The Federal Energy Regulatory Commission is not a Casino, as Commissioner Danly’s dissent notes, “To put this case in context, imagine a game of blackjack at the only casino in the territory—the Federal Energy Regulatory Casino.” FERC Commissioner Danly is a Republican and most likely on his way out in June, but he has made an excellent point in roasting PJM’s capacity market filing in his lone dissent. FERC should issue a policy statement that it will not accept these mid-auction filings in the future from its market operators. Otherwise, it risks losing market participants’ confidence in capacity markets.
The issue is whether grid operators can stop capacity auctions if they think consumer outcry would ensue due to high price outcomes. In PJM’s case, PJM didn’t like what they saw in the Delmarva Dayton Power Light – South zone because planned generation with signed interconnection agreements didn’t make an offer.
What is the difference between a casino and a regulatory commission?
A casino implies people gamble with their money, and sometimes they win, but most times they lose. Danly’s dissent implies PJM’s market participants are gambling with their offers. The main problem is that our market participants who bid their resources to meet the capacity needs expect the market operator to run the auction and post the results. The market participants expect rules to be followed. PJM broke the rules in the middle of the auction because it felt consumers south of the Chesapeake & Delaware Canal would pay four times the normal capacity price. That’s the main issue.
PJM’s auction cleared at $90, nowhere close to the $200 price seen in the New Jersey zone in the 2021-22 auction.
PJM is FERC’s favorite. If it was Midcontinent ISO, I find it hard to believe that FERC would have accepted it. MISO had a similar situation in Illinois in 2015 when the Illinois zone cleared at $150 compared to $3 at the remaining zones. All hell broke loose. Illinois threatened to leave the MISO market, and Attorney General Lisa Madigan filed a case against MISO at FERC. This case seems to be an ongoing litigation at FERC.
Not all FERC-jurisdictional grid operators have capacity markets. Only PJM, MISO, NYISO, and ISO-NE have capacity markets. PJM’s capacity market is the most lucrative out of all organized markets. In the 2023-24 auction run last year, resources were procured at a total cost of $2.2 Billion. PJM states save $1.2-$1.8B by PJM running a capacity market.
PJM runs a 3-year-out capacity auction called Reliability Pricing Model. The first two years are binding; resources must be committed. These capacity markets send long-term locational capacity signals for supply and demand to locate where the need is. For example, if prices are high in a zone like Dayton Power Light – South, supply must be increased, or demand must be decreased to lower that price. Markets work best when regulators don’t mess with rules.
Danly’s dissent is all over the board – it says most commissioners distort the filed rate, precedent, time, space, the principle that “Parts Comprise the Whole,” “settled expectations,” and markets. Danly not only brings up casino in his dissent but also “eating cake broke his diet” as an analogy to drive home the point that the majority of commissioners distort the fact that PJM has already run its auction. So, the damage is done just like eating cake broke the diet.
What prevents MISO or any other Independent System Operator with a capacity market from stopping their auction after looking at the prices? The precedent is set. How would the market participants dependent on these prices feel about participating in the next auction? Why would they participate if the rules change willy-nilly?
In its typical fashion, FERC has called for a “forum” on capacity markets.
The best outcome for FERC to save its face now as a market regulator is to start addressing the wholesale capacity market design at all ISOs, not just PJM. By issuing a Policy Statement to all ISOs, FERC should signal that it will not accept these mid-auction filings. FERC should not be afraid of state regulators accusing FERC of usurping the State’s resource adequacy rights. FERC is doing a favor to states in multi-state ISOs by filling the gap in state Integrated Resource Plans because states don’t collaborate on their resource plans.
Courts have affirmed FERC’s authority to ensure wholesale rates are just and reasonable. The District of Columbia Court of Appeals decision in FERC Order 841 and the US Supreme Court decision in FERC Order 745 upheld FERC orders compensating for electric storage and demand response. In addition to renewables, energy storage and distributed energy resources are the future resources on our grid that provide capacity. So, FERC already has the authority to implement capacity market reforms.
Commissioner Danly’s dissent should lead to some introspection at FERC. Whether the Democrats are in the White House or Republicans, the energy industry expects FERC to be a regulatory commission, not a casino.