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States' Rights, Gamed Markets

RTO Bidding Rules

FERC seems to say that states remain free to interfere with RTO markets.

Citing what it called “mounting evidence of risk” that PJM’s RPM capacity market could indeed “be gamed,” the Federal Energy Regulatory Commission (FERC) last week OK’d most of the tariff amendments PJM had proposed to correct flaws in its Minimum Offer Price Rule (MOPR), which allows the grid operator to mitigate or predatory, below-cost bids by suppliers who would sell generating capacity into the region.

But while FERC may have averted any danger that low-ball bidding could manipulate or distort prices in PJM’s upcoming May 2011 Base Residual Auction, to procure new generating capacity for delivery three years out, FERC perhaps has left questions unanswered on how best to reconcile federally regulated power markets with the legitimate interest of state regulators or legislators in seeking to favor certain energy resources or technologies, or in dictating how the state and its utilities should develop new generation, meet resource adequacy needs, or address long-term economic or policy goals.

In short, the commission’s ruling seems to say that states remain legally and constitutionally free to interfere with RTO capacity markets, yet if they dare to dabble, FERC will go after them with a heavy hand.

‘Dumping’ for Dollars

The case had attracted wide notice around the country, as it had concerned a law enacted recently in New Jersey that appeared to be aimed directly at manipulating or at least undercutting prices set by competitive auction in PJM’s bid-based capacity market, known as the Reliability Pricing Model (RPM). That law, plus a threatened regulatory action in Maryland, had sought to remedy concerns in those two states that the RPM market was imposing high costs on local ratepayers.

The New Jersey law, for example, had sought to mandate development of new, in-state generating plants that would then bid into the RPM Base Residual Auction (BRA) at seemingly uneconomic, below-cost levels. As a result, this “out-of-market” capacity would bring down the market clearing price artificially, and earn savings for in-state ratepayers.

In fact, the New Jersey law had represented a real threat to PJM’s RPM construct. As originally designed, the RPM market and its Minimum Offer Price Rule were designed to block low-ball bids. Yet the old MOPR provision had contained a loop-hole that exempted state-sponsored generation development aimed at resolving a projected capacity shortfall.

The ruling came out only a day after FERC Commissioner Moeller announced he would not recuse himself.

PJM had carved out that exception in recognition that, despite the infl uence of federally regulated regional power markets, state regulators retain a legitimate interest in shaping the in-state power industry —and especially generation. Yet PJM probably never dreamed that New Jersey legislators would someday use this exemption to engage in legally permissible state-sponsored market price manipulation.

Tabbed as “capacity dumping,” the strategy was described in detail an article that appeared recently in Public Utilities Fortnightly, which cited evidence from PJM’s Independent Market Monitor that low-ball bidding under the New Jersey law could cost power producers $500 million or more each year in