FERC Capacity Market Order Suggests Default Service Auctions Could Constitute State Subsidy

The Federal Energy Regulatory Commission on Oct. 15 issued an order on PJM Interconnection LLC’s proposed revisions in response to a December 2019 order that directed the grid operator to expand the minimum offer price rule, or MOPR, effectively raising the bid price for state-subsidized resources to participate in the capacity market. Democratic Commissioner Richard Glick dissented, saying that the order has weaponized MOPR as a tool for raising prices and stifling state efforts to promote clean energy. Notably, Glick pointed out that the commission set aside its previous finding that default service auctions could be subject to MOPR mitigation, but a footnote in the order suggests that New Jersey’s auction would constitute a state subsidy as a certain portion of procurements must come from renewable energy. The issue raises concerns about other such auctions within PJM that might be similarly treated as a subsidy.

State default service auctions are used by utilities in retail choice states to provide energy and related services to retail customers. The order clarifies that “non-discriminatory or fuel-neutral” auctions can avoid MOPR, citing as an example New Jersey’s default service auction would constitute a state subsidy given the possibility that the auction winners would have to comply with the state’s renewable portfolio standard. Several other PJM states’ default service auctions also mention renewable portfolio standards or similar programs applying to entities that provide default service, implying that payments from those auctions would also trigger the MOPR.

The order indicated that further action in another proceeding was required before PJM can commence certain pre-auction activities and prepare for the region’s capacity auctions. The commission directed the grid operator to file another compliance filing within 30 days.

Several states have criticized the commission’s December 2019 order, citing its potential to harm renewable generation seeking to participate in the capacity market. New Jersey and Illinois are among states that are evaluating plans to opt out of the regional capacity market in response to reforms that expanded the minimum offer price rule to subsidized resources. New Jersey and Maryland filed a lawsuit with the D.C. Circuit Court of Appeals challenging the order.

New Jersey regulators are examining resource adequacy alternatives following the capacity market reforms, and are weighing the “fixed resource requirement alternative” mechanism, which allows state-subsidized resources to be removed from the capacity auction.