On Remand, FERC Reverses Prior Approval of PJM 10% Net CONE Adder

Troutman Pepper

Troutman Pepper

On January 20, 2022, FERC issued an order on remand from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) directing PJM Interconnection, L.L.C. (“PJM”) to remove provisions from its Tariff that applied a 10 percent adder to the energy and ancillary services (“E&AS”) offset in PJM’s net Cost of New Entry (“CONE”) calculation. FERC acknowledged that energy market rules permit generators to increase their offers into the energy market by 10 percent above estimated costs. That fact alone, FERC concluded, does not justify application of the 10 percent adder to the E&AS offset in the Net CONE calculation used to establish the Variable Resource Requirement Curve (“VRR Curve”). Moreover, FERC concluded, PJM failed to present sufficient evidence to support inclusion of the 10 percent adder. FERC directed PJM to remove the 10 percent adder from its VRR Curve determination for the 2023-2024 Base Residual Auction (“BRA”) and subsequent auctions. FERC previously directed PJM to delay the start of the 2023-2024 BRA (see January 18, 2022 edition of the WER). In the January 20 order, FERC stated its expectation that PJM propose an amended BRA schedule that would provide it adequate time to remove the 10 percent adder from its Tariff. Commissioner James Danly issued a separate dissenting statement.

FERC’s January 20 order is the latest action in the proceedings surrounding PJM’s 2018 review of its VRR Curve. The VRR Curve represents the prices that consumers should pay for varying quantities of capacity offered in PJM’s Forward Capacity Market (“FCM”). Net CONE is an input to the VRR Curve that measures how much revenue a hypothetical new generator—referred to as the “Reference Resource”—would need to earn in PJM’s FCM to recoup its construction costs. PJM assumes the Reference Resource is a Combustion Turbine (“CT”) (see July 20, 2021 edition of the WER). To calculate net CONE, PJM: 1) estimates the total cost to install and operate the Reference Resource, and 2) subtracts any revenues from PJM’s energy E&AS markets.

PJM reviews the VRR Curve every four years. In the 2018 review, PJM proposed to update the E&AS revenue estimate by increasing the value of the Reference Resource’s offer by 10 percent. FERC accepted PJM’s proposal (see April 24, 2019 edition of the WER and April 23, 2020 edition of the WER), but the D.C. Circuit found on appeal that FERC failed to provide a satisfactory explanation for its approval. The court pointed to evidence that CT plants may not use the 10 percent adder in their energy market offers, and that CTs would rarely, if at all, face the types of risks which the 10 percent adder was designed to offset (see July 20, 2021 edition of the WER).

On remand in the January 20 order, FERC found that PJM failed to meet its burden to demonstrate that the10 percent adder to the E&AS offset is just and reasonable. FERC acknowledged that PJM’s energy market rules permit generators to increase their offers into the energy market by 10 percent above their estimated costs to account for uncertain market participation costs. However, FERC concluded that PJM failed to provide evidence regarding whether and how often a CT resource would actually utilize the 10 percent adder. According to FERC, the fact that the 10 percent adder to cost-based energy market offers is permitted does not explain why PJM should require the 10 percent adder in all of the Reference Resource’s modeled energy market offers. And while FERC acknowledged record evidence showing that natural gas units do make use of at least a portion of the 10 percent adder in their daily energy market offers, FERC concluded that the data did not justify the inclusion of a 10 percent adder in every market interval of the year as an upward adjustment of costs in the E&AS Offset calculation. Rather, it merely showed that CTs that set the energy market price might use the 10 percent adder in some intervals. Accordingly, FERC directed PJM to remove the 10 percent adder from the determination of the VRR Curve for the 2023-2024 BRA and subsequent auctions.

Commissioner Danly argued in his dissenting statement that there was sufficient record evidence to approve the 10 percent adder, and that FERC’s order discounted the evidence submitted by PJM and its market participants in support of the 10 percent adder. Commissioner Danly also pointed out that FERC’s decision will require revising the E&AS Offset and resulting VRR Curve ahead of the already-delayed 2023-2024 BRA. Commissioner Danly stated that such last-minute rule changes create regulatory uncertainty that threatens reliability over time.

FERC’s January 20 order is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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