FERC Filings
EPSA's Request For Clarification or, in the Alternative, Rehearing of the PJM Interconnection
Request for Clarification or Rehearing
A. Definition of Marginal Costs
In the January 25 Order, the Commission states the following,
Under PJM’s LMP pricing system, all generators that lack market power have an incentive to submit bids at their marginal costs, because any price above marginal cost will generate sufficient revenue to cover the unit’s operating costs and contribute to the recovery of the unit’s fixed costs. This is the same incentive that exists in a competitive market, where competitors are expected to produce at the point where prices exceed their short-run marginal costs. When a unit bids above its marginal cost, that is evidence that the unit has some ability to control price, and hence, has market power. This principle has been used by PJM to determine those generators subject to mitigation. [Emphasis added]
The acceptance by the Commission of PJM’s conclusion that bidding above marginal costs indicates market power mischaracterizes the way markets work. If only short-run variable costs are recovered by generators in a market, there are no price signals to the marketplace to provide proper incentives for the development of future resource adequacy or ensure the viability of existing economic generation. Generators routinely submit offer curves that approach long-run marginal costs to reflect scarcity, opportunity costs and risk. Opportunity costs include the financial losses incurred when a resource with limited operating hours runs in low cost hours; for example, hydropower or fossil units with limitation in air, water or other environmental permits. The risk premium refers to the risk that a unit accepted in the day-ahead market will experience a real-time outage and be forced to purchase energy in the real-time spot market to meet its delivery obligations.
The Commission has clearly stated, “Marginal costs include not only variable costs but also the marginal opportunity cost of all legitimate opportunities, costs, and risks.” This definition of marginal costs has been reiterated in subsequent proceedings before the Commission. Hence, consistent with precedent, the Commission should clarify that submission of offer curves that include legitimate scarcity, risk and opportunity costs does not indicate evidence of market power.
B. Timeline for Deactivation Policy
The Commission correctly rejects PJM’s proposal to require generating units that have submitted notice of their intent to retire to continue to operate for an indeterminate period for reliability. EPSA agrees that PJM does not have the authority “to require generators to operate beyond a reasonable notice period.” However, while PJM may not require operation for an indeterminate period, there is no discussion in the January 25 Order of acceptable sunset specifications or a process for determining such a timeline for continued operation under the deactivation structure. The Commission must provide for (or send back to PJM to decide) a transitional mechanism or process that limits the time period a unit is required to operate under this deactivation structure.
C. Clarification of Post-1996 Exemption
In the January 25 Order, the Commission removes the blanket exemption for post-1996 units from PJM’s local market power mitigation, but notes the following:
[S]ome units may have been built in reliance on the exemption…. Consequently, the Commission will grandfather units that relied on the exemption…and they will remain exempt from the offer capping provisions unless PJM can demonstrate that these units exercise market power.
The Commission also found that, before PJM can impose mitigation measures on these grandfathered units, either PJM or its market monitor must make a section 205 filing with the Commission documenting the exercise of market power. The Commission should modify this offer capping process consistent with its original decision in Order No. 888 finding that post-1996 units lack market power. Specifically, the Commission should clarify that all generators for which construction commenced between July 9, 1996 and September 30, 2003 are exempt from offer capping. The Commission's decision in the January 25 Order exempts certain post-1996 units in PJM from mitigation, while subjecting other post-1996 units to mitigation. Such an inequity between post-1996 units is fundamentally unfair (since all post-1996 units relied on the exemption in constructing their facilities) and inconsistent with the Commission's decision in Order No. 888.
For this reason, the just and reasonable rate for all post-1996 units should be based on the exemption from offer capping. To protect consumers, however, the Commission should clarify that post-1996 units can be offer capped if PJM or its market monitor can document the unit's ability to exercise market power through a Section 206 proceeding before FERC. In any such Section 206 proceeding, the grandfathered units should have a rebuttable presumption of reliance on the exemption because of the Commission's decision in Order No. 888.
D. No-Three Pivotal Suppliers Test for Competitiveness
EPSA has stated previously that PJM’s proposed no-three pivotal suppliers test is too restrictive and will impose mitigation even in markets that are workably competitive. Further, EPSA is concerned that implementation of and justification for the no-three jointly pivotal suppliers test will perpetuate the designation of all load pockets as non-competitive, barring the possibility that mitigation measures will be lifted even in areas that exhibit competitive characteristics. In sum, no area in PJM will ever be deemed competitive based on the jointly pivotal suppliers test as set out by the PJM market monitor.
In the January 25 Order, the Commission has tacitly agreed that EPSA’s concerns are warranted, as the order initiates a Section 206 proceeding in order to determine whether the no-three pivotal suppliers test is just and reasonable or should be revised. That noted, the Commission accepts the PJM-proposed test as a means to provide an exception from mitigation for load pockets that are competitive. The Commission erred in accepting a competitiveness test that is inadequate, misleading, and is under investigation while concurrently approved for use by PJM. Hence, the Commission must rescind its acceptance of the no-three pivotal supplier test due to a lack of evidence that the test is just and reasonable. In the interim, pending the completion of the 206 proceeding, the Commission should require PJM to rely on a combination of a pivotal supplier test and a market share analysis as outlined in AEP Power Marketing, Inc., et al., 107 FERC 61,018 (AEP Power Marketing II), the Commission’s current screens for generation market power.