Commissioner Clements’s Partial Dissent in PJM Interconnection, L.L.C. Docket No. EL21-78-000

Docket No. EL21-78-000

I dissent in part on today’s order because I disagree with the majority’s decision to terminate the portion of this Federal Power Act section 206 proceeding that pertains to PJM Interconnection, L.L.C.’s (PJM) offer cap rules for parameter-limited offers. I believe the Independent Market Monitor for PJM (Market Monitor) has presented evidence that these rules may not be working as intended and may be permitting the exercise of market power in PJM’s day-ahead and real-time energy markets. The evidence that served as the basis for initiating this section 206 investigation is largely unrebutted by PJM in the existing record, and key factual questions remain unanswered. Instead of prematurely closing the investigation, I would have set this element of the proceeding for evidentiary hearing to further develop the record to answer these questions. Only then would the Commission be equipped to determine if this element of PJM’s tariff is producing unjust and unreasonable energy rates.

Mitigating market power is a necessary element of ensuring just and reasonable rates in PJM’s energy market

While the tariff rules at issue here are complex, the central question is straightforward: Are the market power mitigation rules in PJM’s energy market, particularly those limiting generators’ operating parameters, preventing the exercise of market power when sellers are found to possess it? The Commission relies upon effective market power mitigation in RTO markets to ensure the resulting rates are just and reasonable.[1] The Market Monitor has, for years, found that the local market structure in PJM’s energy market is “not competitive due to the highly concentrated ownership of supply in local markets created by transmission constraints and local reliability issues.”[2] The Market Monitor has stated that “[w]hile overall offer capping levels have been low, there are a significant number of units with persistent structural local market power that would have a significant impact on prices in the absence of local market power mitigation.”[3] However, while stressing the importance of that mitigation, the Market Monitor has repeatedly identified flaws under existing tariff rules “because unit owners can exercise market power even when they fail the [Three Pivotal Supplier] test.”[4] The Commission initiated the present investigation in response to those claims.[5]

It is worth noting, as a starting point, that PJM and the Market Monitor agree on the purpose of limitations on operating parameters within PJM’s broader energy market mitigation rules—to prevent the exercise of market power through a seller’s submission of inflexible operating parameters.[6] Where they disagree is whether PJM’s existing rules are satisfying that objective.

PJM employs an approach to market power mitigation unique among the RTOs. When other RTOs identify a seller as possessing market power that could inefficiently affect market prices, an energy market offer from that seller is limited to a pre-determined offer price and set of key operating parameters.[7] The objective is to ensure that, when market power is present, a seller cannot use that market power to raise market prices above competitive levels or accrue undue revenue through other means.[8]

By contrast, when PJM identifies a seller with market power, it considers, but does not necessarily use, the fully mitigated cost-based offer in deciding how to commit and dispatch the generator. Rather, it assesses both the cost-based offer and one or more seller-determined “market,” or “price-based,” offers and seeks to choose the one that minimizes total production costs (in the day-ahead market) or dispatch costs (in the real-time market).[9] Those market offers are unmitigated either in terms of their offer price or in terms of their offer price and operating parameters. The result is that PJM may commit or dispatch a generator that possesses market power on an offer that is partially or fully unmitigated. This is not an uncommon occurrence when market power is found: day-ahead sellers which failed the Three Pivotal Supplier test were committed on market offers less flexible than their cost-based, parameter-limited offers in at least 28% of unit hours in each of the last four years.[10]

In other words, PJM layers a second objective into its mitigation rules: curb the exercise of market power but also minimize costs by selecting among mitigated and unmitigated offers. While this sounds good in theory—two birds, one stone—the Market Monitor presents evidence that in trying to do both things, PJM may at times be failing to do either.[11] That is, the Market Monitor asserts that PJM’s tariff rules for selecting among mitigated and unmitigated offers fail to account for all relevant costs and therefore may commit and dispatch resources on offers that reflect the exercise of market power on the part of the seller.[12] That claim calls into question the very basis on which the Commission has found that energy market rates in an RTO like PJM are just and reasonable.[13] While I am not certain based on the existing record that the Market Monitor’s claims are correct, PJM has done little in its answer to persuade us they are not. While it is dissatisfying that the record remains inconclusive after several back and forth pleadings, we owe it to customers to investigate until we have the record we need to render a confident decision, and we have the procedural tools to do so. 

The Market Monitor presents claims and evidence that warrant further investigation

With respect to the day-ahead market, the Market Monitor claims that PJM’s offer-selection formula is susceptible to a seller’s structuring its market offer such that it appears lower cost than the mitigated cost-based offer despite including less flexible operating parameters.[14] The Market Monitor asserts this can result in the seller’s receiving more uplift than under a competitive outcome[15] and possibly raising total production costs above what PJM’s offer-selection formula calculates for the commitment.[16]

The Market Monitor presents aggregated market data to support its claims,[17] including data showing that in 2019, 2020, and most of 2021, generators found to have market power and offering operating parameter limits less flexible than those in their cost-based offers accrued 88.8%, 87.0%, and 66.1% of total day-ahead uplift.[18] It also presents data for the same time periods showing that, on days with hot or cold weather alerts (that indicate aggregate structural market power), generators offering operating parameter limits less flexible than those in their cost-based offers accrued 60.5%, 79.2%, and 32.2% of total day-ahead uplift.[19] This data is not dispositive—it is conceivable that such uplift allocation reflects an efficient market outcome—but it does suggest a deeper analysis is warranted given the large percentages of day-ahead uplift being collected by this subset of generators.

With respect to the real-time market, the Market Monitor argues PJM’s offer-selection formula is flawed because it takes a myopic view of offer prices across the seller’s offers. A seller’s offer includes not a single offer price but a curve of prices at varying quantities of output. But PJM’s real-time offer-selection formula looks only at a single point on each offer curve: the economic minimum quantity, or EcoMin. Should a seller wish to make its non-parameter-limited market offer more attractive under the formula in order to have PJM select it, the seller need only submit a low offer price at EcoMin while potentially submitting much higher prices at quantities above EcoMin. The Market Monitor argues that when PJM selects this offer based on the EcoMin offer price but dispatches the resource above EcoMin, a seller found to possess market power can set the market price based on an unmitigated offer.[20] In addition, the Market Monitor asserts a seller can earn uplift due to inflexible operating parameters in its market offer that it would not have earned had PJM dispatched it on its cost-based (parameter-limited) offer.[21] This is why the Market Monitor states that “the offer with the lowest dispatch cost as defined by PJM is not necessarily the least cost offer at output levels greater than the economic minimum MW.”[22]

 In response to the Market Monitor’s claims, PJM focuses on the day-ahead market and offers several hypothetical examples in which its existing rules commit resources to achieve the lowest total system production cost.[23] These examples demonstrate that these rules can produce the desired least-cost commitment decisions, but they do not demonstrate whether this happens reliably in practice. In fact, the Market Monitor states that PJM’s examples are not reflective of actual offer behavior observed in the market.[24]

PJM, the PJM Power Providers Group, and Vistra also vigorously defend why a seller may legitimately offer a generator at different prices with more or less flexible operating parameters.[25] But this appears to be a red herring. I accept that a seller’s offer price and offered operating parameters may not be independent—I have no reason to doubt these parties’ assertions as to increased wear and tear on a generator of operating more flexibly rather than less flexibly. And in the vast majority of intervals, sellers can reflect those preferences in their offers. According to the Market Monitor’s 2020 State of the Markets Report, mitigation due to sellers’ failing the Three Pivotal Supplier test is infrequent: for the period 2018-2020, between 0.3%-1.3% of total MWh were subject to mitigation in the day-ahead market,[26] and between 0.8%-1.3% of MWh were subject to mitigation in the real-time market.[27] Even if these MWh are concentrated among certain resources due to, for example, recurring local transmission constraints, it is difficult to see how sellers’ being mitigated on their operating parameters during such a small percentage of intervals represents an undue burden. More importantly, it bears reminding that the question raised here is how sellers are permitted to offer when they possess market power. As the Market Monitor states plainly, “generation owners with market power do not have an incentive to submit the most competitive offer.”[28]

It is premature to terminate the section 206 investigation with key questions unresolved

In June 2021, the Commission initiated this investigation and made a preliminary finding that PJM’s tariff was unjust and unreasonable. The Commission stated that PJM’s mitigation rules may permit sellers to structure their market offers strategically to ensure PJM chooses the market offer without parameter limits, thereby “undermin[ing] the purpose of parameter-limited offers, which is to ensure sellers are not able to exercise market power through the use of inflexible operating parameters.”[29] The Commission based that concern on the Market Monitor’s 2020 State of the Markets Report, PJM’s 2021 filing to revise its “Real Time Values” rules, and the Market Monitor’s protests in certain market-based rate application proceedings.[30]

PJM has not provided evidence to dispel the Commission’s stated concern, and today’s order provides no explanation of whether and why the majority believes the concern is allayed. Instead, the majority states only that the existing record is lacking. Are PJM’s mitigation rules reliably curbing market power, contrary to the Commission’s preliminary finding? Are the offer-selection formulas meeting their cost-minimization objectives in practice? More specifically, based on historical data of intervals when market power is found, how do market prices, uplift costs and allocation, and total production costs compare when sellers with market power are committed or dispatched on (1) non-parameter-limited offers versus (2) parameter-limited offers? Have market sellers benefitted, on a portfolio basis or through the collection of additional uplift, from PJM’s selection of non-parameter-limited offers when market power is present rather than the selection of parameter-limited offers? We still do not know.

That is because the existing record provides neither a basis to conclude the Commission’s preliminary finding was without merit nor definitive answers to these critical questions. The answers likely lie in examination of the historical market data that only PJM and the Market Monitor possess, but which has not been fully presented to date in this proceeding. But the Commission has authority to direct evidentiary hearings[31] to resolve factual questions like these. And given the relative infrequency with which energy market mitigation is triggered in PJM,[32] examining the necessary data through a hearing should be a manageable exercise.[33]

By closing out this section 206 investigation rather than seeking out the necessary information to confidently determine whether a market power problem exists, we are potentially leaving in place mitigation rules that are flawed and lead to unjust and unreasonable energy market rates. I cannot support that decision.

For these reasons, I respectfully dissent in part.