The Federal Energy Regulatory Commission (FERC) recently issued an order expanding the Minimum Offer Price Rule (MOPR) in the PJM Interconnection’s capacity market, the wholesale electricity market in which generators are compensated for their contributions to the capacity of the electric grid. The MOPR regulates generators’ offers into the PJM capacity market to prevent them from suppressing prices in the market. FERC is concerned that, if capacity prices are too low, then investment in generation would be impaired, threatening the reliability of the grid.
In a forthcoming article, Penn State Professor of Energy Economics Andrew Kleit and I explore the background to FERC’s MOPR order and then identify three legal defects that underlie the order. Our article builds on prior work described in this recent blog post, in which Kathryne Cleary examines the likely consequences of the order, and Tim Brennan’s explanation of some of the mistaken premises underlying FERC’s approach.
The MOPR originally targeted what FERC refers to as “buyer-side market power” exercised by vertically integrated firms classified as “net buyers.” Because such firms buy more electricity than they sell in the wholesale markets, they could benefit financially from suppressing capacity market prices. Net buyers accordingly may bid into the capacity market at below their actual costs in an effort to drive down the market clearing price. PJM created the MOPR to guard against buyer market power by imposing minimum capacity market offers for net buyer firms. Over the course of the last decade, however, FERC has gradually expanded PJM’s MOPR beyond net-buyer sellers to combat “uneconomic” resources more generally. In FERC’s recent orders, this category of uneconomic resources has included resources that receive out-of-market payments such as state subsidies. The agency contends that such payments impair the pricing mechanisms of a competitive market.
Kleit and I argue in our article that FERC’s expansion of the MOPR to combat state subsidies suffers from at least three legal defects. First, FERC relies on arbitrary distinctions, in violation of the Administrative Procedure Act. It is true that, in principle, subsidies can disrupt markets. But every generator benefits from—and is burdened by—a variety of government policies. The idea that FERC can neatly distinguish subsidized resources from competitive resources, cull out the effects of subsidies, and create a pristine market is fantasy. In actuality, FERC’s order defines subsidies arbitrarily, without regard to the magnitude of the effect on capacity market prices, which is supposedly FERC’s motivating concern.
Second, FERC’s order fails to create a mechanism for a just and reasonable price, in violation of the Federal Power Act. By excluding some subsidized resources from the capacity market, FERC’s order will force the capacity market to procure more capacity, even though the PJM capacity market is currently procuring more than enough capacity to meet customer demand for electricity. In other words, FERC is fixing a reliability problem that does not exist. The cost of this excess capacity ultimately falls on electricity consumers. Charging consumers for unnecessary capacity is not just and reasonable, and is contrary to the goals of electricity restructuring.
Third, FERC’s order also violates the Federal Power Act’s apportionment of federal and state regulatory authority. The Federal Power Act gives FERC the authority to regulate wholesale electricity transactions and reserves to states the authority to make policy regarding generation and retail transactions. FERC purports to respect state authority to subsidize generation, but also claims an imperative to offset the effects of state policies in the capacity market. Such a position effectively endorses a regulatory war between federal and state sovereigns—the opposite of the mutual accommodation our system of energy federalism is designed to create.
FERC tends to be a pragmatic agency that moves incrementally—an approach that often serves it well in navigating thorny stakeholder politics. In this case, however, incremental expansion of the MOPR has led FERC down a path that over time has strayed far from the agency’s original approach and the mandates of its governing statutes. A fundamental correction is long overdue.