Our Comment on PJM’s proposals to pay lower capacity rates to some resources that sell environmental attributes – elibrary.ferc.gov/idmws/file_lis…. We argue PJM’s proposals would disrupt a program of cooperative federalism.
Generation procurement is a program of cooperative federalism: states may require utilities to procure resources for their environmental attributes and FERC has exclusive authority over wholesale capacity rates because they directly affect energy rates.
In the beginning (of restructured markets), RTOs did not administer capacity constructs. With FERC’s encouragement, NYISO, PJM, ISO-NE created them in the mid 2000s, nearly a decade after the first state restructuring laws.
The first version of PJM’s capacity construct (called RPM) allowed generators backed by state policies to offer into the market at whatever price; FERC reasoned that these policies “enable states to meet their responsibilities to ensure local reliability.”
FERC and PJM then recognized that the RPM was not the only means for procuring generation capacity. States have a role too. But then things changed.
In 2011, FERC approved PJM’s revised rules that mitigated offers submitted by natural gas generators that received contracts under NJ and MD policies. States sued and a federal appeals court upheld FERC’s decision.
Importantly, PJM then only mitigated offers from these two states’ policies. Those policies were later preempted by the Supreme Court’s 2016 Hughes decision because they “operated within the [PJM] auction” and conditioned payment on the plants clearing the PJM auction.
Those policies benefited natural gas plants, the type of capacity that FERC determined could be used to suppress capacity prices. FERC stated explicitly that it would not mitigate wind and solar. But this limited mitigation was a big deal.
For the first time, FERC decided that state policies interfered with PJM’s auctions and took remedial action. Previously, mitigation in PJM was only used to address generators/buyers exercising market power (tangent on mkt power at the end of this thread).
PJM’s current proposals vastly expand this mitigation authority; PJM wants to mitigate the bids of some resources that sells RECs or other environmental attributes; oddly, a resource owned by a vertically integrated utility that sells RECs does not get mitigated.
PJM acknowledges that there are myriad state subsidies that can affect wholesale rates but it has chosen to single out state renewable energy and carbon programs.
We argue that PJM is targeting programs that benefit sellers who are outmatched in the PJM stakeholder process while leaving untouched subsidies (such as state tax benefits and vertical integration) that benefit incumbents and PJM’s preferred investors @SimeoneEnergy
PJM argues that states are reneging on their commitments to competitive markets; but that has it backwards. State renewable programs pre-date the PJM capacity construct by nearly a decade. States opposed the creation of the capacity construct a decade ago.
When states restructured, they did not sign up to have a regional system operator pick and choose among their generation procurement programs.
Commission approval of a PJM proposal would substantially expand RTO authority in a field of shared authority. In 2006, the Pennsylvania PUC saw this coming. In comments opposing the capacity construct, it told FERC: 
7 yrs ago, FERC invited PJM to submit a capacity proposal that accounts for the environmental benefits that states want. FERC should reject this filing and send PJM back to the drawing board.
--- quick tangent on why PJM mitigates offers – after all, it’s a market…why should PJM tell sellers at what price to offer?
Federal law instructs FERC to ensure that energy rates are just and reasonable – it doesn’t tell FERC what that means or how to figure that out. Historically FERC set rates based on seller costs.
But in the late 80s FERC reasoned that market-based rates (as opposed to cost-based rates) are just and reasonable when neither buyer nor seller has significant market power.
Today’s interstate energy markets are premised on that principle. FERC’s market-based rate regulatory regime is rooted in its ability to detect and mitigate market power.
Nothing in federal law explicitly allows FERC to regulate energy markets. FERC invented the idea (supported by economic theory) and courts bought in.
Step-by-step, as the FERC's market-based rate regime evolved, FERC has consistently emphasized the central importance of market power.
Mitigating offers into a market was initially only a mechanism for addressing market power. FERC was not trying to mitigate the effects of state policies...until very recently.
