability problems in the state.  Working with state legislators, the Board of Public Utilities (BPU) developed the Long-Term Capacity Agreement Pilot Program (LCAPP), an incentive scheme designed to encourage gas-fired generation in or near New Jersey.  Like the Maryland incentive, New Jersey’s program guaranteed developers of new generation payments from the state’s incumbent utilities if PJM’s capacity auction resulted in a price lower than a set price that reflected development costs of new in-state generation.

The Judge found that state’s LCAPP occupies the same field of regulation and intrudes upon FERC’s authority to set wholesale rates through its approved PJM capacity auction.  Because LCAPP requires generators to clear the PJM capacity auction and the LCAPP rules incorporate PJM’s auction rules, the Judge determined that the state’s LCAPP is “not separate from, and to the contrary, occup[ies] the same field” as PJM’s auction.  The Judge rejected the state’s argument that LCAPP contracts are merely financial arrangements and therefore not subject to FERC jurisdiction.  According to testimony presented by a plaintiff witness and cited by the Judge, a purely financial contract does not “involve any real performance.”  New Jersey, on the other hand, required developers to build a plant, make capacity available, and clear that capacity in the PJM auction.  The Judge therefore found that payments under the state’s LCAPP contracts were in exchange for performance.

The Judge also found that plaintiffs had not met their burden of proof that LCAPP violated the Commerce Clause of the Constitution.  Plaintiffs argued that in-state generators had advantages in securing LCAPP contracts, which effectively prohibited out-of-state generators from competing.  According to the Judge, the BPU has authority to incentivize construction in New Jersey, and it “appears reasonable that the [BPU] would incentivize construction in areas where reliability concerns are in flux.”  The Judge therefore found that the in-state benefit is reasonable in light of New Jersey’s interest in ensuring reliable electric service.

The decisions in this case and in the Maryland case both struck down state incentive schemes that required utilities to pay the difference between a set contract price and a price determined by a FERC-regulated wholesale auction market.  Such a scheme, according to these two judges, sets the price received by a generator and therefore impermissibly intrudes on federal ratemaking and is void under the Supremacy Clause.

The Judge in the New Jersey case suggested alternative incentives, including tax exempt financing, property tax relief and favorable leases on public lands.  However, rather than routing incentives through [...]

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Federal Court Rules Maryland Scheme to Promote Investment in In-State Generation Unconstitutional

by Ari Peskoe

On September 30, a Federal District Court Judge for Maryland declared that the state’s incentive scheme to encourage the construction of new gas-fired generation capacity violates the Supremacy Clause of the Constitution.  By requiring incumbent utilities to supplement PJM’s market-clearing prices with payments to the developer of a new gas-fired generator, the Judge determined that Maryland’s incentive scheme impermissibly sets a wholesale rate.  The Judge’s ruling may complicate states’ efforts to ensure that FERC-jurisdictional electricity markets meet the goals of individual states.

In 1999, Maryland restructured its electricity industry, requiring its investor-owned utilities to divest their generation assets and purchase electricity in federally regulated, regional wholesale markets. In 2007, at the direction of the Maryland General Assembly, the state’s Public Service Commission (PSC) published a report that concluded that the state faced a critical shortage of generation capacity.   According to the PSC, Maryland was located in a highly congested portion of the regional PJM market and therefore paid higher than average prices for wholesale energy.  The PSC found that while the PJM markets are “structured ostensibly to create price incentives for [investment in] new generation and transmission,” the markets had not responded to the state’s “looming capacity shortage.”

Following several proceedings at the PSC, including the issuance of an RFP to construct new gas-fired capacity in Maryland, in April of 2012 the PSC issued an order directing the state’s three incumbent utilities to enter into contracts for differences (CfDs) with a developer that would construct 661 megawatts of new in-state generation capacity. Under the CfDs, the utilities would pay the developer the difference between set contract prices and the PJM clearing prices for energy and capacity.  When the PJM prices were lower than the contract prices, the utilities would pay the developer.  When PJM prices were higher than the contract prices, the developer would pay the utilities.

The plaintiffs – primarily existing generators – complained that the PSC’s order impermissibly regulated the price of wholesale energy sales.  Such sales, they argued, may not be regulated by states because the “scheme of federal regulation . . . [is] so pervasive as to make reasonable the inference that Congress left no room for the states to supplement it.”  The Judge agreed, concluding that the PSC is “establish[ing] the price ultimately received [by the developer] for its physical energy and capacity sales to PJM . . . under field preemption principles, the PSC is impotent to take regulatory action to establish the price for wholesale energy and capacity sales.”  In other words, the Judge concluded that the PSC set the rate and not merely that its order affected the rate by inducing the developer to bid into the PJM markets.

The Judge rejected the defendant’s argument that the CfDs merely finance construction and therefore do intrude on FERC’s ratemaking.  First, to get paid under the CfDs the developer’s bids had to clear the PJM market.  Payment required delivery of energy and not [...]

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