On March 18, 2021, FERC granted two consolidated complaints alleging that the default offer cap in PJM Interconnection, L.L.C.’s (“PJM”) capacity market is unjust and unreasonable because the Expected Performance Assessment Intervals input, set at a value of 360 12-minute intervals (30 hours), is too high. Ultimately, FERC found that the default offer cap is “incorrectly calibrated,” rendering PJM and its Market Monitor unable to ensure competitive market outcomes. FERC ordered additional briefing on a replacement rate, but concluded that PJM’s capacity auction for the 2022-2023 delivery year, scheduled for May 2021, should go forward under the current rules.

In PJM’s capacity market, offers below a set default offer cap are deemed competitive, while offers above the cap are subject to review by the Market Monitor and PJM to ensure that the offer is based on legitimate costs and reasonable estimates of unit-specific performance and system parameters. Generation resources that fail to meet their capacity commitments during specific 12-minute intervals when PJM declares an emergency—termed Performance Assessment Intervals (“PAI”)—are assessed a penalty. Resources that exceed their performance obligation and those that perform during an emergency despite having no capacity obligation are entitled to receive a bonus payment. The default offer cap is calculated as a product of the penalty rate (set at the net cost of new entry or “Net CONE” of a reference resource divided by an estimate of the total number of PAI in a given delivery year, or “Penalty PAI”) times a Balancing Ratio (“B,” a measure of average fleet-wide performance during the review period) times the number of Expected PAI in a given delivery year (“H”):

PJM currently estimates both the Expected PAI (H) and Penalty PAI to be the same value of 30 hours, or 360 intervals of 12 minutes, and accordingly abbreviates the formula for the default offer cap as Net CONE * B.

The PJM Market Monitor filed a complaint in February 2019 alleging that PJM’s default offer cap is too high because PJM uses an unreasonable and unsupportable value of 360 for its Expected PAI value, and requested that FERC direct PJM to update the assumptions regarding Expected PAI. Similarly, Joint Consumer Advocates (“JCA”) filed a complaint in April 2019 requesting that FERC revise PJM’s methodology for calculating the default offer cap. In support of their complaints, the Market Monitor and JCA pointed out that only a small number of very high offers in the capacity market have been subject to unit-specific cost review, preventing effective market power mitigation; that the Base Residual Auction cleared below the default offer cap in all four of the past Capacity Performance auctions, meaning that the additional protection FERC expected from the Market Monitor reviewing the marginal offers was not provided; and that a more reasonable Expected PAI is closer to zero than 360 intervals, given that from 2015 to 2017 there were no emergency events that triggered PAI and only two PAI events were triggered in 2018 in small, localized areas of PJM.

FERC’s March 18 order granted the complaints, finding that it is no longer just and reasonable for PJM to use 360 intervals for the Expected PAI value in the default offer cap formula. FERC also directed the parties to submit briefs addressing alternative approaches to market mitigation, including:

• Using different values for Penalty PAI and Expected PAI and the appropriate method for setting and updating each value;
• Whether revisions to the default offer cap can be made without revision to the unit-specific offer cap;
• Alternative methods of market power mitigation;
• Whether it would be just and reasonable to remove the market-wide default market seller cap and instead employ unit-specific offer caps for certain resources; and
• Any updates on PAI that have occurred since the complaints were filed.

Initial briefs will be due May 3, 2021; Reply briefs will be due June 2, 2021. FERC also established a refund effective date of March 18, 2021, but stated that it did not anticipate ordering refunds or ordering PJM to rerun intermediate incremental auctions. Finally, FERC concluded that PJM’s capacity auction for the 2022-2023 delivery year, scheduled for May 2021, should go forward under the current rules in light of the imminent start of the delivery year and the two-year delay to the auction already experienced.

FERC’s March 18 order is available here.