151 FERC ¶ 61,208 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Norman C. Bay, Chairman; Philip D. Moeller, Cheryl A. LaFleur, Tony Clark, and Colette D. Honorable.
PJM Interconnection, L.L.C.

Essential Power Rock Springs, LLC , Essential Power OPP, LLC, and Lak ewood Cogeneration, L.P. v. PJM Interconnection, L.L.C. Docket Nos. ER15

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- 000 EL15

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- 000 ER15

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EL15

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ORDER ON PROPOSED TARIFF REVISIONS
(Issued June 9, 2015)

Table of Contents Paragraph Numbers

I. Introduction

................................ ................................ ................................ ............................ 4. II. Notice of Filing and Responsive Pleadings

................................ ................................ .......... 16. III. Procedural Matters

................................ ................................ ................................ ............... 20. IV. Capacity Market Revisions

................................ ................................ ................................ . 22. A. PJM’s Justification for the Proposed Changes

................................ ................................ . 24. 1. PJM’s Proposal

................................ ................................ ................................ ............. 24. 2. Protests and Comments

................................ ................................ ................................ 30. 3. PJM’s Answer

................................ ................................ ................................ ............... 36. 4. Additional Answers

................................ ................................ ................................ ...... 38. 5. Commission De termination

................................ ................................ .......................... 41. B. Performance Requirements

................................ ................................ .............................. 51. 1. PJM’s Proposal

................................ ................................ ................................ ............. 51. 2. Protests and Comments

................................ ................................ .............................. 60. 3. PJM’s Answer

................................ ................................ ................................ ............... 73. 4. Additional Answers

................................ ................................ ................................ ..... 82.Docket No. ER15

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5. Deficiency Letter, PJM’s Response, and Protests and Comments

............................... 85. 6. Commission Determination

................................ ................................ .......................... 91. C. Non

- Performance Charges

................................ ................................ ............................... 106. 1. PJM’s Proposal

................................ ................................ ................................ ............. 108. 2. Protests and Comments

................................ ................................ ................................ 117. 3. PJM’s Answer

................................ ................................ ................................ ............... 134. 4. Additional Answers

................................ ................................ ................................ ...... 142. 5. Deficiency Let ter, PJM’s Response, and Protests and Comments

............................... 147. 6. Commission Determination

................................ ................................ .......................... 158. D. Fixed Resource Requirement Plans

................................ ................................ ................. 187. 1. PJM’s Proposal

................................ ................................ ................................ ............. 188. 2. Protests and Comments

................................ ................................ ................................ 190. 3. PJM’s Answer

................................ ................................ ................................ ............... 195. 4. Additional Answers

................................ ................................ ................................ ...... 198. 5. Commission Determination

................................ ................................ .......................... 202. E. Transition Mechanisms

................................ ................................ ................................ ..... 213. 1. PJM’s Proposal

................................ ................................ ................................ ............. 213. 2. Protests and Comments

................................ ................................ ................................ 224. 3. PJM’s Answer

................................ ................................ ................................ ............... 237. 4. Additional Answers

................................ ................................ ................................ ...... 247. 5. Commission Det ermination

................................ ................................ .......................... 253. F. Market Power Mitigation

................................ ................................ ................................ .. 262. 1. PJM’s Proposal

................................ ................................ ................................ ............. 263. 2. Protests and Comments

................................ ................................ ................................ 271. 3. PJM’s Answer

................................ ................................ ................................ ............... 297. 4. Additional Answers

................................ ................................ ................................ ...... 307. 5. Market Monitor Answer and Replies

................................ ................................ ......... 310. 6. Deficiency Letter, PJM’s Response, and Protests and Comments

............................... 313. 7. Commission Determination

................................ ................................ ......................... 334. G. Credit Requirements

................................ ................................ ................................ ......... 359. 1. PJM’s Proposal

................................ ................................ ................................ ............. 363. 2. Protests and Comments

................................ ................................ ................................ 369. 3. PJM’s Answer

................................ ................................ ................................ ............... 374. 4. Commission De termination

................................ ................................ .......................... 378. H. Short

- Term Resource Procurement

................................ ................................ .................. 384. 1. PJM’s Proposal

................................ ................................ ................................ ............. 385. 2. Protests and Comments

................................ ................................ ................................ 386. 3. PJM’s Answer

................................ ................................ ................................ ............... 390. 4. Additional Answers

................................ ................................ ................................ ..... 391. 5. Commission Determination

................................ ................................ .......................... 394. V. Energy Market Revisions

................................ ................................ ................................ ..... 400. A. Operating Parameters

................................ ................................ ................................ ....... 401.Docket No. ER15

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1. PJM’s Proposal

................................ ................................ ................................ ............. 402. 2. Protests and Comments

................................ ................................ ................................ 404. 3. PJM’s Answer

................................ ................................ ................................ ............... 421. 4. Additional Answers

................................ ................................ ................................ ...... 430. 5. Commission Determination

................................ ................................ .......................... 43 2. B. Force Majeure

................................ ................................ ................................ ................... 447. 1. PJM’s Proposal

................................ ................................ ................................ ............. 448. 2. Protests and Comments

................................ ................................ ................................ 451. 3. PJM’s Answer

................................ ................................ ................................ ............... 458. 4. Additional Answers

................................ ................................ ................................ ...... 461. 5. Commission Determination

................................ ................................ .......................... 462. C. Maximum Emergency Offers

................................ ................................ ........................... 471. 1. PJM’s Proposal

................................ ................................ ................................ ............. 472. 2. Protests and Comments

................................ ................................ ................................ 473. 3. PJM’s Answer

................................ ................................ ................................ ............... 475. 4. Commission Determination

................................ ................................ .......................... 476. D. Generator Outages

................................ ................................ ................................ ............ 482. 1. PJM’s Proposal

................................ ................................ ................................ ............. 483. 2. Protests and Comments

................................ ................................ ................................ 486. 3. PJM ’s Answer

................................ ................................ ................................ ............... 489. 4. Additional Answers

................................ ................................ ................................ ...... 492. 5. Commission Determination

................................ ................................ .......................... 493.Docket No. ER15

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1. On December 12, 2014, in Docket No. ER15

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- 000, PJM Interconnection, L.L.C. (PJM) submitted proposed changes to its Open Access Transmission Tariff (OATT) and Reliability Assurance Agreement Among Load Serving Entities (RAA) , pursuant to section 205 of the Federal Power Act (FPA), 1 to establish a new capacity product, a Capacity Performance Resou rce, on a phased

- in basis, to ensure that PJM’s capacity market provides adequate incentives for resource performance (Capacity Performance Filing). In a related, contemporaneous filing, PJM submitted in Docket No. EL15

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- 000 proposed changes to its Am ended and Restated Operating Agreement (Operating Agreement) and to its OATT, pursuant to FPA section 206, 2 to address these performance issues, as applicable to PJM’s energy market (Energy Market Filing). 3

2. For the reasons discussed below, we conditional ly accept PJM’s Capacity Performance Filing , effective April 1, 201 5 , as requested, subject to the condition that PJM submit a compliance filing within 30 days of the date this order issues. 4 In addition,
we grant, in part, and deny, in part, PJM’s compla int in its Energy Market Filing and direct PJM to submit a compliance filing within 30 days of the date this order issues

. 5 We find that PJM has demonstrated that its existing energy market rules addressing operating parameters, force majeure, and generat or outages are unjust and unreasonable. We accept PJM’s proposed revisions to rules related to force majeure and generator

1 16 U.S.C. § 824d (2012).

2 Id. § 824e.

3 PJM notes that the Energy Market Filing revisions arise primarily under the PJM Operating Agreement, which requires PJM to obtain a two

- thirds vote from its members to support a section 205 filing. PJM states, however, that its proposed revisions were
co nsidered by its stakeholders under a special procedure, without a vote. Accordingly, PJM requests approval of its Operating Agreement revisions, pursuant to section 206, and seeks approval of its proposed OATT provisions, pursuant to section 205. For the reasons addressed by the Commission in its guidance on electronic filings, our review of the Energy Market Filing will be undertaken pursuant to section 206, i.e. , by the filing code chosen by PJM. See Electronic Tariff Filings , 130 FERC ¶ 61,047 at P 8 (2010) (the treatment of any “combined filing,” i.e. , a filing whose different parts would, if filed individually, have different Type

- of

- Filing codes, will depend on the code chosen by the filing entity).

4 See Appendix C for a complete list of the conditions to acceptance in Docket No. ER15

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5 See Appendix D for a complete list of the compliance directives that PJM is to submit in Docket No. EL15

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- 000.Docket No. ER15

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outages, accept , in part , and reject , in part , PJM’s proposed revisions to rules related to operating parameters, and direct further modifications to the operating parameters rules. Lastly, we find that PJM has not demonstrated that its rules related to Maximum Emergency Offers are unjust and unreasonable and therefore deny this aspect of PJM’s complaint.
3. In the December 12, 2014 fili ng, PJM proposed to implement the tariff changes addressed in its filings effective April 1, 2015, in advance of a May 2015 Base Residual Auction, i.e. , for the capacity procurements applicable to the 2018

- 19 delivery year. However, on March 31, 2015, the Commission notified PJM that the December 12, 2014 filing was deficient and that the Commission would need further information to process the proposal (Deficiency Letter). On April 7, 2015, PJM filed a request for waiver of its OATT to delay the 2015 Bas e Residual Auction for the 2018

- 19 delivery year. On April 10, 2015, PJM supplemented the December 12, 2014 filing by submitting a response to the deficiency letter (Deficiency Letter Response). On April 24, 2015, the Commission granted PJM’s request t o delay the 2015 Base Residual Auction for the 2018

- 19 delivery year, 6 which was previously scheduled for May 11

- 15, 2015, and instead conduct the auction within 30

- 75 days after the Commission issues a merits order in this proceeding, but no later than th e week of August 10

- 14, 2015. 7

6 PJM Interconnection, L.L.C. , 151 FERC ¶ 61,067 (2015).

7 On January 30, 2015, Essenti al Power Rock Springs, LLC, Essential Power OPP, LLC, and Lakewood Cogeneration, L.P. (Essential Power) filed a complaint with the Commission against PJM in Docket No. EL15

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- 000. In it, Essential Power argues that capacity sellers’ decisions to seek, or not seek, a capacity market must

- offer exception request by the tariff

- determined deadline of January 11, 2015, should not be binding due to the pendency of the instant proceeding. In addition, Morgan Stanley submitted comments in the instant proceeding, requesting that the Commission require that PJM delay the date capacity sellers must submit a sell offer or seek an exception to the capacity market must

- offer requirement until after a final order is issued in the proceeding. On February 5, 2015, Essent ial Power and PJM filed with the Commission a joint motion to dismiss the complaint, stating that they had reached an agreement whereby capacity sellers will be able to amend their must

- offer exception requests within seven days after the Commission issues an order in the instant proceeding. We grant the request to dismiss Essential Power’s complaint. We note that, in its waiver request to delay the 2015 Base Residual Auction for the 2018

- 19 delivery year, PJM committed to announce the deadlines for marke t participants to update their pre

- auction submissions, such as offer quantities, offer

- price caps, and credit submissions, as necessary and appropriate to reflect the Capacity Performance rules accepted by the Commission, shortly after the Commission’s ac tion on the deficiency letter response. See PJMDocket No. ER15

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I. Introduction

4. Today’s order approves, as modified, significant reforms to PJM’s capacity market construct, as well as corresponding changes within PJM’s energy markets. As discussed at length below, the Commission finds that PJM has demonstrated the need for these reforms to ensure the long

- term reliability of electric supply in the PJM region. We also find that PJM has demonstrated that its proposal, as modified herein, is just and reasonable.

5. PJM relies on a three

- year forw ard capacity market construct to ensure resource adequacy at a reasonable cost through the use of an annual auction and subsequent incremental auctions closer to the delivery year. 8 PJM states, however, that its construct has failed to keep pace with the level of resource commitments required, has applied inadequate charges for sub

- par performance, and otherwise has not adequately ensured actual performance. PJM adds, and we agree, that a resource adequacy construct that fails to provide adequate incentiv es for resource performance can threaten the reliable operation of PJM’s system and force consumers to pay for capacity without receiving commensurate reliability benefits.

6. To address these problems with its current capacity construct, PJM’s Capacity Per formance Filing would establish, on a phased

- in basis, a new capacity product, i.e

. , a Capacity Performance Resource, to provide greater assurance of delivery of energy and reserves during emergency conditions. PJM also proposes to establish charges for p oor performance (Non

- Performance Charges) and credits for superior performance (Performance Bonus Payments), a must

- offer requirement as applicable to Capacity Performance Resources, and a transition mechanism to remain in effect through May 31, 2020. PJM also proposes, in its Energy Market Filing, changes to its energy market tariff rules to implement the performance obligations and corresponding payments and penalties associated with its capacity market reforms. PJM proposes to implement its proposed ch anges for the 2018

- 19 delivery year, with a transition mechanism for the 2016

- 17 and 2017

- 18 delivery years that will facilitate improved resource performance during those years. Ultimately, PJM proposes to procure 100 percent of the region’s capacity res ources as Capacity Performance Resources.

Interconnection, L.L.C. , 151 FERC ¶ 61,067 at P 6. We find that this commitment addresses the concerns of Essential Power, as well as Morgan Stanley. Specifically, PJM will announce the specific timing for the rescheduled 2018

- 19 Base Residual Auction, including an amended deadline for market participants to update their pre

- auction submissions.

8 PJM Interconnection, L.L.C. , 117 FERC ¶ 61,331 (2006).Docket No. ER15

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7. The Commission approves PJM’s proposed reforms, as modified herein, because we find that these reforms are a significant step toward addressing a confluence of changes in the PJM markets, including both recent perf ormance issues that PJM has demonstrated are impacted by inadequate incentives and penalties for resource performance under its current construct, 9 and ongoing changes in PJM’s resource mix that are projected to accelerate. Given the forward nature of PJM 's capacity market, failure to act today to address recent generator performance issues and anticipated resource fleet changes could cause reliability issues years from now, at realized cost levels potentially significantly higher to customers

-- in the fo rm not just of extreme price spikes like those seen in January 2014, but potentially in loss of load or other reliability events. We find that taking action at this time to increase reliability, and to ensure incentives for resource performance (including both existing and new capacity), is both appropriate and necessary.
8. The Commission has been actively involved in the review of capacity markets and larger trends regarding resource adequacy and fuel assurance. In particular, we note that the Commission r ecently recognized the need to address resource performance issues in ISO New England Inc. (ISO

- NE), 10 and in a generic proceeding in which the Commission : (i) directed regional transmission organizations (RTOs) and independent system operators (ISOs) to f ile reports on the status of their efforts to address fuel assurance issues; and (ii) provided guidance to assist RTOs and ISOs in these efforts. 11 PJM states that its proposed reforms were prepared in the context of these related policy initiatives, and a re designed to ensure that resources committed as capacity to meet PJM’s reliability needs will deliver the promised energy and reserves when called upon in emergencies, and thus will provide the reliability that the region expects and requires. We recogn ize that PJM’s reforms are part of a broader effort at the Commission to ensure that the competitive wholesale markets continue to meet the needs of customers, and to encourage evolution of the markets based on operational experience.
9. Furthermore, we find persuasive PJM’s argument that its existing capacity construct must be substantially reformed to meet these challenges, and that incremental change to capacity or energy market rules alone might be inadequate to address the long

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9 Although we do not base our approval today solely on the recent degradation of resource performance in PJM during times of system stress, we note that this poor performance has led to significant and expensive price spikes.

10 ISO New England Inc. , 147 FERC ¶ 61,172 (2014) ( ISO

- NE Capacity Performance Ord er ), reh’g pending

.
11 Centralized Capacity Markets in Reg’l Transmission Orgs. & Indep. Sys. Operators , 149 FERC ¶ 61,145 (2014) ( Fuel Assurance Guidance Order ).Docket No. ER15

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term r esource concerns faced by the region. PJM raises serious and legitimate concerns regarding the adequacy of its current capacity market design to ensure the performance of capacity resources, which are critical to maintaining regional reliability. 12 Althou gh it is correct that PJM’s existing capacity construct has successfully provided an incentive for the construction of new generation to both meet load growth and replace retiring resources, it is not enough simply to ensure that “capacity,” whether in the form of existing or new resources, is procured to meet reserve targets; rather, that capacity must carry with it meaningful performance obligations, and corresponding incentives and penalties, to ensure that those resources actually deliver when needed. 13 PJM has convincingly argued not only that its current construct fails to provide appropriate incentives and penalties, but also that its proposed reforms, as modified herein, are a just and reasonable solution to address those deficiencies and will meanin gfully improve resource performance in PJM. 14

10. Having concluded that PJM has met its burden under the FPA to justify substantial reforms to its capacity market construct, today’s order also addresses in detail the individual components of PJM’s proposed r eforms. Given the length of this order, we will briefly address certain aspects of PJM’s proposal to provide clarity regarding the basis for the Commission’s action.

12 Although PJM has not argued that its existing capacity construct is unjust and unreasonable, we note that PJM was under no obligation to make that showing, as PJM has rights to seek changes to the capacity market provisions of its OATT pursuant to section 205 of the FPA, i.e., under the just and reasonable standard. We disagree with suggestions that PJM’s election to seek reforms pursuant to section 205 undermines PJM’s argument that its existing construct is not working; indeed, the fact that PJM argues that its energy market rules, which are located in the Operating Agreement and which require a two

- thirds vote from its members to revise pursuant to section 205, are unjust and unreasonable highlights PJM’s view of the gravity of the needed reforms. Furt hermore, following the issuance of the Commission’s March 31, 2015 deficiency letter, PJM took the unprecedented step of asking the Commission to delay its May 2015 BRA to allow the Commission to rule on the merits of its proposed reforms. That PJM sought , and the Commission granted, a delay in the auction indicates how significant these reforms are to the PJM region and its long

- term ability to ensure reliability.

13 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 36.

14 As noted below in para graph 49, in making that case, PJM is not required by the FPA or Commission precedent to provide the mathematical specificity of a cost

- benefit analysis to support a market rule change.Docket No. ER15

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11. PJM proposes to revise its market mitigation for capacity market offers to establish, consistent with the Commission’s acceptance of a similar proposal in ISO

- NE, 15 a default offer cap based on the estimated level of capacity revenues that a representative resource would require to incur a capacity obligation. Also consistent with the proposal accepted in ISO

- NE, 16 offers above the default offer cap are subject to a unit

- specific review by PJM and the Market Monitor. PJM proposes to base its default offer cap, as well as its proposed penalty level (referred to as the Non

- Performance Charge), upon an assumption that PJM will experience 30 Emergency Action hours per year. 17

12. As discussed below in section V.F, we find that PJM’s proposed market mitigation construct is just and reasonable. It is precisely because the PJM capacity market is structurally non

- competitive that mitigation is necessary, and we conclude that PJM’s proposal, which is modeled on the construct previously accepted by the Commission in ISO

- NE, 18 is an appropriate mitigation construct. Indeed, we note that the Market Monitor, who evaluates the competitiveness of PJM’s capacity markets, supports PJM’s proposed mitigation design, including its proposed default offer cap. 19 We also disagree that PJM’s proposal creates improper arbitrage opportunities that could undermine the effectiveness of its reforms. PJM’s proposal does not create new or different drivers of price difference between the Base Residual Auction and Incremental Auctions for the relevant delivery year. To the extent reforms to the number or design of PJM ’s incremental auctions are needed, we note that the Commission has a pending proceeding under section 206 of the FPA to investigate whether PJM’s capacity market fails to promote long

- term reliability by possibly permitting speculative sell offers. 20

13. As di scussed below in section V.C, we also accept PJM’s 30 hour proposal and find that it is a reasonable approximation of the upper bound of hours during which the

15 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 96.

16 Id . P 91.

17 The Emergency Action hours are, in turn, the Performance Assessment Hours during which a Capacity Performance Resource’s performance will be evaluated for, among other things, possible assessment of Non

- Performance Charges (for under

performan ce) or receipt of bonus payments (for over

- performance).

18 PJM Deficiency Letter Response at 3.

19 Market Monitor comments to PJM’s Deficiency Letter Response at 2.

20 PJM Interconnection, L.L.C. , 147 FERC ¶ 61,108 (2014).Docket No. ER15

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PJM system is likely to experience Emergency Actions over the relevant commitment period, and th erefore reasonable to use in the calculation of both the default offer cap and Non

- Performance Charge. PJM’s proposal is based on recent experiences with extreme weather across the PJM system and, given that PJM’s proposal is intended to ensure resource p erformance during times of system stress, is an appropriate number to use going forward. As a result, we also disagree with assertions that PJM’s assumption that its system will experience 30 Emergency Action hours each year leads to an improper imbalance of risks and rewards under PJM’s proposal, or otherwise constitutes a fundamental design flaw, that warrants rejection of PJM’s entire proposal. Nonetheless, as part of the Commission’s ongoing monitoring of PJM’s markets, we require that PJM submit info rmational filings with the Commission after the conclusion of each of the first five delivery years under PJM’s proposal, beginning with the 2016

- 2017 delivery year, to evaluate the impact of this 30 hour assumption on resource performance during Performan ce Assessment Hours, as well as the possible impact of alternative Non

Performance Charges based on higher and lower estimates of the number of Emergency Action hours during each delivery year. We also encourage PJM, as it gains more experience under its new capacity construct, to reassess the assumed number of Performance Assessment Hours and file with the Commission if it believes a revision is warranted. 21

14. In today’s order, the Commission also conditionally accepts in part, and rejects in part, PJM’s p roposed changes to what a capacity market seller may reflect in its operating parameters in the energy market. The purpose of Capacity Performance is to ensure performance during extreme events. We find that PJM’s proposal, as revised below, undergirds t he overall Capacity Performance proposal because it ensures that resources needed to perform during those events can also recover their costs of doing so. 22 Lacking such assurance, resources faced with actual constraints will be in a position of weighing
n onperformance penalties against costs of performance that are specifically disallowed in make

- whole payments, which could discourage the very performance that PJM seeks to encourage . Further, we believe that today’s order appropriately ensures that resour ces cannot quantify and include in their capacity performance sell offer firm fuel costs and/or risks that will be recovered in make whole payments.
15. Ultimately, the Commission has an ongoing obligation to ensure that rates are just and reasonable, and that obligation does not end with today’s order. We note that while some have disagreed with the balance struck in the PJM proposal between capacity

21 Infra paragraph 163.

22 While we recognize that these resources may present PJM with limits on their flexibility, we do not believe our findings in today’s order discourage flexibility; in any event, the PJM markets provide numerous incentives to encourage resource flexibility.Docket No. ER15

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payments, Non

- Performance Penalties and Bonus Performance Payments, the Commission sees great value in a tarif f

- defined mechanism that establishes a transparent, operative framework to provide an incentive for resource reliability. Under PJM’s current capacity construct, resources may not have sufficient incentives to deliver on their capacity commitments when ne eded; under PJM’s proposal, which we accept today, capacity resources in PJM will face new and substantial penalties for non

- performance that we conclude will help ensure the reliability of the PJM system. Maintaining reliability is not optional, and it i s critical that PJM’s forward capacity market, which plays an essential role in that reliability effort, work to provide an incentive for resource performance during times of system stress. Therefore, while we accept PJM’s proposal (as modified), the Comm ission can and will actively monitor its implementation, and we will act where necessary to modify it to ensure the proper alignment of performance obligations, incentives, and penalties.

II. Notice of Filing and Responsive Pleadings

16. Notice of PJM’s filing in Docket No. ER15

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- 000 was published in the Federal Register , 79 Fed. Reg. 77,467 (2014) and notice of PJM’s filing in Docket No. EL15

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- 000 was published in the Federal Register , 79 Fed. Reg. 76,321 (2014), with interventions a nd protests due on or before January 20, 2014. 23 Notices of intervention and timely

- filed motions to intervene were submitted by the entities listed in the Appendices to this order. 24 In addition, motions to intervene out

- of

- time were submitted, in Docket No. ER15

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- 000, by Panda, Covanta, Noble, AEIF, and Morgan Stanley, and in Docket No. EL15

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- 000, by Panda, EKPC, AEIF, and Morgan Stanley.
17. Comments and/or protests were submitted by numerous entities, as summarized below. In addition, answers were su bmitted, in Docket No. ER15

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- 000, by PJM, the Indiana Commission, the PJM Utilities Coalition, EKPC, Exelon, the Maryland Commission, Panda, Calpine, the Transition Coalition, 25 Brookfield, EKPC, the Market Monitor, Direct Energy, Homer City, LS Power, Duke, AEMA, Joint Protestors, 26

23 See N otice Granting Extension of Time (issued Dec. 24, 2014)

.
24 The abbreviated names or acronyms by which these entities are referred to in this order are noted in the Appendices

.
25 The Transition Coalition is comprised of the following entities: the Delaware Commission, Duquesne Light Company, Direct Energy, NextEra, Noble, ODEC, PJM Industrial Coalition, Rockland, SMEC, and WGL Energy Services, Inc.

26 Joint Protestors is comprised of the following entities: AMP, ODEC, and SMEC.Docket No. ER15

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NRG/Dynegy, Dominion, Moxie, Rockland, P3, Joint Consumers, RESA, and H.Q. Energy Service (U.S.) Inc. Answers were submitted, in Docket No. EL15

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- 000, by PJM, Exelon, the Maryland Commission, the PJM Utilities Coalition, C alpine, the Market Monitor, Joint Protestors, Dominion, Rockland, and Joint Consumers.
18. Notice of PJM’s Deficiency Letter Response was published in the Federal Register, 80 Fed. Reg. 21,716 (2015), with interventions and protests due on or before April 24, 2015. Timely motions to intervene were filed by Public Citizen, Inc and SunEdison Utility Holdings, Inc

. 19. Comments and/or protests were submitted by numerous entities, as summarized below.

III. Procedural Matters

20. Pursuant to Rule 214 of the Commission’s Rul es of Practice and Procedure, 18 C.F.R. § 385.214 (2014), the notices of intervention and timely, unopposed motions to intervene serve to make the entities that filed them parties to the proceedings in which these pleadings were filed. In addition , given their interest in the proceedings, the early stage of the proceedings, and the absence of undue prejudice or delay, we grant the unopposed, late

- filed interventions submitted, in Docket No. ER15

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- 000, by Panda, Covanta, Noble, AEIF and Morgan St anley , and in Docket No. EL15

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- 000, by Panda, EKPC, AEIF , and Morgan Stanley

. 21. Rule 213(a)(2) of the Commission’s Rules of Practice and Procedure prohibits an answer to a protest and an answer to an answer unless otherwise ordered by the decisional author ity. We accept the aforementioned answers, in the proceedings in which they were submitted, because they have provided information that has assisted us in our decision

- making process.
IV. Capacity Market Revisions

22. As discussed more fully below, we conditional ly accept PJM’s Capacity Performance filing , subject to PJM ’s submitting a compliance filing within 30 days of the date this order issues. PJM has demonstrated that, in light of recent events and changes in the PJM region, its existing capacity market rul es addressing capacity performance should be revised because they do not provide adequate incentives for resource performance and may negatively impact reliability. We find that most of the proposed tariff revisions in the Capacity Performance Filing , as modified by certain aspects of PJM’s Deficiency Letter Response, are just and reasonable and will provide appropriate incentives for resource performance. However, we condition our acceptance upon PJM’s submission of a compliance filing to effectuate the modifications outlined in Appendix C and discussed in detail in the body of this order

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23. Unless otherwise noted herein, we find that PJM’s Capacity Performance proposal , as modified by its Deficiency Letter Response, 27 is just and reasonable. 28 In the sections of this order that follow, we consider the specific elements of PJM’s proposal, beginning with the need for reforms to PJM’s capacity market.
A. PJM’s Justification for the Proposed Changes

1. PJM’s Proposal

24. PJM designed its existing capacity market con struct (the Reliability Pricing Model, or RPM), to ensure resource adequacy at a reasonable cost through the use of an annual auction. 29 PJM states, however, that these rules have failed to keep pace with the level of commitments required, apply inadequate charges for sub

- par performance, and do not adequately ensure actual performance. PJM adds that a resource adequacy construct that fails to provide adequate incentives for resource performance can threaten the reliable operation of PJM’s system and force consumers to pay for capacity without receiving commensurate reliability benefits.
25. PJM explains that its existing rules compensate a capacity resource based on its real

- time performance, by increasing, or decreasing, its total capacity revenue. Under the se rules, a resource’s “availability” during peak hours is determined based on whether the resource is able to operate in a given hour at expected levels, subject to a Peak Hour Assessment Charge. PJM states, however, that this existing penalty structure is inadequate, given that it places most of the risk of resource under

- performance on loads, not on resource owners or operators. PJM notes, in its answer, a seller can earn substantial revenues through PJM’s capacity auctions by committing its resource a s capacity, with little concern that it will lose much of that revenue even if it performs poorly. 30 As such, the Peak Hour Assessment Charge provides little incentive to the seller to make capital improvements, or increase its operating expenses for the p urpose of enhancing the availability of its unit during emergency conditions.

27 In its answer, PJM pr oposes to withdraw one element of its proposal in Schedule 8 of the RAA addressing load serving entity capacity obligation allocations. We therefore condition acceptance of PJM’s proposal on removal of this element. PJM may, at its election, make a separ ate filing with the Commission addressing this matter.

28 Nothing in this order prevents the enforcement of the Commission’s Anti

Manipulation Rule. 18 C.F.R. § 1c.2 (2014).

29 PJM Interconnection, L.L.C. , 117 FERC ¶ 61,331 (2006).

30 See PJM answer at 7.Docket No. ER15

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26. PJM states that its existing rules also limit a seller’s opportunity to recover through the capacity market certain costs associated with improv ing the performance capability of its resource. Specifically, PJM’s currently

- effective offer cap for existing generators (the Avoidable Cost Rate), while allowing for the recovery of certain capital costs ( e.g. , investments in dual

- fuel capability), does not allow sellers to include in t heir sell offers the costs attributable to natural gas firm transportation arrangements. PJM states, however, that allowing capacity sellers to include costs of firm natural gas transportation in their capacity offers is n ot, alone, sufficient to fully ad dress the problem. According to PJM, even if a seller could include such costs in its Avoidable Cost Rate, PJM’s existing rules provide inadequate deterrents to poor performance to incent it to incur such costs . PJM explains that doing so w ould reduce the seller’s probability of clearing the capacity market because the seller must compet e with other sellers that can clear in the auction and receive all, or most, of their allotted capacity payments without making the same type of investments.
27. PJM contends that the deficiencies in PJM’s existing rules, in this regard, will only be exacerbated, if they remain in effect, as additional natural gas

- fired resources come online. PJM states that in the years following its implementation of PJM’s capa city auctions, its generator forced outage rates have increased . In particular, PJM notes that resource performance fell well below expected levels during the extreme weather events of January 2014 ( i.e

. , during the polar vortex), when PJM’s forced out age rate (22 percent) far exceeded its 7 percent historical average. 31

28. In response to these deficiencies, PJM proposes to replace its existing capacity products with a new capacity product, a Capacity Performance Resource, capable of sustained, predicta ble operation such that the resource will be reliably available to provide energy and reserves in an emergency condition. As a transition to the Capacity Performance product, PJM proposes a separate , interim capacity product with a lower performance expec tation, referred to as a Base Capacity Resource, for the 2018

- 19 and 2019

- 20 delivery years. PJM states that it will procure at least 8 0 percent of the re gion’s capacity re quirement for those years in the form of Capacity Performance Resources, with the r emainder composed of Base Capacity Resources. For the 2020

- 21 delivery year and beyond, PJM proposes to procure all of the region’s capacity requirement in the form of Capacity Performance Resources.
29. PJM contends that because RPM secures capacity commitments on a three

- year forward basis, RPM reforms, for the most part, can only take full effect on a three

- year

forward basis. It notes that the next RPM Base Residual Auction will secure capacity commit ments for the delivery year that starts on June 1, 2018. PJM states that if it deferred these proposed changes to the following Base Residual Auction, held in

31 See id. at 21

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May 2016 for the delivery year that starts on June 1, 2019, five years would pass after 2 014 without implementing a full remedy to the manifestly deficient performance requirements in the current rules.
2. Protests and Comments

30. Intervenors protest PJM’s Capacity Performance proposal, and the associated energy market changes, as premature and insu fficiently vetted with stakeholders. Numerous protestors argue that PJM sought, and received, inadequate stakeholder input on its proposal. APPA/NRECA protest the breadth and haste of PJM’s proposal, asserting a “dearth of evidence that such drastic chan ges are necessary” at this time. Allegheny likewise argues that a “comprehensive stakeholder process” is needed to more fully define and develop an appropriate solution. Direct Energy and Dominion argue that further stakeholder processes would allow mark et participants to discuss whether there are more appropriate solutions than PJM’s proposal. PHI asserts that, prior to approving the proposal, the Commission should require PJM to provide stakeholders a comprehensive financial impact analysis of the prop osed changes.
31. Intervenors characterize PJM’s proposed establishment of a Capacity Performance Resource as a disproportionate response to the abnormal weather patterns experienced in January 2014. Joint Consumers assert that these conditions were anomalous , i.e

. , that they had not been experienced for many years and are not likely to recur during future delivery years. OPSI points out that PJM has undertaken other initiatives to address and resolve reliability concerns highlighted by the events in January 2014, including improvements to coordination of the natural gas and electric markets, transmission systems, and fuel assurance. Public Interest Organizations concur, noting that the one

time gap between capacity commitments and actual performance has decr eased. Essential Power argues that PJM’s proposal is unjust and unreasonable because it fails to make changes to its day

- ahead energy market scheduling practices so that generators have notice of their obligation to run in time to use their firm natural g as transportation rights.
32. APPA/NRECA, PHI, Allegheny, and Joint Protestors argue that PJM has not explained why less extensive measures to address unit performance currently being developed and implemented are insufficient. U.S. Agencies, the Delaware Com mission, and Direct Energy, too, state their concern that PJM’s proposal appears to be an overreaction to potential supply shortages with low probabilities. Illinois Commission protests that PJM has not demonstrated why, after the transition period, it is necessary that all capacity in PJM be Capacity Performance Resources, suggesting that PJM consider the development of a capacity product with seasonal characteristics. Joint Protestors argue that the focus should be on addressing operational issues direc tlyDocket No. ER15

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through improved price formation, noting that PJM reported improvements in unit availability during January 2014. 32

33. Intervenors challenge PJM’s proposal as unduly expensive and unsupported as to its cost impact. The Pennsylvania Commission asserts that PJM has not attempted to quantify the cost impact of its proposal. The Delaware Commission argues that there are many aspects of PJM’s proposal for which the costs and benefits cannot be estimated with any degree o f certainty. Joint Consumers, CleanGrid, Allegheny, and APPA/NRECA argue that PJM’s proposal will increase capacity costs dramatically for consumers without providing any additional assurances of reliability that are not already being provided, or could n ot be provided, through more surgical means. OPSI and the Delaware Commission similarly argue that PJM has not provided sufficient data to show that the expenditures proposed are needed for reliability and asserts that the cost

effectiveness of the propos al must be examined through a hearing. Direct Energy argues that PJM’s proposal will lead to significant unwarranted capacity cost increases, including during the proposed transition period.
34. Public Interest Organizations point out that while, in the Fuel Assurance Guidance Order , the Commission emphasized the need to consider both costs and benefits in evaluating any capacity performance proposal, PJM’s proposal fails to demonstrate that the asserted benefits outweigh the costs. Specifically, Public Inter est Organizations cite to PJM’s cost

- benefit study of its October 7, 2014 capacity performance proposal, showing net incremental costs (taking into account the savings from load payments and uplift) for the next three delivery years would be in the range o f $1.4 to 4.0 billion, i.e

. , that it would be less costly to pay uplift during extreme weather conditions. CleanGrid argues that, by compromising the participation of renewables, demand response, and energy efficiency, which drives down market clearing pr ices, PJM’s proposal will lead to “dramatically higher” costs for consumers.
35. Intervenors also question whether the approach taken by ISO

- NE to address capacity performance can be applied to PJM’s markets. Direct Energy argues that there are significant di fferences in the PJM and ISO

- NE markets that warrant different capacity performance proposals. Public Interest Organizations argue the PJM region is larger than ISO

- NE and requires a more diverse supply of resources. The PJM Utilities Coalition argues th at the alternative approach to fuel assurance taken by ISO

- NE (a price

- incentive approach) would not be appropriate for PJM, given the speculative offer behavior in PJM’s capacity auctions and the fact that offers will not always reflect the physical attri butes of the underlying resource.

32 Joint Protestors comments to PJM’s Deficiency Letter Response at 14

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3. PJM’s Answer

36. PJM, in its answer, defends its proposal to improve resource performance in its markets. PJM argues that it did not file its Capacity Performance proposal to address one year or one set of circumstances. Rat her PJM contends that its proposal is designed to address a fundamental shortcoming in PJM’s capacity construct. In response to claims that PJM’s proposal is an overreaction to the Polar Vortex, PJM asserts that while the Polar Vortex provided a d ramatic demonstration of these adverse effects, the lack of similar disruptions this winter do not demonstrate that the conditions seen in January 2014 were a one

- time event that could not be duplicated in the future. PJM contends that , given projected retirement trends and the region’s increased reliance on natural gas, it is prudent for PJM to eliminate disincentives to sound unit performance even if another Polar Vortex does not occur in the near future

. 37. PJM also responds to interve nors’ assertion that PJM’s proposal is deficient, absent the consideration of a cost

- benefit analysis. PJM asserts that the Commission, generally, does not require such a showing, when the proposed changes are otherwise just and reasonable. 33 PJM adds tha t, regardless, it did prepare a cost

- benefit analysis for its stakeholders, with input from the Market Monitor, with findings that highlight the overall economic benefits of PJM’s proposal, including improved performance and a reduction in uplift. PJM ass erts that, based on these findings, the economic benefits attributable to its proposal exceed the economic costs in years with extreme weather

. 4. Additional Answers

38. Calpine, in its answer, responds to the Joint Consumer s ’ claim that PJM’s filing represents an over

- reaction to the Polar Vortex. Calpine argues that PJM’s filing addresses valid reliability concerns and the underlying deficiencies in PJM’s existing capacity market construct, including the incentives and allowances that giv e rise to PJM’s force d outage rates. 34 The PJM Utilities Coalition not es that, in February , the PJM system has experienced its fifth and seventh highest winter peaks on record and that if nothing is done to improve performance, PJM could experience a loss

- of

- load event as earl y as delivery year 2015

- 16, if conditions similar to the events of January 2014 occur

.

33 PJM answer at 15 (citing Sw. Power Pool, Inc ., 141 FERC ¶ 61,048 , at P 57 (2012)).

34 Calpine adds that, while the Polar Vortex itself may have been a highly unusual event, the problems it highlighted have been developing for years and, if not addressed, will jeopardize reliability of the PJM grid, even if there is never another Polar Vort ex.Docket No. ER15

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39. Exelon answer s that, without rule changes, capacity performance will continue to decline in the coming years, due to the failure of PJM’s existing rules to provide ade quate incentives for performance. Exelon notes that operations and maintenance spending for coal units has declined, resulting in worsening forced outage rates ; an unprecedented number of coal plants are scheduled to retire ; and additional coal and nuclea r plants are at risk of retirement. Exelon further notes that these units will be replaced by single

- fuel natural gas plants that will draw on the same constrained supply infrastructure that resulted in the curtailment of one

- fifth of PJM’s natural gas fl eet last winter.
40. Exelon also responds to intervenors’ argument that PJM’s establishment of a Capacity Performance Resource product, as proposed, is too costly. Exelon argues that the Commission’s prior acceptance of PJM’s one

- event

- in

- 10

- years loss

- of

- loa d expectation carries with it an implicit finding that the benefits attributable to achieving this standard are cost

- justified. I n response to intervenors’ claims that PJM’s proposal is too costly and is unsupported by any cost

- benefit analysis , Exelon states that it conducted its own cost

- benefit analysis and that the analysis demonstrates that the benefits of PJM’s proposal will outweigh its costs.
5. Commission Determination

41. We find that PJM has provided sufficient justification for its proposed revisi ons to its capacity market rule s . Under PJM’s existing rules, if PJM procures capacity in an amount that exceeds the region’s Net Installed Capacity Requirement, resource adequacy for the relevant delivery year is assumed to have been achieved. However, this existing procurement standard notwithstanding, PJM demonstrates that the combination of deteriorating resource performance and the ongoing change in the resource mix in the PJM region makes rule changes appropriate.
42. PJM presents evidence that generato r equivalent forced outage rates have steadily increased since implementation of RPM and the Peak

- Hour Period Availability charge with delivery year 2007

- 08. 35 In addition, the Polar Vortex of January 2014 was notable not only for the 22 percent forced out age rate, but also for the scope and breadth of
reasons resources were u nabl e to deliver energy during the extreme cold temperatures. While PJM reports that natural gas interruptions accounted for the largest single cause of
resource non

- performance, on a MW basis, roughly three

- quarters of the over 40,000 MW on forced outage were due to other causes. 36 This evidence reasonably supports PJM’s concern that the problem is one in which resources are not being properly incented

35 PJM transmittal at 15

- 16 (Docket No. ER15

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36 Id . at 17

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to make the investments required to perform reliably, including during extreme weather conditions.
43. PJM also presents evidence that, absent rule changes, resource performance will continue to decline in future delivery years, given the current retirement trends in the region and resource owners’ increasing reliance on natural gas as a fuel source. PJM states that “[c]umulatively since 2008, and projecting forward to 2019, over 26,000 MW of coal and oil

- fired generation in the PJM [r]egion have retired or are expected to retire.” 37 PJM fur ther states that the vast majority of resources seeking to enter the PJM region in every one of the past five years has been natural gas

- fired, and that, currently, natural gas

- fired projects account for approximately 82 percent of the projects listed in i ts interconnection request queue. 38 Although the Fuel Assurance Guidance Order noted that the Commission’s concerns regarding fuel assurance issues are not limited to natural gas

- fired resources, 39 this resource type

– and a re

- weighting of PJM’s fleet towa rd natural gas

– does present unique challenges. Accordingly, we find that these significant ongoing changes to the resource mix in PJM and the demonstrated deterioration in existing resource performance in recent years together provide sufficient justifi cation for PJM’s proposal to enhance the reliability of resources in the capacity market.
44. Some parties argue that generators already improved cold

- weather performance in response to the outages experienced during the Polar Vortex. In support of th is assertion, these parties point to lower outage rates in the current 2014

- 15 delivery year. While encouraging, t his does not assuage the long

- term reliability concerns raised by historical unit performance. Moreover, it i s not uncommon for performance to improve after an event, only to trail off later. PJM has shown that, although its capacity market construct has been successful in procuring commitments three years in the future, it has not been successful in ensuring that resources actually perform w hen called upon three years in the future. The record reflects that there are three primary reasons for this failure to perform: (1) a lack of an adequate penalty structure; (2) a limited ability to recover costs of necessary investments; and (3) an ince ntive to trim capital improvement plans and operating budgets. 40 We discuss each of these shortcomings of the current market design, below.

37 Id . at 12.

38 Id . at 12

- 1 3

.
39 Fuel Assurance Guidance Order , 149 FERC ¶ 61,145 at P 7.

40 PJM transmittal at 23

- 25 (Docket No. ER15

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- 000); Exelon January 20, 2015 comments at 11, 16

- 17 (citing PJM Interconnection L.L.C., 2014 Reserve RequirementDocket No. ER15

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45. As to the lack of an adequate penalty structure, while PJM’s existing OATT includes charges for capacity resources t hat fail to perform when called upon, PJM’s experience has shown these charges to be insufficient. As PJM indicates, even poorly performing resources can expect to pay only minimal penalties, placing most of the risk of under

- performance on load. For exa mple, PJM’s Peak

- Hour Period Availability Charge applies when a resource’s actual availability, during 500 peak hours of the delivery year, is worse than the resource’s five

- year average annual outage experience. As PJM demonstrates, this charge creates a perverse incentive, whereby a poorly

performing resource can avoid penalties by improving its performance only slightly over its five

- year average. It also applies to too many hours of the delivery year, allowing resources to offset poor performance duri ng critical emergency hours with adequate performance during other peak hours. As PJM shows, for the 2013

- 14 delivery year that saw the significant forced outage rates during Polar Vortex days described above, Peak

Hour Period Availability Charges totaled approximately $38.9 million, or just 0.6 percent of total capacity revenues. 41 While PJM will also reduce a capacity resource’s saleable megawatt (MW) value to reflect its forced outage history, such reductions are only realized in subsequent years, and w ill typically only change a resource’s saleable capacity by a few percent age points each year. Without more stringent penalties, PJM has shown there is little incentive for a seller to make capital improvements, or increase its operating maintenance for t he purpose of enhancing the availability of its unit during emergency conditions.
46. As to limited recovery of costs for necessary investments, PJM shows that its existing rules also limit the seller’s opportunity to recover, as a capacity resource, the costs it must incur to improve the performance capability of its resource. Specifically, PJM’s currently

- effective offer cap for existing generators (the Avoidable Cost Rate), while allowing for the recovery of certain capital costs ( e.g. , investments in dual

- fuel capability), skews investment decisions toward capital procurement and does not allow sellers to include in their sell offers costs attributable to other means of securing reliable fuel, such as natural gas firm transportation arrangements or priority fuel procurement contracts . PJM asserts that the deficiencies in its existing rules, in this regard, will only be exacerbated if they remain in effect as additional natural gas

- fired resources come on line

. 47. Additionally, PJM explains that its existing ru les operate in manner that encourages a seller to trim its capital improvement plans and operating budgets to remain competitive with resources that can clear in PJM’s auction. As PJM indicates, f aced with
Study, October 9, 2014, at 8

- 9, http://www.pjm.com/~/media/planning/res

- adeq/2014

- pjm

- reserve

- requirementstudy.ashx .)

41 PJM transmittal at 9 (Docket No. ER15

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only minimal penalties, many resources offer into PJM’s auction as price

- takers, displacing resources that submit higher priced bids that account for such investments and incenting resources to delay prudent investments that would enhance fuel security or otherwise improve their performance capability.
48. For the reasons discussed above, we find that PJM adequately demonstrates the appropriateness of revising its existing capacity market construct at this time

. PJM has shown that its existing payment features not only inadequately incent resource perfor mance, but may perversely select less reliable resources over more reliable
resources because a capacity s e l l er’s decision to forego investments that would improve resource performance allows it to offer in PJM’s capacity market at a lower price and be paid the clearing price while providing less reliable service

. 49. As to intervenors’ arguments that PJM’s proposal lacks the supportive findings of a cost

- benefit analysis, we note, as a threshold matter, that the Commission does not generally requi re the mathematical specificity of a cost

- benefit analysis to support a market rule change. Rather, the Commission considers the proposal in light of the currently effective tariff and comments in support and opposition to reach its determination. Here, on balance and in light of other changes on which we condition our acceptance , we find the proposal to be just and reasonable

. 50. Intervenors’ argue that better incentives for performance c ould be achieved through other means, including energy and ancillary services markets reforms . As discussed above, PJM has provided sufficient justification for its proposal and has shown that acting at this time to revise the existing capacity market construct is appropriate. W e are unpersuaded that any of the reforms i dentified by intervenors are substitutes for this proposal or render it unjust and unreasonable. For example, although better alignment of electric market and natural gas pipeline scheduling deadlines would improve operations, it would not provide capacit y market sellers the incentive to perform. We nevertheless note that the Commission will continue to take appropriate steps to encourage proper incentives and improved price formation in energy markets. 42

B. Performance Requirements

1. PJM’s Proposal

51. PJM states that a Capacity Performance Resource must be capable of sustained, predictable operation that allows the resource to be available to provide energy and

42 See Price Formation in Energy and Ancillary Services Markets Operated by Regional Transmission Organizations and Indep endent System Operators , Docket No. AD14

- 14

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reserves whenever PJM determines an emergency condition exists. PJM states that, rather than establishing prescriptive eligibility requirements such as delineating acceptable fuel transportation arrangements, storage requirements for dual fuel capable units, or weatherization requirements, PJM proposes that an offer as a Capacity Performance Reso urce include a representation, described in more detail below, that the Capacity Market Seller has made, or will make, the necessary investment to ensure the resource has the capability to provide energy when called upon by PJM.

52. PJM proposes that all ann ual Capacity Resources are eligible to offer in as Capacity Performance Resources, unless such resources qualify for an exception under the new proposed must

- offer requirement in section 6.6A of Attachment DD. 43 PJM also proposes that an Annual Demand Reso urce be permitted to aggregate with other eligible resource types to submit a Capacity Performance offer. 44

53. PJM notes that, as it moves towards a single Capacity Performance product, certain resources, including I ntermittent R esources and C apacity S torage R esources, may not be capable of sustained, predictable operation and may not be able to provide energy during both summer and winter emergency conditions. PJM states, however, that resources of this sort should be encouraged to continue to participate i n PJM’s capacity market. Accordingly, PJM proposes that sellers that own one or more C apacity S torage R esources, I ntermittent R esources, D emand Response R esources, or E nergy E fficiency R esources th at are located within the same L ocational D eliverability A rea be permitted to submit an offer as a Capacity Performance Resource, as represented by the aggregated unforced capacity value of such resources (aggregated offer).
54. PJM proposes that, given the application of Non

- Performance Charges and Performance Bonus Payments under the Capacity Performance design (as discussed in Section V. C , below), compliance for PJM

- dispatched load reductions should be based on real

- time energy load reductions provided using the same Customer Baseline Load methodology that PJM curr ently utilizes for measuring load reductions in the energy market. 45 PJM proposes to determine the unforced capacity value of Demand Resource s,

43 PJM thus proposes to eliminate Limited Demand Resources and Extended Summer Demand Resources.

44 See proposed OATT at Attachment DD, section 5.6.1(h).

45 See proposed RAA at Schedule 6, section G and p roposed OATT at Attachment DD

- 1, section G. PJM states that for Demand Resources that employ direct load control to measure and ensure reductions in load based on the time period of the control signal, it does not propose to change non

- summer compliance m easurement to the customer baseline load method because direct load control

- based resources have established the ability to reduce load in response to a control signal and thus the control signal isDocket No. ER15

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starting with the 2018

- 19 delivery year, as the nominated value times the forecast pool requirement and to elimi nate the step of multiplying that product by the “demand response factor.” 46 PJM asserts that, under its proposal, demand response factor discounting due to assumed constant quantities of load reductions at high load levels is no longer necessary. 47

55. PJM a lso proposes rule changes applicable to Energy Efficiency Resources, similar to those summarized above for Demand Resource s. First, PJM proposes to broaden the definition of Energy Efficiency Resources to allow for winter

- peak reductions, in addition to s ummer

- peak reductions. PJM also proposes to establish a new energy efficiency resource product, called Annual Energy Efficiency Resource, and to rename the existing product as Base Capacity Energy Efficiency Resource. 48

56. PJM proposes that an Annual Energy E fficiency resource be permitted to offer as either (or both) a Capacity Performance Resource or a Base Capacity Resource, while a Base Capacity Energy Efficiency Resource be permitted to offer only as a Base Capacity Resource. PJM also proposes that Energ y Efficiency Resources be permitted to
sufficient to determine compliance. PJM also proposes no change in the measurement of load reductions during the summer months, regardless of whether the Demand Resource is a Base Capacity Resource or a Capacity Performance Resource.

46 Proposed RAA at Schedule 6, section L and proposed OATT at Attachment DD, section 5.11(a)(iii)

. The demand response factor is the increase in the peak load carrying capability in the PJM region due to demand response resources divided by the total nominated value of demand response resources in the PJM region. It is determined using a probabilistic approach to determine reliability. See e.g. RAA at Schedule 6, section B and proposed OATT at Attachment DD

- 1, section B.

47 For this same reason, PJM also proposes to eliminate consideration of the demand response factor from the de termination of an Energy Efficiency Resource’s unforced capacity value. See proposed RAA at Schedule 6, section L(3) and proposed OATT at Attachment DD

- 1, section L(3)

48 See proposed RAA at Schedule 6, section L(2) and proposed OATT at Attachment DD

- 1, se ction L(2). PJM adds that an Annual Energy Efficiency Resource is designed to achieve a continuous reduction in energy consumption in both the summer and winter peak seasons, with a reduction time

- frame from 2:00 p.m. to 6:00 p.m. over the summer months ( June through August)

– the same summer time

- frame as will apply to Base Capacity Energy Efficiency Resource. PJM states that the winter peak season will be from January through February, with a reduction time

- frame from 7:00 a.m. to 9:00 a.m. and from 6:0 0 p.m. to 8:00 p.m. each day. Id.Docket No. ER15

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aggregate and submit offers, whether coupled or not, as a Base Capacity Resource or a Capacity Performance Resource.
57. PJM also proposes that a Capacity Performance offer be accompanied by a good faith representa tion as to the seller’s performance ability. 49 With respect to E xternal G eneration C apacity R esources, PJM proposes that any such resource be required to represent that it meets the criteria for obtaining an exception to the Capacity Import Limit as contai ned in section 1.7A of the RAA

. 50 PJM also proposes that knowingly false representations may be determined by PJM to constitute a violation of, and may subject the seller to penalties under, PJM’s market rules and/or the Commission’s market rules.

58. PJM al so proposes to reserve the ability for PJM or the Market Monitor to obtain information and documentation from a seller to evaluate whether a given resource can meet the operational and performance requirements applicable to a Capacity Performance Resource. PJM states that this review allowance is similar to the process currently in

49 P roposed PJM OATT at Attachment DD, section 5.5A(c). Specifically, the seller would be required to represent that it : (i) “has made, or is capable of demonstrating that it will make, the necessary investment to ensure the Capacity Resource has the capability for the entire such Delivery Year to provide energy at any time when called upon by the Office of the Interconnection” ; (ii) “shall be capable of complying with the performance obligations specified in this Attachment DD and in Schedule 1 of the Operating Agreement, by the relevant Delivery Year” ; (iii) “meets the criteria for obtaining an exception to the Capacity Import Limit as contained in section 1.7A of the [RAA], to the extent the underlying Capacity Resource is an external Generation Capacity Resource” ; and (iv) “contemplates the physical delivery of the Capacity Performance Resource underlying such Sell Offer by no later than the commencement of the applicable delivery year.” PJM notes that an offer would not be deemed to meet the standard of physical delivery if, at the time it was submitted, the seller intended to satisfy its obligation for the applicable deliver y year by subsequently securing a replacement Capacity Performance Resource through either an Incremental Auction or a bilateral transaction.

50 The criteria for an exception are that the external resource : (i) has met all applicable requirements to be t reated as equivalent to PJM region internal generation that is not subject to North American Electric Reliability Corporation (NERC) tagging as an interchange transaction; (ii) has long

- term firm transmission service confirmed on the complete transmission path from the resource into PJM; and (iii) will be subject to the same obligations imposed on Generation Capacity Resources located in the PJM region by section 6.6 of Attachment DD of the OATT, including the capacity market must

- offer requirement. RAA at Article 1

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place with respect to demand response sell offers. PJM adds that, if the seller can provide a satisfactory explanation of how it intends to meet the standard of performance to deliver energy during emergency conditions, with supporting documentation, if requested, PJM will accept the seller’s offer. PJM states that, under its proposal, it would be required to provide the seller and the Market Monitor with any determination to r eject an offer no later than 65 days prior to the commencement of the offer period for the relevant capacity auction. The seller would thereafter be permitted to seek recourse with the Commission if it does not agree with PJM’s determination.

59. PJM asserts that, in response to its proposed rule changes (including its proposed Non

- Performance Charges, as discussed in Section V.C of this order, below), market participants will be encouraged to invest in plant redesign changes or new equipment, or increase oper ating budgets to accommodate more staff, firm fuel delivery arrangements, greater inventories, or changed operating practices. PJM emphasizes that, while it is not prescribing the manner in which sellers will ensure that their resources perform, PJM’s cap acity auctions, by clearing some but not all offers, will reveal which strategies are cost

- effective. In further support of its proposal, PJM cites to its existing rules requiring reasonable assurances that D emand R esponse R esources submitting offers into PJM’s capacity market will, in fact, be able to provide the offered capacity. 51 PJM asserts that this expectation and its corresponding requirement are as applicable to G eneration Capacity R esources as they are to D emand R esponse R esource s

. 2. Protests and Comments

60. Some intervenors argue in their protests that PJM should clearly define eligibility requirements for Capacity Performance Resources. Joint Protestors and Exelon suggest that PJM’s definitions should consist of specific criteria, no t aspirational statements. Joint Protestors contend that as set forth in the proposed tariff, the eligibility criteria are : (1) the resource has either cleared a capacity auction or is otherwise committed as a capacity resource; and (2) the resource is ob ligated to deliver energy during the relevant delivery year as scheduled and/or dispatched by the Office of Interconnection during the Performance Assessment Hour. 52 Joint Protestors and Exelon recommend that PJM’s eligibility requirements and process be m odified such that there are clear and

51 PJM transmittal at 24 (Docket No. ER15

- 623

- 000) (citing PJM Interconnection, L.L.C. , 146 FERC ¶ 61,150 at P 22 (2014)).

52 Proposed PJM OATT at Attachment DD, section 2.48A. (“‘Performance Assessment Hour’ shall mean each whole or partial clock

- hour for which an Emergency Action has been declared by the Office of the Interconnection, provided, however, that Performance Assessment Hours for a Base Capacity Resource shall not include any hours outside the calendar months of J une through September.”)Docket No. ER15

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understandable eligibility requirements, which would eliminate both opportunities for conflict and manipulation by sellers and the necessity for PJM or the Market Monitor to judge whether the resources qualify. Joint Protestors claim that PJM’s proposal will be unworkable and overly cumbersome and therefore unjust and unreasonable. Exelon requests that the Commission direct PJM to create Capacity Performance eligibility screens for units that historically have perform ed poorly.
61. Intervenors protest PJM’s proposed treatment of renewable resources. Wind Energy and Renewables Coalition argues that PJM’s proposal would incent renewable and intermittent resources to offer less capacity than their true value and does not acc ount for all resources’ full contribution to the total power system capacity. U.S. Agencies, Public Interest Organizations, and CleanGrid argue that PJM’s proposal fails to value renewable resources, conflicts with important state and federal public polic ies, and functionally eliminates the participation of renewables, demand response, and energy efficiency and storage in PJM’s capacity market.
62. Intervenors also argue that PJM’s proposal creates unnecessary barriers to entry to demand response, potentiall y reducing the absolute volume of Demand Resource s that may participate and decreasing the forms of demand response available. The Pennsylvania Commission characterizes PJM’s existing demand response rules as well

designed and argues that PJM’s proposed e xpansion of its existing hours

- of

- performance requirements for Demand Resource s represent a disproportionate response that will likely lead to less demand response participation, less reliability, higher costs to consumers, and less resource diversificati on. Intervenors also object to PJM’s proposed elimination of Limited and Extended Summer Demand Response. Joint Consumers and Rockland argue that there are cost savings associated with these summer peaking resources and that a mix of resource types, incl uding Limited Demand Response, Extended Summer Demand Response, and peaking generation resources, is appropriate to meet PJM’s expected peak load service obligations. 53

63. Public Interest Organizations assert that PJM’s proposal to allow for aggregated offer s from certain resources ( i.e

. , from Capacity Storage Resources, Intermittent Resources, Demand Resources, or Energy Efficiency Resources) will help alleviate the

53 See also Public Interest Organizations comments at 12 (arguing that eliminating sub

- annual demand response will increase costs to consumers by more than $2.2 billion, as shown by the Market Monitor’s 2017

- 18 Base Residual Auction sensitivity analysis); Rockland protest at 6

- 7 (arguing that it is unreasonable to assume that Limited and Extended Summer Demand Response will be able to pool with other demand response to participate as Capacity Performance Resources and that PJM’s prop osal fails to adequately recognize steps already taken to address concerns that such resources have limited availability).Docket No. ER15

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adverse impact that PJM’s Capacity Performance Resource requirements will have on these resou rces. Nonetheless, Public Interest Organizations , and others, assert that clarification of this allowance is required, given that the proposed language could be read to require that aggregated resources must come from the same seller or be controlled by t he same seller, an interpretation they argue could unduly favor sellers with large portfolios. T he Illinois Commission and Essential Power ag re e , arguing that PJM’s proposal to prohibit resource aggregation across companies or across Locational Deliverabi lity Area s will foreclose competition from companies that do not own a diverse portfolio of different resource types. Joint Protestors similarly claim that PJM’s proposal discriminates against single

- plant capacity owners by not allowing them to aggregate with other units. ESA requests clarification that the intent of PJM’s proposal is to allow resources to be aggregated, so long as they are located within the same unconstrained Locational Deliverability Area group, rather than the same Locational Deliver ability Area. Wind Energy and Renewables Coalition assert that PJM should also allow variable resources to aggregate with any other type of resource.
64. The Pennsylvania Commission characterizes PJM’s proposal to exclude resources other than C apacity S to rage R esources, I ntermittent R esources, Demand Resource s, and E nergy E fficiency R esources as unsupported. Joint Protestors argue that the proposal gives undue preference to variable resources because the differing treatment has no valid basis in reliability considerations or other relevant factors.
65. EPSA protests that allowing Demand Resource s to submit aggregated offers is contrary to the intent underlying PJM’s Capacity Performance construct and is at odds with PJM’s efforts in other proceedings to require demand response to participate on an equal or more comparable footing with generation resources.

66. Covanta asserts that small power production facilities operating as qualifying facilities under the Public Utility Regulatory Policies Act of 1978 (PURPA) 54 should be allowed to use fossil fuels to deliver energy and reserves when participating as Capacity Performance Resources. 55

54 16 U.S.C. § 2601 et seq. (2012).

55 Covanta therefore requests that the Commission exempt such qualifying facilities’ use of fossil fuels, when called upon by PJM during emergencies, from the 25 percent limitation set forth in Section 292.205(b) of the Commission’s regulations. In the alternative, Covanta asks the Commission to require PJM to revise its proposal to permit such qu alifying facilities that are waste resources to participate as Capacity Performance Resources in a way that will not jeopardize their status under PURPA. See Covanta comments at 5 (asserting that such an exemption would be consistent with Section 292.204( b)(2) of the Commission’s regulations which permits the use of fossilDocket No. ER15

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67. Intervenors protest PJM’s proposal to reserve for itself the ability to evaluate whether a given resource meets the opera tional and performance requirements applicable to a Capacity Performance Resource. NRG/Dynegy asserts that the provisions allowing PJM to reject a resource’s Capacity Performance offer are too ambiguous and give PJM excessive discretion. NRG/Dynegy adds that PJM’s proposal creates un

- hedgeable risks for suppliers. The Market Monitor asserts that PJM’s proposal fails to set clear, appropriately stringent standards regarding the ability of a resource to be physically delivered, particularly as this require ment will apply to Demand Resource s, planned generation, and imports. The Market Monitor further argues that in addition to the authority that PJM seeks to review and , when appropriate , reject a sell offer, the Market Monitor should also be authorized to reject an offer. The PJM Utilities Coalition characterizes, as unduly rushed, PJM’s proposed process by which a seller deemed ineligible to perform could appeal that ruling to the Commission in advance of the relevant auction.
68. Intervenors also object to PJM’s proposed good faith representation requirement. The PJM Utilities Coalition argues that such a requirement will be difficult to enforce, especially in the case of a resource that is simply unrealistic (but strategic) about its ability to secure fir m fuel arrangements. Wind Energy and Renewables Coalition assert that market forces alone are sufficient to meet PJM’s underlying objective. Brookfield requests clarification that a capacity market seller’s good faith representation cannot be deemed to b e knowingly false or inconsistent, or in violation of PJM or Commission market rules, if it is given in accordance with Good Utility Practice. With respect to PJM’s proposal that a seller be required to make a good faith representation that its offer cont emplates the physical delivery of its Capacity Performance Resource, the Pennsylvania Commission objects to the proposed corollary requirement that such an offer will not be found to have met this standard if, at the time it is submitted, the seller intend s to satisfy its obligation by subsequently securing a replacement resource through an Incremental Auction or a bilateral transaction. The Pennsylvania Commission argues that such a rule could have a negative impact on the procurement of demand response, given that customers who participate in demand response markets, through curtailment service providers, often switch providers.
69. The PJM Utilities Coalition requests that PJM be required to adopt tariff language specifying that, to qualify as a Capacity P erformance Resource, a resource will either have on

- site fuel back

- up or firm natural gas supply. The PJM Utilities Coalition further argues that “firm natural gas supply” should be defined as firm natural gas supply commodity and firm natural gas supply transportation, storage, or the equivalent, and that

fuels for “emergencies, directly affecting the public health, safety, or welfare which would result from electric power outages”).Docket No. ER15

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any resource failing to meet this criteria should be required to submit an officer

- certified plan demonstrating its reasonable expectation to meet this standard by the required delivery year. The PJM Ut ilities Coalition argues that such plan would be consistent with the Commission’s approvals in the case of PJM’s Demand Resource s. 56

70. Intervenors also challenge the eligibility requirements that will apply to the designation of a Capacity Performance R esource. UGI raises the issue of a natural gas

fired generator subject to a state law

- based natural gas curtailment process. UGI argues that, in this circumstance, it cannot be concluded that such a resource is categorically unable to perform, or otherwi se not similarly situated to other natural gas

- fired generators. Gas Alliance seeks clarification reg arding the treatment of natural gas

- fired generators receiving fuel from a local distribution company behind the city gate. Essential Power argues that g enerators that are unable to perform due to tariff

- based limitations that preclude their operation ( i.e. , due to the need to preserve natural gas service to other customers), should not be penalized, as ineligible, under PJM’s proposal. Shell argues that PJM’s proposal fails to describe what investment is adequate to demonstrate eligibility. Specifically, Shell argues that it is unclear how a generator could qualify as a Capacity Performance Resource when it does not own the relevant resource, but rather operates that unit under a long

- term contract.
71. The Illinois Commission and Joint Consumers argue that planned generation resources should not be required to execute an Interconnection Facilities Service Agreement before being eligible to offer into PJM’s capacity markets, arguing that such a requiremen t would act as a barrier to entry and reduce competition. The Illinois Commission asserts that such a requirement is unwarranted, unless and until PJM can identify any negative market outcomes from allowing planned generation resources to offer into PJM’s capacity markets. Joint Consumers assert that, given the three

- year forward nature of PJM’s capacity market, a System Impact Study should be sufficient for a resource to qualify as a Planned Generation Capacity Resource.
72. Finally, intervenors address th e effect of PJM’s proposed designations on external resources. Brookfield requests clarification that, during an Emergency Action , PJM will not be authorized to recall a resource that is physically located within the PJM region but either has not cleared in a capacity auction or has secured replacement capacity, if such resource is exporting energy or capacity to another region. Joint Protestors and the Illinois Commission protest PJM’s proposal to limit external resources’ Capacity Performance offers to those resources that have exceptions to PJM’s Capacity Import Limit, which include a requirement that the external generation become pseudo

- tied by the beginning of the delivery year. The Illinois Commission argues that this requirement

56 PJM Utilities Coalition protest at 53 (citing PJM Int erconnection, L.L.C

. , 146 FERC ¶ 61,150 (2014)).Docket No. ER15

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will unreasonably deter the entry of external resources into PJM’s capacity market and exacerbate seams issues between PJM and adjacent regions. In addition, Joint Protestors and the Illinois Commission assert that the Commission has already rejected similar recommendations that the pseudo

- tie requirement be made a requirement for all external resources seeking to participate in PJM’s capacity auctions. 57

3. PJM’s Answer

73. PJM responds to intervenors’ arguments regarding PJM’s proposed treatment of renewable resources. PJM asserts that requiring these resources to perform as a Capacity Performance Resource presents opportunities for these resources, not obstacles. PJM explains that none o f these resource types will be obligated to offer as a Capacity Performance Resource during the transition period (as discussed in Section V.E, below) and, if they do choose to submit an offer, it may be aggregated. PJM adds that Demand Resources, Capacit y Storage Resources, and Intermittent Resources will have the flexibility to determine the amount of capacity to offer into PJM’s Base Residual Auctions, and, with this flexibility, will have the opportunity to profit by their over

performance.
74. PJM assert s that the aggregated offer option for Intermittent Resources, Capacity Storage Resources, Energy Efficiency Resources, and Demand Resources should alleviate intervenors’ concerns regarding the potential for under

- estimating the value of these resource typ es. PJM also clarifies how resources in different Locational Deliverability Area s, and resources that are owned by multiple entities, can be aggregated in the capacity account of a single market participant. Specifically, PJM states that aggregation will be feasible across Locational Deliverability Area s. PJM also states that, if directed to do so, it will submit revised tariff language addressing this proposed allowance.
75. PJM also responds to intervenors’ argument that aggregation among any resource ty pe should be permitted. PJM argues that such an approach would transform PJM’s capacity bidding process from an individual unit approach to a portfolio bidding approach. PJM asserts that such an approach would be unwarranted. Nevertheless, PJM states t hat a traditional generation resource that is environmentally limited as a result of a government regulation, and which therefore could not otherwise offer as a Capacity Performance Resource, could potentially aggregate with another such limited resource o r with an I ntermittent Resource , Capacity S torage Resource , D emand R eso urc e, or E nergy E fficiency R esource. PJM also clarifies that aggregated resource offers are not required

57 Illinois Commission comments at 7 (citing PJM Interconnection, L.L.C. , 147 FERC ¶ 61,060, at P 21 (2014) ( Capacity Import Limit Order ); see also Joint Protestors protest at 68

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to be from the same entity and that it will consider resources to be in the sam e portfolio, to the extent such arrangements are reflected in the seller’s account.

76. PJM also responds to intervenors’ arguments regarding PJM’s proposed good faith representation requirements. PJM clarifies that, under its proposal, Demand Resource s will not be required to go beyond the requirements, including the “reasonable expectation” standard, as accepted by the Commission in Docket No. ER13

- 2108

- 000. 58 PJM further proposes to add additional guidelines to its good faith representation requirement, as applicable to fossil

- fueled generation resources. 59

77. PJM also clarifies that, under its proposal, a Capacity Performance Resource will not be required to operate during all hours of a delivery year; rather, it need only be

58 See PJM February 13, 2015 answer at 31 (citing PJM Interconnection, L.L.C. , 146 FERC ¶ 61,150 (2014)).

59 Specifically, PJM proposes to revise Attachment DD, section 5.5A(a)(i ) to provide that, in submitting a sell offer for a Capacity Performance Resource, the seller represents that [E.] to the extent that the Capacity Performance Resource is not an Intermittent Resource, Capacity Storage Resource, Demand Resource or Energy Efficiency Resource, has obtained and holds, or reasonably expects to obtain and hold, the contractual and other rights necessary to ensure firm fuel supply to each of its affected units during the delivery year. For such purpose, units intending to rely on on

- site fuel storage must be able to demonstrate, as needed, the basis for their reasonable expectation that such arrangements as may be necessary to replenish the on

- site fuel on a rolling basis will be in place by the start of the delivery year in ord er to assure unit performance at all times throughout such delivery year; and units not intending to rely on on

- site fuel storage must be able to demonstrate, as needed, the basis for their reasonable expectation that sufficient transmission, storage and f uel commodity supply contracts or arrangements will be in place by the start of the delivery year to assure unit performance at all times throughout the delivery year. [F.] to the extent the Capacity Market Seller proposes to offer a Demand Resource as a Capacity Performance Resource, the representation in this subsection shall not be read to impose any greater, or lesser, obligation on a Capacity Market Seller offering a Demand Resource into [a capacity market] Auction than is established by Section A.1 of Schedule 6 to the RAA, or any officer certification provided thereunder.Docket No. ER15

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capable of delivering energy and r eserves when needed, including during emergency conditions. In response to UGI’s concerns about single

- fueled resources behind a local natural gas distribution company, PJM clarifies that there may be legitimate ways in which such a resource can meet its performance obligations, and that for this reason, PJM will request additional information from that resource at the outset and work with that resource to understand the basis for its sell offer and representation.
78. With respect to PJM’s proposal to vest a uthority in itself to approve or reject a sell offer, PJM asserts that it must have this ability, consistent with its existing rules allowing PJM to reject a sell offer if it determines that the relevant resource does not qualify as a capacity resource.
79. PJM also responds to the objection made by the Illinois Commission and Joint Protestors in opposition to PJM’s proposal that external resources, in order to submit a Capacity Performance Resource offer, must obtain an exception to PJM’s Capacity Import Lim it, which requires external resources to be pseudo

- tied to PJM. PJM argues that its proposal is appropriate because it will ensure that external resources are on equal footing with internal resources. PJM asserts that it must be able to monitor what thes e resources are doing during the operating day. PJM adds that the exception requests it has received to its capacity import limit demonstrate that this requirement will not create a barrier to entry.
80. PJM also responds to intervenors’ objections to PJM’s proposed method for measuring demand response performance during non

- summer emergency and compliance events. PJM argues that non

- summer consumption that falls below the summer

- based peak load contribution is insufficient to demonstrate performance, becau se any seasonal difference in demand is already accounted for in the planned outage schedules that PJM uses in calculating its installed reserve margin. 60

81. Finally, PJM responds to the Illinois Commission’s argument that a planned generation resource shoul d not be required to execute a Facilities Study Agreement as a condition to its right to submit an offer into PJM’s Base Residual Auction. PJM argues that its proposal is appropriate given its operational experience, i.e

. , that historically, project devel opers that have executed a Facilities Study Agreement have been more likely to complete their project in advance of the relevant delivery year.

60 PJM argues that, in the absence of a non

- summer equivalent of peak load contribution, it must use an alternative measure of performance and customer baseline load is an appropr iate alternative. PJM adds that any end user may have a lower nominated demand response value in non

- summer months, and that if the resource wishes to submit an offer as a Capacity Performance Resource, it may do so at the non

- summer capacity value or agg regate with another resource.Docket No. ER15

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4. Additional Answers

82. Exelon, in its answer, also responds to AMP’s argument that an eligibility standard requiri ng external resources to be tied to PJM under a long

- term firm transmission service agreement, and subject to PJM’s must

- offer requirement, is unduly discriminatory. Exelon argues that PJM’s proposed rules, as to external resources, are based on a reasona ble classification that recognizes the degree to which firm transmission into PJM has been curtailed. Exelon also cites the Commission’s prior finding that the risk of non

- performance attributable to external resources, seeking to participate in PJM’s cap acity auctions, suggests that, in satisfying a capacity requirement, these resources may not be equal to internal resources. 61

83. LS Power, in its answer, opposes PJM’s proposed additions to Attachment DD, section 5.5A(a)(i), as addressed in PJM’s answer. LS Power asserts that, on its face, PJM’s proposed language would appear to require generators that do not have on

- site storage to have firm fuel supply arrangements in place to assure performance at every moment of every day of the delivery year. LS Power asserts, however, that such a requirement is inconsistent with PJM’s general approach to resource eligibility. Accordingly, LS Power seeks clarification that under PJM’s proposed language, sellers will only be required to have the fuel supply arrangements necessary to provide a reasonable expectation, based on individual unit characteristics and the sellers’ experiences with such units, that their generation facilities will be able to satisfy the Capacity Performance Resource obligations.
84. Joint Protestors, in their answer, argue that PJM’s proposed eligibility requirements for a Capacity Performance Resource, as clarified by PJM in its answer, remain ill

- defined and will subject reliable resources to the risk of not qualifying as Capacity Performance Resour ce or incurring excessive penalties based on excessively narrow excuses for non

- performance. Joint Protestors also characterize PJM’s review criteria as non

- transparent and overly

- subjective.
5. Deficiency Letter, PJM’s Response, and Protests and Comments

85. T he Deficiency Letter asked what mechanisms, other than the proposed seller representations, could be used to supplement the Non

- Performance Charge to better incent resource performance. In addition the Deficiency Letter requested PJM to describe how it ev aluates the performance of external resources that are not pseudo

- tied to PJM, specifically, how and when PJM receives the data necessary to perform its evaluation.

61 See Exelon answer at 41 (citing PJM Interconnection, L.L.C., 150 FERC ¶ 61,041 at P 14 (2015))

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86. In its answer, PJM states that it proposed an increased market seller offer cap which will allow resources to include the increased operating and capital costs necessary to improve resource performance. PJM posits that varying strategies will allow resources to determine the most efficient and cost effective ways to improve resource performanc e. 62 PJM contends that the opportunity to earn additional revenues with P erformance Bonus P ayments coupled with the N on

- P erformance C harge incent resources to perform because those resources with the highest performance will have the opportunity to earn the most revenue. PJM notes that , when coupled with its proposed rules regarding operating parameter limitations , resources are incented to increase performance at least cost. PJM contend s that its proposed rules are design ed to work together to reflec t supply and demand fundamentals and rules that prevent units from avoiding the obligation to provide energy when needed.
87. I n response to questions about measuring external resource performance, PJM states that external resources that are not dynamically tr ansferred into PJM through either a pseudo

- tie or a dynamic schedule are required to schedule their energy delivery into PJM via external interchange transactions. 63 PJM states that , for external resource s using external interchange transactions, PJM does not receive unit

- specific performance information

. 64 Rather, PJM states that external interchange transactions are identified by customer account and the external b alancing a uthority from which the energy being scheduled into PJM is sourced.
88. PJM contend s that the fact that external interchange transactions are not unit

specific , and therefore cannot be tied to any specific external resource , is one of the reasons underlying the PJM proposal to require that external units be pseudo

- tied into PJM to qualif y as Capacity Performance Resources. PJM argues that without the benefit of the pseudo

- tie, PJM cannot accurately determine whether an external capacity resource owner met its commitment to deliver energy to PJM from the specific resource committed as a C apacity Performance R esource. PJM contends that this information is critical to ensure that the performance assessment evaluations are completed accurately and that any Non

- Performance Charges are applied correctly.
89. The PJM Utilities Coalition reiterates its request that PJM be required to adopt tariff language specifying more stringent and objective qualification criteria for capacity

62 PJM Deficiency Letter Response at 26.

63 Id . at 29.

64 Id

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market participation, arguing that such criteria would have an even greater impact on ensuring reliable performance than the deterrent effect of Non

- Performance Charges

. 65

90. Joint Protestors request that PJM modify the Capacity Performance seller representation that the seller “has made or is capable of demonstrating that it will make, the necessary investment to ensure the Capacity Resource has the capability for the entire such delivery year to provide energy at any time when called upon by the Office of the Interconnection.” Joint Protestors argue that it is physically impossible fo r any generation resource, even a Capacity Performance Resource, to be available 100 percent of the time and requiring such a certification as a condition precedent to qualify as a Capacity Performance Resource unreasonably exposes the certifying official to civil and criminal charges and significant penalties for making knowingly false statements. 66

6. Commission Determination

91. For the reasons discussed below, we accept , subject to conditions, PJM’s proposal addressing the performance requirements and expectati ons applicable to Capacity Performance Resources.
92. We find that PJM’s proposed mechanism for reviewing and, when appropriate, rejecting a sell offer is just and reasonable , subject to PJM removing the phrase “to the satisfaction of the Office of the Interconnection” from proposed section 5.5A(ii) ( B ) of Attachment DD . PJM’s existing tariff gives PJM th e authority to reject a seller offer , as applicable to a capacity resource. 67 We find that this same authority is generally appropriate in the case of a Capacity Performance Resource offer, given that it will enable PJM to reject offers from resources that : (i) cannot reasonably be relied on to perform, as required, during emergency conditions; (ii) are purely speculative; or (iii) would otherwis e undermine the intent of PJM’s Capacity Performance construct. We also accept PJM’s commitment to modify this provision, so that PJM will only reject an offer when a resource fails to demonstrate that it can reasonably be expected to meet Capacity Perfor mance obligations consistent with the resource’s offer by the relevant delivery year. However, as the Commission has found previously, the scope of PJM’s

65 PJM Utilities Coalition comments to PJM’s Deficiency Letter Response at 11.

66 Joint Protestors protest to PJM’s Deficiency Letter Response at 16 (citing 18 C.F.R. section 1c (2014) and FPA section 316A).

67 See PJM OATT at Attachment DD, sections 5.6.6 and 5.8(i).Docket No. ER15

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review authority must be appropriately defined and limited. 68 The phrase “ to the satisfaction of t he Office of the Interconnection ” is too ambiguous and allows PJM too much discretion in determining whether a resource can meet the operational and performance requirements of Capacity Performance Resources.
93. We disagree with the Market Monitor’s argument that, in addition to PJM’s authority to review and , as appropriate, reject the sell offer of a Capacity Performance Resource , the Market Monitor should also be given the authority to reject an offer. Under PJM’s proposal, PJ M will be required to consult with the Market Monitor and seek the Market Monitor’s advice and recommendations concerning a sell offer. We are not persuaded that the separate layer of review requested by the Market Monitor is required. We further note th at, under Order No. 719, it is the RTO that is responsible for a prospective determination of this sort. 69

94. PJM proposes to require a market seller submitting a Capacity Performance offer to make a good faith representation that (i) it has made, or will make , the necessary investment to ensure that its resource has the capability to provide energy when called upon; (ii) the resource meets the operational requirements and performance obligations applicable to Capacity Performance Resources; and (iii) the selle r’s offer contemplates the physical delivery of the Capacity Performance Resource by no later than the commencement of the applicable delivery year. PJM also proposes that knowingly false representations may be determined by PJM to constitute a violation of, and may subject the seller to penalties under, PJM’s market rules and/or the Commission’s market rules. We are not persuaded that PJM’s proposed good faith representation requirement would provide any added value in incenting resource performance , and the scope of the required representations is unclear and c ould serve as a n unnecessary barrier to entry for new C apacity Performance R esources

. 95. In particular, we are concerned that significant aspects of the required representation are inappropriately v ague and this ambiguity could incent well

- performing resources to elect not to participate in the capacity market to avoid the risk of sanction under the provision, PJM’s market rules and/or the Commission’s authority . For

68 See PJM Interconnection, L.L.C., 121 FERC ¶ 61,089 at P 35 (2007) (finding, in the case of credit requirements, that the review standard, “to PJM’s satisfaction,” is ambiguous and would grant undue discretion to PJM).

69 See Wholesale Competition in Regions with Organized Electric Markets , Order No. 719, 73 Fed. Reg. 64,100 (Oct. 28, 2008), FERC Stats. & Regs. ¶ 31,281 at P 375 (2008), order on reh’g , Order No. 719

- A, FERC Stats. & Reg. ¶ 31,292 (2009), FERC Stats. & Regs. ¶ 31,292 (2009), order o n reh’g , Order No. 719

- B, 129 FERC ¶ 61,252 (2009)Docket No. ER15

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example, whether a resource meet s “the operational requirements and performance obligations applicable to Capacity Performance Resources” may not be clear until a resource performs, or fails to perform. Given the significant ambiguity inherent in this requirement, and in light of the sp ecific tariff provision designed to elicit performance and penalize failure to perform , we find that PJM has not demonstrated that the required good faith representation is either necessary or just and reasonable. Accordingly, we conditionally accept PJM’ s filing, subject to the removal of this provision from its proposed tariff changes. We further note that PJM’s tariff reflects requirements that generally pertain to the good faith representations PJM seeks to elicit. PJM’s tariff currently provides, fo r example, that a resource with a capacity commitment must offer into the day

- ahead and real

- time energy markets, must leave its real

- time offer open throughout the operating day, and must follow PJM’s dispatch instructions. 70 In addition, as discussed above, PJM will be authorized to review Capacity Performance Resource sell offers in order to mitigate speculative participation in PJM’s capacity market.

96. Notwithstanding the above finding, w e find merit in PJM’s proposal that E xternal Generation Capacit y R esources be required to meet the criteria for obtaining an exception to PJM’s Capacity Import Limit (including the requirement that such resources be pseudo

- tied to PJM by the relevant delivery year) to be eligible to submit a Capacity Performance Resou rce offer. 71 PJM proposes this requirement as a seller representation, but we interpret it as an eligibility requirement for External Generation Capacity Resources. The Illinois Commission and Joint Protestors assert that PJM has not shown why the require d three conditions to receive an exception to the Capacity Import Limit ( i.e. , pseudo

- tie, firm transmission service, and must

- offer) must be made mandatory for all external resources to qualify as Capacity Performance. However, we agree with the clarific ation PJM provides in its D eficiency L etter R esponse and find that this requirement is necessary to ensure that external resources are accountable for their individual performance when PJM’s system is experiencing Emergency Action s. Regarding the Illinois Commission’s argument that requiring external resources to become pseudo

- tied will exacerbate seams issues between PJM and adjacent regions, we find that the Illinois Commission fails to specify what seams issues would be exacerbated or how such r esult would occur. We note that PJM is required to reach agreement with

70 See PJM Operating Agreement at Schedule 1, section 1.10.1A(d) ( Day

- ahead Energy Market Scheduling); and section 1.10.4(b) (Capacity Resources ). Such a resource is also required to demonstrate that it ha s the capability to provide its capacity on, or before, the start of the delivery year. See PJM OATT at Attachment DD, section 5.5. In addition, such a resource is required to comply with PJM’s capacity import limit to the extent it is an external resour ce. Id. at section 5.5.

71 Proposed OATT Attachment DD.5.5A Capacity Resource Types, 0.0.0.Docket No. ER15

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external Balancing Authorities regarding all implementation issues associated with a pseudo

- tied resource, including reliability and commercial obligations, 72 and that this process sho uld minimize any resulting seams issues.
97. In its Deficiency Letter Response, 73 PJM explains that under existing rules, PJM evaluates the availability of external capacity resources based on the quantity of energy scheduled (as an external interchange transac tion into PJM) or reported on outage by an external capacity resource owner

. PJM explains, however, that external interchange schedules are not unit

- specific and cannot be tied to any specific external resource and , therefore, PJM proposes to require that an external resource be pseudo

- tied into PJM to qualify as a Capacity Performance Resource. PJM states that absent the pseudo

- tie requirement, PJM will not have the unit

- specific visibility of external resource performance necessary to accurately apply N on

- Performance Charges to external resources. Based on the information t hat PJM has provided, we agree that this component of the Capacity Performance design is just and reasonable. We therefore accept PJM’s proposal , subject to PJM includ ing in its tari ff revisions a requirement that
an External Generation Capacity Resource must demonstrate that it meet s

– or will meet by the start of the delivery year

– the criteria for an exception to the Capacity Import Limit in order to offer as a C apacity Performanc e Resource

. 98. We accept PJM’s proposed milestone modification requiring that planned resources execute a Facilities Study Agreement before being permitted to offer into a Base Residual Auction. 74 Despite the Illinois Commission’s claims that PJM has not adeq uately supported this provision, we agree with PJM that requiring resources to complete the Facilities Study Agreement will help prevent resources that are un likely to be in service by the relevant delivery year from clear ing in a Base Residual Auction and potentially artificially suppressing prices for the region. 75

72 NERC Reliability Standard INT

- 004

- 3.1, Requirement R3, available at http://www.nerc.com/pa/Stand/Reliability%20Standards/INT

- 004

- 3.1.pdf . In order for a pseudo

- tie to be included in the NAESB Electric Industry Registration (EIR) publication, all entities listed in the EIR registration must approve the registration, includ ing the source Balancing Authority. See NAESB Guide for Implementing EIR 13001, available at https://www.naesb.org/pdf4/weq_jess080514a5.docx

.
73 PJM Deficiency Letter Response at 24

- 25.

74 P roposed RAA, sections 1.69B and 1.70.

75 PJM February 13, 2015 answer at 116.Docket No. ER15

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99. We next consider PJM’s proposed Capacity Performance construct as it relates to Demand Resources, Energy Efficiency Resources, Capacity Storage Resources, and Interm ittent Resources, including PJM’s proposal to permit aggregated offers. As a general matter, we accept PJM’s proposal to establish, on a phased

- in basis, an Annual Demand Resource product that will : (i) replace PJM’s existing demand response capacity pro ducts; and (ii) require conformance with the standards applicable to a Capacity Performance Resource, as modified herein. We agree with PJM that, as modified, PJM’s proposal is appropriate, because it creates the same expectations for all Capacity Perform ance Resources ( i.e

. , the expectation that such resources will be available to provide energy and reserves when called upon), without regard to technology type. We note that currently the vast majority of Demand Resources are available to PJM during the s ummer peak season only, with Limited Demand Response available for 10 days and for a maximum of 6 hours a day. 76

100. We also find PJM’s propos al, as clarified in it s answer, to permit Demand Resources, Energy Efficiency Resources, Capacity Storage Resour ces, and Intermittent Resources offer as stand

- alone Capacity Performance Resources to be just and reasonable. Therefore, we accept this aspect of PJM’s proposal, subject to PJM submi tting tariff revisions clarifying that, as PJM states in its answer, 77 Ca pacity Storage Resources, Intermittent Resources, Energy Efficiency Resources, and Demand Resources may submit stand

- alone Capacity Performance sell offers in a MW quantity consistent with their average expected output during peak

- hour periods.
101. Next we add ress PJM’s proposal to allow certain types of resources to combine with other resources to submit a Capacity Performance s ell o ffer representing the total Unforced Capacity value of the aggregated resources. In its initial filing, PJM proposed to allow Capacity Storage Resources, Intermittent Resources, Demand Resources, and Energy Efficiency Resources to submit aggregated offers. In its answer, PJM offers to additionally permit aggregated offers from envir onmentally

- limited resources , and to permit aggregated offers composed of resources from different entities so long as the associated bilateral arrangements are reflected in PJM’s system

. 78 We find merit in PJM’s proposal to allow resources that would gene rally not be able to offer as Capacity Performance Resources to aggregate their capabilities in order to reliably perform during emergency conditions. Permitting such resources to submit aggregated offers as Capacity

76 PJM transmittal at 34, n.96 (Docket No. ER15

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- 000) (noting that in the most recent Base Residual Auction, for the 2017

- 18 delivery year, only 13.6 percent of the Demand Resources that cleared were Annual Demand Resources).

77 PJM February 13, 2015 answer at 23

- 24.

78 Id . at 27

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Performance will likely enhance their ability to provide reliability benefits to the PJM region and may increase competition in the capacity market. We also agree with PJM that extending this allowance to environmentally

- limited resources and permitting aggregated offers from different entiti es are appropriate modifications

. W e therefore accept this aspect of PJM’s proposal, subject to PJM submitting tariff revisions consistent with its commitment to clarify that : (i) aggregated offers from environmentally

- limited
resources are permitted ; an d (ii) aggregated offers composed of resources from different entities, so long as the associated bilateral arrangements are reflected in PJM’s system, are permitted

. 102. Although some intervenors argue that permitting aggregated offers from only certain reso urce types is unduly discriminatory and request that PJM provide the same allowance to all resources types, we do not find that such a change is necessary. T he aggregated offer allowance is designed to provide an avenue to Capacity Performance participati on by resources that otherwise may be unable or unwilling to participate on a stand

- alone basis because no reasonable amount of investment in the resource can mitigate non

- performance risk to an acceptable level within the Capacity Performance market desig n

. Generally speaking, other resource types do not face this same limitation. We also agree with PJM that allowing aggregated offers from all resources could transform the RPM bidding process from an individual unit approach to a portfolio bidding approach, which is a change that we do not find necessary for PJM’s proposal to be just and reasonable

. 103. Regarding PJM’s proposal to allow eligible resources in different Locational Deliverability Areas to submit aggregated offers, we find that PJM has fa iled to show how this provision is necessary and appropriate. PJM has not demonstrated why Capacity Emergency Transfer Limits should not be taken into account for purposes of aggregating a Capacity Performance offer. 79 PJM’s Capacity Emergency Transfer Li mits recognize system constraints and the ability to provide capacity across Locational Deliverability Areas. We are not persuaded that aggregation will be feasible across Locational Deliverability Areas in all circumstances, or would be able to provide t he required resource adequacy during emergency conditions. Moreover, allowing aggregation across L ocal D eliverability A rea s appears inconsistent with the design of PJM’s Capacity Performance proposal. As discussed in greater detail in sections V. C and V. F of this order, several Capacity Performance rate parameters, such as the Non

Performance Charge rate, Performance Bonus Payment rate, stop

- loss limits, and default offer caps, are designed to be Locational Deliverability Area

- specific. Although there
ma y be value in permitting aggregation across Locational Deliverability Areas , PJM has not adequately supported how it would determine clearing prices, Non

- Performance

79 See PJM M anual 14B at Attachment C.Docket No. ER15

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Charges, and P erformance Bonus Payment s across multiple Locational Deliverability Areas.
104. Brookfield requests clarification that during an Emergency Action PJM will not be authorized to recall a resource that does not hold a capacity commitment for that delivery year but which is physically located within the PJM region and is exporting energy or capacity to another region. We dismiss Brookfield’s request a s beyond the scope of this proceeding because PJM proposes no such ability for itself in the instant filing.
105. We deny Covanta’s requests that the Commission exempt Qualifying Facilities’ use of fossil fuels from the 25 percent limitation set forth in Sectio n 292.205(b) of the Commission’s regulations. To the extent such resources are unable to meet the Capacity Performance Resource obligations, they can seek an exception to PJM’s Capacity Performance must

- offer requirement. We also note that, consistent wi th our findings in section VI.C below, Qualifying Facilities may use Maximum Emergency Offers if they are only able to deliver energy during emergencies.
C. Non

- Performance Charges

106. Under PJM’s existing rules, a capacity resource commitment that fails to prov ide energy and reserves, when needed, is subject to certain charges and adjustments. A capacity resource’s saleable MW value, for example, is subject to discount, to reflect that resource’s forced outage history. 80 In addition, a generation capacity resou rce is subject to a Peak

- Hour Period Availability charge or credit, employing a peak

- period availability metric to assess whether generation resources committed as capacity are available at expected levels during peak periods. 81

107. PJM asserts, however, that the Peak

- Hour Period Availability charge is flawed. Specifically, PJM asserts that this charge assesses the performance or availability of a resource over too many hours, allowing poor performance during the most critical times to be masked by adequate p erformance during other, less critical times. In addition, PJM argues that its Peak

- Hour Period Availability charge broadly excuses unavailability.

80 See RAA at Schedule 5 (describing PJM’s existing demand

- equivalent forced outage rate, or EFORd, calculation).

81 See PJM OATT at Attachment DD

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1. PJM’s Proposal

108. PJM proposes to replace the existing Peak

- Hour Period Availability Charge and certain re lated charges 82 with a new Non

- Performance Charge. PJM states that its proposed charge is generally modeled on a comparable charge recently accepted by the Commission in the ISO

- NE Capacity Performance Order

. 83 PJM states that its proposed charge will be b ased on the expected performance of each Capacity Resource, as compared to its actual performance during an Emergency Action declared by PJM. 84

109. PJM proposes that it will measure capacity resources’ performance during Performance Assessment Hours, which will be triggered when PJM declares an Emergency Action

. 85 PJM explains that it bases the definition of Emergency Action on the conditions and events identified in PJM’s Manual 13, section 2.3, as “Warnings” or “Actions” for capacity emergencies. PJM also sta tes that its declarations of these actions must be consistent with the operating procedures specified by NERC and the corresponding regional reliability entity for the PJM region, Reliability First Corporation.
110. PJM states that, if a capacity resource’s actual performance falls short of its expected performance, this shortfall will be subject to a Non

- Performance Charge, absent a valid excuse (as summarized below), or the application of a stop

- loss limit (as also

82 In addition to the Peak

- Hour Period Availability Charge, additional currently

effective provisions of PJM’s OATT addressing resource availability and performance include the Peak

- Season Maintenance Compliance Penalty Charge ( see OATT at Attachment DD, section 9) and the Demand Resource Compliance Penalty Charge ( see id. a t Attachment DD, section 11). PJM notes that any resources that voluntarily commit to being a Capacity Performance Resource for the 2016

- 17 or 2017

- 18 delivery years will be subject on the Non

- Performance Charge provisions in section 10A and will not be
s ubject to the capacity performance provisions in sections 9 or 10.

83 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 4

.
84 See proposed PJM OATT at Attachment DD, section 10A

.
85 Proposed PJM OATT at Attachment DD, section 2.23A. (“‘Emergency Action’ shall mean any Emergency Action for locational or system

- wide capacity shortages that either utilizes pre

- emergency mandatory load management reductions or other emergency capacity, or initiates a more severe action including, but not limited to, a Voltage Reduction Warning, Voltage Reduction Action, Manual Load Dump Warning, or Manual Load Dump Action.)Docket No. ER15

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summarized below). PJM adds that while certain existing capacity deficiency charges 86 will remain in place after implementation of the new Non

- Performance Charge , and operate in tandem with the Non

- Performance Charge, it will assess only the greater of the two charg es when they apply to the same event or occurrence.
111. PJM states that the measure of expected performance and actual performance will differ based on the resource type at issue and PJM’s existing rules governing these resources. PJM notes, for example, that a Generation Capacity Resource is expected to provide a share of the PJM system’s hourly needs for energy and reserves based on a ratio of its capacity commitment to the total capacity commitment of all Generation Capacity Resources. 87 On the other hand, for a Qualifying Transmission Upgrade or an Energy Efficiency Resource, expected performance is defined as the MW quantity of that resource’s cleared capacity commitment. For a Demand Resource, actual performance will be based on the load reduction provid ed during the relevant emergency, as determined through the load response settlement process.
112. PJM proposes to base the Non

- Performance C harge on yearly Net CONE for a Capacity Performance Resource ( i.e. , the value of a performance shortfall), or the yearl y resource clearing price for a Base Capacity Resource, divided by 30 (the assumed Emergency Action hours per year). 88 PJM states that while its proposed Non

Performance Charge will apply to both a Base Capacity Resource and a Capacity Performance Resource , it is appropriate that a Base Capacity Resource be subject to a lower exposure, given that it is a n interim product not intended to incent investment. PJM also proposes that a Base Capacity Resource be subject to a Non

- Performance Charge only for its pe rformance shortfalls during Emergency Action s in the summer months, consistent with PJM’s classification of summer

- only Demand Resources and Energy Efficiency Resources as a Base Capacity Resource.

86 These include the generator testing provision ( see OATT at Attachment DD, section 7), the capacity deficiency charge provision ( see OATT at Atta chment DD, section 8), and the Demand Resource testing provision ( see OATT at Attachment DD, section 11A).

87 See PJM OATT at Attachment DD, section 10A(c).

88 PJM asserts that a rate divisor based on 30 hours of total annual Emergency Actions is reasonabl e, given its experience over the 2013

- 14 delivery year during which Emergency Actions were in effect for 23 hours. PJM argues that it would not be appropriate to set its rate divisor any lower than that level and that the additional hedge it is proposing is appropriate, given the possibility of supply shortages, and given the fact that increased hours in the divisor will moderate the hourly rate.Docket No. ER15

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113. PJM also proposes to exempt from its charges a performanc e shortfall attributable to : (i) a planned or a maintenance outage approved by PJM; (ii) non

- dispatch by PJM; or (iii) a reduced

- level dispatch by PJM. 89 PJM adds, however, that it will not be an acceptable excuse if the resource was not dispatched, or wa s dispatched down, due to resource parameter limitations specified by the seller, or due to the seller’s submission of a market

- based offer in excess of a cost

- based offer.
114. PJM also proposes to place a cap, or “stop

- loss” limit , on the total Non

Performanc e Charges it will be authorized to assess, for the purpose of limiting a seller’s financial exposure. PJM asserts that such a provision is necessary, given that the combination of an unusually high number of Emergency Action s and/or poor performance could lead to a total net charge liability that would be disproportionate to the risks that a resource reasonably should undertake in committing capacity. Accordingly, PJM proposes that, for a calendar month, its maximum charge for each resource, i.e

. , its
mon thly stop

- loss limit , will be 0.5 times Net CONE times the relevant resource’s installed capacity. 90 For a calendar year, PJM proposes a maximum charge equal to 1.5 times Net CONE times the relevant resource’s installed capacity. PJM adds that, for Ba se Capacity Resources, a calendar year limit will apply that is equal to the relevant resource’s total capacity revenues for that delivery year.
115. PJM states that revenue collected from payment of Non

- Performance Charges will be distributed, as a b onus, to resources that perform above expectations, based on the ratio of the relevant resource’s b onus performance level to the total b onus performance from all resources over the same Performance Assessment Hour . Specifically, PJM proposes to distribute Non

- Performance Credits for a Performance Assessment Hour “to each Market Participant, whether or not such Market Participant committed [capacity] for [that hour], that provided energy or load reductions above the levels expected for such resource during such hour.” 91 PJM states, however, that, contrary to the approach taken by ISO

- NE, its proposed mechanism will assess performance during Emergency Action s,

89 See proposed PJM OATT at Attachment DD, section 10(A)(d).

90 PJM notes that its proposed use of Net CONE, in this context, corresponds to the maximum clearing price allowed by PJM’s Variable Resource Requirement curve, i.e. , PJM’s capacity auction clearing mechanism, and is appropriate, given that that PJM’s capacity auction could clear at 1.5 times Net CONE.

91 See proposed PJM OATT at Attachment DD, section 10(A)(g).Docket No. ER15

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which include w arnings and p re

- e mergency a ctions, rather than only during shortage or scarcity co nditions. 92

116. Finally, PJM proposes to limit its currently effective excuses for non

- performance. PJM notes that, currently, an event classified by NERC as “outside management control” is not considered a forced outage for the purpose of calculating a force d outage rate or peak

- hour period penalties. PJM proposes, however, that beginning with the 2018

- 19 delivery year, such events will be treated as forced outages. 93 PJM also proposes that a performance shortfall not be assessed a charge if the resource was unavailable during the hour solely because it was on an approved Generator Planned Outage

. 2. Protests and Comments

117. Intervenors challenge PJM’s claim that PJM’s proposed penalty provisions will, in fact, penalize non

- performance during the hours when capacit y is needed most. Some argue that PJM’s penalty mechanism will not operate to recover capacity market revenues from non

- performing resources, given the number of hours used to compute the charge, i.e

. , the divisor of 30 performance hours in PJM’s formula. Joint Consumers argue that the use of 30 hours, as the devisor, represents an unwarranted 30 percent increase over the anomalous totals represented by the extreme weather events of January 2014 and should be revised to reflect no more than an actual, his torically

- experienced number of performance hours in a single delivery year, or an averaging of prior delivery years. 94 Joint Consumers note that, in the three delivery years prior to 2013

- 14, the cumulative number of hours during which Emergency Action s w ere in effect totaled only nine such hours, such that PJM’s charge will only rarely, if ever, apply. Accordingly, Joint Consumers request that PJM’s proposed charge be rejected, or in the alternative, set for hearing.

92 See proposed PJM OATT at Attachment DD, section 2.23A (defining Emergency Actions as locational or system

- wide capacity shortages, including Voltage Reduction Warnings, Manual Load Dump Warnings, Voltage Reduction Actions, and Manual Load Dump Actions, that cause pre

- emergency mandatory load management reductions or a more severe action)

.
93 See proposed RAA at Schedule 5

.
94 See also Wind Energy and Renewables Coalition comments at 10

- 11 (asserting that the proposed stop

- loss provisions are unjust and unreasonable, arguing that the provisions would lead to excessively high and excessively punitive charges. Wind Energy and Renewables C oalition add that the stop

- loss limit proposal is a barrier to entry to small generation, because it drives high credit requirements, and should instead be calculated as a function of capacity revenues).Docket No. ER15

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118. Exelon, too, argues that PJM’s prop osed Non

- Performance Charge rate, coupled with the proposed stop

- loss provisions, will result in inappropriately low penalty charges and, therefore, will not adequately incent resources to make the investments necessary to enhance reliability. Exelon asse rts that PJM must revise its methodology for calculating the hourly penalty and, instead, use a probabilistic modeling approach to determine the expected number of Performance Assessment Hours, based upon all potential weather scenarios and capacity supply performance at the target levels consistent with a 0.1 loss of load expectation. Exelon argues that relying on capacity resources’ poor performance in a single year with very extreme weather, January 2014, is inappropriate, particularly because the histo rical average number of Performance Assessment Hours is significantly less. Exelon acknowledges that it is unlikely this probabilistic approach could be effectuated for the Base Residual Auction for the 2018

- 19 delivery year or the T ransition Incremental Auctions, given the complexity of the modeling that would be needed. Nevertheless, Exelon maintains that it is critical that PJM’s hourly penalty be calibrated to the expected number of Performance Assessment Hours. Thus, Exelon argues, PJM should revise the divisor for the Non

- Performance Charge formula for the transition period to 20 and increase the monthly stop

- loss limit to 0.75 times Net CONE.
119. The Market Monitor and Joint Consumers protest that PJM’s proposal does not provide adequate performance in centives, because the parameters are not defined correctly. Joint Consumers argue that the stop

- loss provisions compound the unlikelihood of non

- performing resources facing significant capacity revenue forfeiture. Joint Consumers contend that there is no logical basis for limiting the exposure of non

performing resources through a monthly stop

- loss provision, arguing that this provision must be eliminated. The Market Monitor argues that the Non

- Performance Charge should not be based on the distribution o f emergency events within a delivery year, but rather should be based on performance anytime the system is in a critical capacity scarcity condition. The Market Monitor adds that, by preventing the forfeiture of capacity revenue for non

- performance, the m onthly stop

- loss provision reduces resources’ incentives to make the investments needed to improve reliability, and therefore, should be eliminated. The Market Monitor also argues that the estimated number of Performance Assessment Hour s should be reduced from 30 and calculated based on a defined method that considers specific forecasts, such as forecast weather conditions and forecast resource mix and availability. In addition, the Market Monitor argues that PJM’s proposal must define how expected perfor mance is calculated for emergencies that are declared at the zonal or sub

- zonal levels. The Market Monitor also contends that PJM’s proposed B alanc ing R atio 95 fails to appropriately incorporate performance of energy efficiency and Demand Resource s.

95 As proposed in section 10A of Attachment DD of th e OATT, the Balancing Ratio is a determinant of any capacity resource’s Expected Performance during aDocket No. ER15

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120. Other intervenors object to PJM’s proposed Non

- Performance Charge for Capacity Performance Resources as excessive and inconsistent with those charges accepted by the Commission in the ISO

- NE Capacity Performance Order

. 96 The PJM Utilities Coalition argues that, as compared to ISO

- NE’s phased

- in penalty structure, PJM’s proposed rate is approximately double the ISO

- NE initial rate, in place over the first several years, with monthly and annual stop

- loss provisions resulting in penalty caps that are approximately f our times as high. Coalition of Resource Projects similarly objects to PJM’s comparison with the stop

- loss provisions adopted in ISO

- NE, arguing that PJM’s proposal is “far more likely” to result in excessive penalties on generators. Coalition of Resourc e Projects argues that PJM’s proposed Non

- Performance Charge, coupled with the proposed stop

- loss provisions, are unfairly punitive and place unsustainable risk upon generators. Dominion argues that PJM’s proposed penalty structure may be too punitive and , as such, could undermine the incentives it is intended to create. Dominion requests that PJM revise the Non

- Performance Charge to allow “minor deviations from expected performance” with less substantial penalties.
121. Intervenors also protest PJM’s proposal to base the Non

- Performance Charge on Net CONE. Invenergy, Coalition of Resource Projects, and Dominion assert that PJM’s proposed penalty and stop

- loss provisions should be revised to ensure an appropriate relationship between revenues resources receive as capacity payments and penalties. 97 Invenergy argues that the penalty amount should be tied to annual capacity market revenues, namely the capacity market clearing price, rather than Net CONE. Invenergy argues that this flaw in PJM’s proposal is partic ularly egregious when clearing prices differ significantly from Net CONE, because the relationship between risk and reward is distorted. Coalition of Resource Projects argues that it is inappropriate to base the Non

-

Performance Assessment Hour ( i.e. , the quantity of energy or reserves that the capacity resource must deliver is order to exactly fulfill its capacity obl igation within the two

settlement capacity market design). PJM proposes that the Balancing Ratio equal the sum of all actual generation performance, storage resource performance, net energy imports, and demand response bonus performance divided by the sum of all committed generation and storage capacity (these components are defined in section 10A of Attachment DD), and that a capacity resource’s Expected Performance during any Performance Assessment Hour equal the resource’s committed capacity times the B alancing Ratio.

96 See, e.g., PJM Utilities Coalition comments at 12; Rockland comments at 7; Coalition of Resource Projects protest at 6; and AEP/Duke Energy protest at 33.

97 See Invenergy comments at 7 (proposing the use of 1.25 times a resource’s total annual revenue for the annual stop

- loss limit).Docket No. ER15

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Performance Charge on Net CONE, when ca pacity auctions in the region routinely may clear at far less than Net CONE. In addition, Coalition of Resource Projects believes the monthly stop

- loss limit should be calculated using a 30

- day period, rather than a calendar month. The PJM Utilities Coal ition argues that PJM’s proposed stop

- loss provisions fail to take account of the energy price penalties to which Capacity Performance Resources will be exposed during shortage conditions, i.e. , the fact that generators that are forced out during emergency hours are also likely replacing their day

- ahead energy commitment through higher energy purchases. Dominion argues that PJM should include a daily stop

loss provision that would limit resources’ exposure for an individual emergency event.
122. The PJM Utili ties Coalition also argues that basing performance penalties for a Capacity Performance Resource on Net CONE, and not on the relevant Locational Deliverability Area clearing price, has a discriminatory effect on resources in western PJM ( i.e. , on resources located in zones with lower clearing prices) that are not similarly situated to resources located in eastern PJM. The PJM Utilities Coalition adds that, while ISO

- NE has tied its penalties to auction prices, and not to zonal clearing prices, ISO

- NE has n ot experienced PJM’s persistent price separation. To remedy this discriminatory effect, the PJM Utilities Coalition proposes a stop

- loss provision tied to an historical, three

- year rolling average of capacity clearing prices similar to the method by which the energy and ancillary services offset is determined for purposes of calculating Net CONE.
123. AEM A argues that Demand Resource performance during Emergency Action s should be measured against their capacity commitment rather than Customer Baseline Load bec ause PJM and the Market Monitor have previously stated that it would be inappropriate to measure demand reductions in the capacity markets through performance in the energy market. 98 AEMA also asserts that PJM’s proposal to base performance penalties on Ne t CONE is inappropriate because Net CONE does not represent the true cost of new entry and the rate would be discriminatory against D emand R esources because “demand response resources have no relationship to Net CONE.” 99 Furthermore, AEMA claims that D ema nd R esources already have sufficient penalties in place and should not be subject to PJM’s proposed penalties. 100 Finally, AEMA argues that the stop

- loss l imit s should be based on 1.2 times the Base Residual Auction clearing price to reduce unnecessary risk exposure. 101

98 AEMA protest at 18

- 20.

99 Id . at 22

- 23.

100 Id . at 20

- 22.

101 Id . at 23

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124. Public Interest Organizations argue that PJM’s proposed charges are unduly discriminatory as to non

- fueled resources who do have the ability to supply year

- round capacity by way of resource upgrades, and thus cannot be incented to do so through the risk of penalty exposures. Public Interest Organizations argue that an alternative approach would be to exempt non

- fuel based resources from PJM’s proposed penalties, or to reduce the penalties. 102

125. The PJM Utilities Coalition also notes that PJM has proposed duplicative transition penalties, perhaps inadvertently. Specifically, the PJM Utilities Coalition asserts that, under PJM’s proposed tariff language, a Capacity Performance Resource will pay both the currently

- effective Peak

- Hour Period Availabi lity Charge and PJM’s proposed Non

- Performance Charge, as applicable. The PJM Utilities Coalition requests that PJM be directed to correct this error by limiting the application of Peak

- Hour Period Availability Charges to annual resources, extended summer demand resources, and limited summer demand resources for the 2016

- 17 and 2017

- 18 delivery years.
126. Intervenors also protest PJM’s proposal to impose N on

- P erformance C harges on a resource that is uncommitted due to the seller’s submission of a market

- based offer that is higher than its cost

- based offer. NRG/Dynegy and the PJM Utilities Coalition argue that the proposal is unsupported, adding that PJM has not provided evidence demonstrating that such resources possess the market power to incent them to manip ulate their bidding strategy. The PJM Utilities Coalition argues that, while the ostensible rationale for this proposed rule change is the deterrence of economic withholding, such a concern is not at issue here, given that PJM’s software screens for the a bility to exercise market power through the application of the three

- pivotal supplier test on every five

- minute dispatch interval and imposes cost

- based mitigation when this test is failed. LS Power protests that the effect of this aspect of PJM’s proposa l is to effectively eliminate sellers’ ability to submit market

- based offers for Performance Assessment Hours. Dominion similarly argues that PJM’s proposal effectively nullifies price offers in emergency situations and unreasonably exposes market sellers to penalty risk, particularly where resources have no opportunity to update their price offer. 103

102 Public Interest Organizations comments at 15; see also Solar Association comments at 4 (requesting clarification that solar generators either can serve as Capacity Performance Resources alone or are exempt from PJM’s proposed must

- offer requirement).

103 See also NRG/Dynegy protest at 27

- 28 (arguing that PJM’s proposal will convey improper price signals by encouraging certain resources to submit energy market offers below their actual marginal cost of operating).Docket No. ER15

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127. Coalition of Resource Projects protests PJM’s proposal to impose Non

Performance Charge s on resources during “catastrophic weather conditions, such as hurricanes or tornadoes,” arguing that PJM has offered no explanation why it continues to
excuse non

- performance by transmission owning utilities during such weather conditions but not Capacit y Performance Resources. Coalition of Resource Projects similarly objects to imposing penalties on resources “behind citygates” subject to state

- based interruptible service.
128. Dominion protests that PJM’s proposal would impose Non

- Performance Charge s on re sources that PJM did not commit, or dispatched down, due to parameter limitations that account for the resources’ physical operating characteristics. Citing pumped storage as an example, Dominion argues that PJM could conceivably exhaust all of a pumped
s torage resource’s capability during or prior to an Emergency Action and then ask for more, even though PJM is fully aware that energy storage has been exhausted. In this situation, Dominion states, the resource would still be penalized for non

- performance even though it fully performed to its known physical capability as directed by PJM.
129. Intervenors protest PJM’s proposal to allocate the revenue collected from payment of Non

- Performance Charges, the Performance Bonus Payment , only to those resources that p erform above expectations. The Pennsylvania Commission argues that load should also receive a reasonable share of these revenues, to the extent it is forced to bear the additional costs of higher locational marginal prices and energy uplift costs associat ed with net

- generator non

- performance. Homer City argues that the Commission should clarify that market participants that act as energy importers are likewise eligible to receive the Performance Bonus P ayments.
130. Calpine protests PJM’s process for billing and crediting the Non

- Performance Charge. Calpine asserts that, according to PJM’s proposal, Non

- Performance Charges may not be collected within three months, but rather may be collected in installments over the balance of the relevant delivery year. Cal pine argues that this “delayed invoicing mechanism” increases risk to over

- performers, and should either be revised or allowed to accrue interest.
131. Brookfield protests that it is unclear how PJM will assess Non

- Performance Charges during the transition peri od, particularly for resources (or coupled resources) that submit offers as both Capacity Performance Resources and Base Capacity Resources. Brookfield argues that PJM should clarify that it will attribute the output of such a resource first to any Capaci ty Performance obligations and any remaining output to Base Capacity. In addition, Brookfield argues, PJM should assess the Non

- Performance Charge for any shortfall first based on the Base Capacity amount and only second as Capacity Performance. Brookfie ld argues that this approach is just and reasonable because the output of an offer made jointly as Capacity Performance and Base Capacity during the transition period is fungible, regardless of the amount that cleared as a Base Capacity Resource versus a C apacity Performance Resource.Docket No. ER15

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132. Intervenors also protest PJM’s proposed trigger for Performance Assessment Hour s. The Market Monitor argues that PJM should define the trigger for Performance Assessment Hour s clearly, using a calculated metric based on the a vailable reserves, and should use an “annual probabilistic analysis” with the same inputs used for the installed reserve margin study to approximate the appropriate Non

- Performance Charge rate. Invenergy protests that there is no limit on the number of ho urs each year during which PJM could implement Emergency Actions. Invener g y argues that, while some flexibility is warranted, PJM must recognize that the number of hours will drive capacity market sellers’ penalty risk exposure. Therefore, Invenergy asse rts, PJM must revise its proposal to incorporate a process by which PJM will review and identify the circumstances under which Emergency Actions are declared and a trigger for that review. Specifically, Invenergy argues that, if the total number of hours during which Emergency Actions are implemented in a single year exceeds 40, PJM should be required to conduct this review process. Invenergy argues that this review will allow the Commission to consider whether the Non

- Performance Charge should be modifie d to reflect more than 30 hours of expected Emergency Actions. Exelon argues that PJM should have flexibility to revise both the triggers for Performance Assessment Hours and the stop

- loss provisions, in the event the calculation results in unacceptably h igh or low Non

- Performance Charges.
133. Dominion argues that PJM’s proposed changes are unjust and unreasonable because they could penalize a resource for following PJM’s instructions or due to a transmission maintenance outage outside of the generator’s con trol. 104 Dominion argues that the Commission should reject this aspect of PJM’s proposal because the proposed penalty for generator outages caused by transmission system outages bears no relation to PJM’s goal of incenting performance.
3. PJM’s Answer

134. In res ponse to protestors, PJM asserts that the Non

- Performance Charge is reasonably based on Net CONE regardless of the clearing price for any particular capacity auction. PJM argues that Net CONE is an appropriate measure because it reflects the cost of new c apacity under equilibrium conditions, an accepted reference point for the value of capacity. In contrast, PJM responds, using the energy market shortage price as Coalition of Resource Projects suggests is inappropriate, because the shortage price is an en ergy market value.
135. PJM disagrees with the Market Monitor’s and Exelon’s suggested approaches for calculating a performance penalty. PJM asserts that either method could result in changes to the performance penalty rate after the relevant Base Residual A uction is cleared. Thus, PJM concludes, such approaches “appear to sacrifice rate predictability.”

104 See also Essential Power protest at 12.Docket No. ER15

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Nevertheless, PJM explains that it is willing to revise the OATT to state that the denominator in the Non

- Performance Charge calculation will contain a num ber of hours equal to the annual average of the Performance Assessment Hours in the three calendar years preceding PJM’s posting of parameters for the Base Residual Auction for a delivery year. 105

136. PJM disagrees with the Market Monitor’s assertion that the Balancing Ratio should include actual performance and commitments of D emand R eso urce s and E nergy E fficiency R esources. PJM argues that including these factors incorrectly assumes that the expected performance of D emand R es ource s and E nergy E fficiency R eso urces is based on the Balancing Ratio itself, which, thereby, leads to an inflated figure. PJM explains that it measures performance by demand response and energy efficiency resources through a separate calculation, because such resources are always expec ted to provide their full committed load reduction values. Thus, PJM argues that the Market Monitor’s calculation does not correspond to what the system expects or needs and should be rejected.
137. PJM also disagrees with protestors seeking to require a l ower penalty charge for Demand Resource s. PJM argues that it is reasonable for Demand Resource s to be subject to the same penalty provisions as generators, regardless of whether they cleared as Base Capacity or Capacity Performance. PJM adds that the new capacity construct should not have differentiated penalties based on how well different resource types have performed in the past.
138. In response to intervenors’ arguments seeking exemptions from the Non

Performance Charge for resources that do not perform i n specific circumstances, PJM argues that granting such exemptions unreasonably seeks to shift to loads the adverse effects of poor performance that is traceable to an economic decision of the capacity provider. For example, PJM explains that when a resou rce submits a market

- based offer that is higher than its cost

- based offer, the resource indicates its economic choice not to be dispatched at its cost

- based level. PJM adds that, in this situation, the financial consequences of the offer strategy should f all on the market seller. 106

105 PJM adds that, to ensure market seller expectations are honored, this denominator will not change once it is used in the Base Residual Auction. PJM asserts that this approach would afford market sellers notice of the Non

- Performance Charge rate at the time they submit their capacity offers for the relevant del ivery year. See PJM February 13, 2015 answer at 65.

106 Similarly, PJM argues, physical resource limitations are a “design and economic choice by the resource provider” and exposing resources to the consequencesDocket No. ER15

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-

139. PJM reiterates that the proposed Non

- Performance Charge and performance payment “closely track” the approach the Commission recently approved for ISO

- NE, with “only one notable departure,” the proposed stop

- loss limit mechanism . PJM argues that this departure is warranted, because utilizing the ISO

- NE method in the PJM region would effectively eliminate the threat of loss of all revenues for a delivery year. In particular, PJM explains, under the ISO

- NE stop

- loss method, a res ource would have to trigger the monthly stop

- loss limit in eight months in order to lose its capacity auction revenue for the year. This result is nearly impossible in PJM, PJM argues, and would inhibit the performance incentives it seeks to establish and dampen its ability to shift performance risk from load to suppliers.
140. With regard to Joint Consumers’ protest that Base Capacity Resources should be subject to a performance penalty that exceeds the capacity auction clearing price, PJM responds that Base C apacity Resources are only transitional under the new construct. PJM adds that units that clear as Base Capacity Resources will become subject to the Non

- Performance Charge for Capacity Performance after the end of the transition period, so market sellers will know that they will face more stringent penalty provisions in the future. PJM argues that this eventuality “should provide all the incentive the seller needs” to make appropriate investments now and in the future.
141. PJM also responds to intervenors’ a rguments regarding the ability of PJM to appropriately calculate performance for coupled offer s . PJM explains that, under its proposal, output will be attributed first to the Capacity Performance Resource performance requirement, with any output over and above that quantity attributed to the Base Capacity performance requirement. 107 PJM disagrees with protestors who assert that PJM should distribute Non

- Performance Charge revenues to load rather than over

performing resources. PJM argues that its approach corresponds to the method accepted for ISO

- NE, reflects the logic that resour ce owners are responsible for resource performance, and will promote competition among better

- performing resources. In return, PJM adds, load receives the reliability the capacity market is intended to provide.
4. Additional Answers

142. Exelon, in its answer, renews its objections to PJM’s proposed hourly penalty rate because it is too low. Exelon notes that, while PJM’s proposal is based on the

of such choices will result in more flexible and better performing resources over time. Id. at 70.

107 PJM also commits to include in its Manuals the methodology for calculating capacity values for Intermittent Resources, Capacity Storage Resources, Demand Resources, and Energy Efficiency Resources.Docket No. ER15

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assumption that there will be approximately 30 Performance Assessment Hours a year going forward, creating a static divisor based on the worst performance PJM has ever experienced will establish penalties that will forever be too low.
143. Exelon also responds to the PJM Utilities Coalition’s argument that an hourly penalty paid by a non

- performing resource located in a Lo cational Deliverability Area that has a relatively low capacity clearing price will be unduly discriminatory, given that it will constitute a larger share of that resource’s total capacity revenues relative to the hourly penalty paid by a non

- performing re source in a Locational Deliverability Area that has a relatively high clearing price. Exelon argues that, in fact, PJM’s proposal will penalize non

- performance in the same manner, regardless of location or technology, based on the cost of replacement capa city valued at Net CONE. Exelon asserts that, regardless, any resource will be free to incorporate the exposure risk attributable to a penalty into its sell offer.
144. The PJM Utilities Coalition, in its answer, responds to Exelon’s argument that the fixed denominator established under PJM’s proposed hourly penalty rate relies on an excessive estimate as to poor performance. The PJM Utilities Coalition argues that PJM’s divisor is appropriate, given the recent increase in unit retirements.
145. The PJM Utilities Coalition also responds to the Pennsylvania Commission’s argument that the revenue collected from payment of Non

- Performance Charges should be allocated to load, to the extent that load is forced to bear the additional costs of higher locational marginal prices and energy uplift costs associated with net

- generator non

performance. The PJM Utilities Coalition argues that, to generate the revenues required to maintain reliability and to properly incent resource performance, it is critical that PJM’s capacit y rules allocate performance payments to suppliers. 108

146. Finally, the Market Monitor, in its answer, responds to arguments made by NRG/Dynegy and LS Power, in opposition to PJM’s proposal to impose Non

Performance Charge s on a resource that is uncommitted du e to the seller’s submission of a market

- based offer that is higher than its cost

- based offer. The Market Monitor asserts that PJM’s proposal is appropriate, given that the risk of non

- performance in the capacity market is explicitly incorporated into a s eller’s offer. The Market Monitor argues that, under these circumstances, performance should not be excused on the basis of an energy offer.

108 The PJM Utilities Coalition adds that allocating performance payments to load would incent offers that reflect only a downside risk attributable to the capacity being offered, with the resulting clearing price not reflecting the risk

- adjusted value of c apacity. See PJM Utilities Coalition Answer at 15.Docket No. ER15

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-

5. Deficiency Letter, PJM’s Response, and Protests and Comments

147. The Deficiency Letter asked whether it is approp riate for PJM to phase

- in its Non

Performance Charge by transitioning from its proposed rate, based on 30 expected Performance Assessment Hours, to a more stringent penalty assessment.
148. The Deficiency Letter also requested PJM to provide any analysis it has completed that indicates the expected frequency with which a Capacity Performance Resource would hit the monthly or the annual stop

- loss limit and any analysis it has completed of expected performance charges and bonus payments for Capacity Performance R e sources under PJM's Capacity Performance proposal.
149. Regarding the proposed stop loss provisions, PJM indicates that while it has not performed unit

- specific analysis to determine when or the frequency with which a Capacity Performance R esource can be expect ed to hit the monthly or annual stop

- loss limit s, it paid careful attention to the number of full non

- performance hours required for any c apacity resource to reach either the monthly or annual stop

- loss limits

. 109 PJM notes that using the data from Emergenc y Actions declared by PJM during the 2013

- 14 delivery year that ran from June 1, 2013 through May 31, 2014, the Market Monitor calculated the Non

- Performance Charges that would have been paid by a non

- performing
resource. 110 PJM indicates that the analysis shows the monthly stop

- loss limit would have reduced a resource’s exposure to the Non

- Performance Charge by $6.5 million compared to the outcome without a stop

- loss limit

. Similarly, PJM states that on a per

- MW basis, the total N on

- P erformance C harge is $13,626/MW lower with the stop

loss limit compared to what it would have been without the stop

- loss limit

. 111

150. PJM states that it is willing to eliminate the proposed monthly stop

- loss limit in this proceeding or to commit to review the monthly stop

- loss limit and any impact on performance incentives at an appropriate time after implementing the Capacity Performance design. 112 PJM contends that , while the monthly stop

- loss limit is beneficial from the market seller’s perspective because it reduces exposure to the N on

- P erformance Charge in a month like January 2014, the monthly stop

- loss limit dilutes the core incentives b y allow ing under

- performance without consequence once a resource has

109 PJM Deficiency Letter Response at 20.

110 Id . at 21

- 22.

111 Id . at 21

- 22.

112 Id . at 23.Docket No. ER15

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reached the monthly stop

- loss limit

. 113 Additionally, PJM states that t he monthly stop

loss limit decreases the total pool of dollars collected from Non

- Performance Charges, thereby reducing the size of Performance Bonus Payments available to resources that exceed their commitments. PJM s tates that the annual stop

- loss limit is based on the premise that no resource should be penalized more than 1.5 times Net CONE times its capacity commitment because the Variable Resource Requirement curve sets 1.5 times Net CONE a s the maximum price load will pay for capacity.
151. Finally, P JM suggests that, given its proposed transition mechanism, there is no need for any further phase

- in of the N on

- P erformance C harge rate. 114 PJM contends that it s transition mechanism assures load that Capacity Performance Resources have the full incentive to invest appropriately in their resources from the 2018

- 19 delivery year forward. PJM believes that phasing in the N on

- P erformance C harge rate beyond what PJM has already proposed in its transition mechanism would inappropriately dilute incentives to per form. PJM suggests that a stringent Non

- Performance Charge is critical to ensure that sufficient incentive exists for Capacity Market Sellers to invest any increased capacity payments in preparing their resources to be capable of providing energy to the s ystem when they are most needed for reliability.
152. Exelon states that it would not object to PJM using a divisor of 30 Performance Assessment Hours to calculate the penalty rate for the Transition Incremental Auctions and for the Base Residual Auction for delivery year 2018

- 19, and then moving to a more accurate and stringent penalty assessment based on the annual average of Performance Assessment Hours over the last three years preceding the Base Residual Auction. 115 Dominion, in contrast, opposes a phase

- i n of the penalty rate. 116 Panda argues that allowing the rate to fluctuate would perversely cause the Non

- Performance Charge r ate to increase as reliability, and thus expected performance, improves. 117 The Pennsylvania Commission argues that PJM’s assumption of non

- performance hours should reflect a more current number of emergency events. 118

113 Id . at 22.

114 Id . at 24.

115 Exelon comments to PJM’s Deficiency Letter Response at 10.

116 Dominion comments to PJM’s Deficiency Letter Response at 6

- 9.

117 Panda comments to PJM’s Deficiency Letter Response at 3

- 4.

118 Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 8.Docket No. ER15

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153. Regarding PJM’s proposed Non

- Performance Charge mechanism, the Pennsylvania Commission and Joint Consumers argue that an appropriate penalty for
non

- performance is based o n actual capacity market clearing prices. Joint Consumers contend that the relationship between the penalty rate and the opportunity cost component of the Revised Offer Cap would result in escalated RPM clearing prices if penalties are based on Net CONE, regardless of the actual marginal units’ operating costs. 119 The Pennsylvania Commission suggests that basing the penalty rate on Net CONE effectively requires a capacity resource to “return a payment which it has not earned.” 120 The Pennsylvania Commission argues that, if PJM eliminates the monthly stop

- loss limit, it should adjust the base penalty rate calculation to reflect actual capacity market clearing prices, rather than Net CONE. AEMA contends that penalties that are too high, increase risk, possibly deter market entry, and increase capacity costs for ratepayers. AEMA suggest s that , in years during which there are very few emergency hours, the Non

P erformance Charge rate and Performance B onus Payment rate could rise to astronomical levels, potentially compressing a year’s worth of penalty into a single hour. 121 AEMA contends that PJM’s proposed Balancing Ratio discriminates against Demand Resources and that future Performance Bonus Payments are diluted , because such r esources are not eligible to have their expected performance during Performance Assessment Hour s reduced by the Balancing Ratio

. 122 Panda agrees, adding that PJM’s proposal appears to discriminate against Energy Efficiency Resources as well. 123

154. Panda and the Coalition of Resource Projects state that it appears the value for the Balancing Ratio could exceed one , both in concept and in practice , and that a resource delivering its contractually committed capacity during a compliance hour might still be exposed to paying the Non

- Performance Charge. 124 Panda adds that it is illogical to

119 Joint Consumers comments to PJM’s Deficiency Lett er Response at 15.

120 Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 3.

121 AEMA c omments to PJM’s Deficiency Letter Response at 18.

122 Id . at 21

- 22.

123 Panda comments to PJM’s Deficiency Letter Response at 7.

124 Id . at 9

- 11 (refer ring to testimony from Dr. Poray); Coalition of Resource Projects comments to PJM’s Deficiency Letter Response at 9.Docket No. ER15

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include Net PJM Energy Imports in the Balancing Ratio for a Locational Deliverability Area, but that this appears to be PJM’s proposed approach. 125

155. Some intervenors support PJM’s commitment to eliminate the monthly stop

- loss limit. The Market Monitor requests that the Commission condition approval of the Capacity Performance Proposal on elimination of the monthly stop

- loss provision. 126 Exelon agrees, arguing that the monthly stop

- loss limit dilutes the core incentives by allowing under

- performance without consequence any time a resource has reached the monthly stop

- loss limit

. 127 Additionally, Exelon argues, it decreases the total pool of money funding Performance Bonus Payments . P SEG argues that eliminating the monthly stop

- loss provision is consistent with the overall goal of the Capacity Performance Proposal

– to shift the risk of non

- performance to suppliers. PSEG adds that the Commission should direct PJM to include a provisio n that requires the periodic review of the impact of the monthly stop

- loss limit and considers whether it is necessary once PJM gains operational experience with the Capacity Performance design. 128

156. Others protest PJM’s proposed elimination of the monthly sto p

- loss provision. Multiple intervenors contend that, due to the probable discrepancy between the penalty rate, based on Net CONE, and capacity revenues that will likely be lower than Net CONE, eliminating the monthly stop loss would tip the risk

- to

- reward balance of PJM’s Capacity Performance proposal

. 129 In particular, such intervenors are concerned that eliminating the monthly stop

- loss limit could threaten a resource’s financial viability and creat e an inappropriate level of risk in the market. Essent ial Power argu es that it is ineffective to attempt to balance total Non

- Performance Charge revenue with expected Performance Bonus Payments when, in reality, such speculative revenues are highly discounted in the financing process

. 130 PJM Utilities Coalitio n adds that unreasonably

125 Panda comments to PJM’s Deficiency Letter Response at 8

- 9.

126 Market Monitor comments to PJM’s Deficiency Letter Response at 3.

127 Exelon comments to PJM’s Deficiency Letter Response at 8

- 9.

128 PSEG comments to PJM’s Deficiency Letter Response at 4.

129 Rockland comments to PJM’s Deficiency Letter Response at 2

- 6; Essential Power comments to PJM’s Deficiency Letter Response at 6

- 7; Domi nion comments to PJM’s Deficiency Letter Response at 3

- 4; Panda comments to PJM’s Deficiency Letter Response at 6

- 7; Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 8; PJM Utilities Coalition comments to PJM’s Deficiency Letter Resp onse at 6

- 10.

130 Essential Power comments to PJM’s Deficiency Letter Response at 6

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high penalty exposure will forestall, not encourage, needed capital investments. 131 PJM Utilities Coalition and Pennsylvania Commission argue that a monthly stop

- loss limit reduces risk and thus capacity prices borne by consumers. 132 Panda adds that PJM does not justify or explain the significantly higher risk, particularly in light of the Commission’s finding that ISO

- NE’s stop

- loss limit was sufficient to incent reliable performance. 133 Panda requests that, if the Commission accepts the stop

- loss limits as proposed, the provisions be subject to the review conducted under Section 5.10 of Attachment DD of the Tariff. 134

157. Dominion disagrees with PJM that the monthly stop

- loss limit could undermine incentives by allowing a capacity resource to under

- perform without incurring additional penalties once the stop

- loss limit is reached . Dominion point s out that there are numerous consequences outside of the capacity market penalty structure that incent resources to perform , f or example, the fact that Capacity Performance Resources that fail to perform will also forego all revenues from the energy markets. 135

6. Commission Determination

158. For the reasons discussed below, we a cce pt PJM’s proposed Non

- Performance Charge mechanics, subject to the condition that PJM modif y certain aspects in a compliance filing. We generally find the proposed mechanics to be a just and reasonable alternative to PJM’s existing rules to adjust a capacity resource’s compensation based on its real

- time performance. PJM argues, and we agree, that under the existing rules a seller can earn substantial revenues through PJM’s capacity auctions by committing its resource as capacity, with little concern that it will lose significant revenue even if it performs poorly. 136 PJM’s experience in the winter of 2013

- 14 demonstrated that, while the system suffered from outage rates two to three times that of historical norms,

131 PJM Utilities Coalition comments to PJM’s Deficiency Letter Response at 9.

132 Id . at 6

- 7; Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 8.

133 Panda comments to PJM’s Deficiency Letter Response at 6

- 7.

134 Id . at 7

- 8.

135 Dominion comments to PJM’s Deficiency Letter Response at 4

- 5.

136 PJM transmittal at 9 (Docket No. ER15

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answer at 7 (Docket No. ER15

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penalties constituted just 0.6 percent of total capacity revenue. 137 The existing rules therefore place mo st of the risk of resource under

- performance on load, not on capacity sellers, and provide little incentive to capacity sellers to make capital improvements or increase operating expenses to enhanc e the performance of its unit during emergency conditions. By contrast, we find that PJM’s proposed Non

- Performance Charge , and the mechanics by which it will be applied, will provide incentive to capacity sellers to invest in and maintain their resources by tying capacity revenues more closely with real

- time del ivery of energy and reserves during emergency system conditions.
159. Consistent with the Commission’s finding in the ISO

- NE Capacity Performance Order, we find reasonable PJM’s propos al to base the Non

- P erformance Charge rate on Net CONE. 138 We disagree with the assertions of multiple intervenors that relying on Net CONE would result in a punitive or inappropriate penalty rate. 139 We continue to find that Net CONE is a reasonable estimate of the cost of providing new capacity. 140 W e find that it is appropriate to set the penalty rate at a level that would require resources that fail to perform for any Emergency Action hours of a commitment period to pay the expected full cost of replacement capacity for that period

. Furthermore, a Non

Performance Charge rate based on Net CONE is more likely to prevent non

- performing resources from receiving positive net capacity revenues over the long run. W e find that this is consistent with the overall Capacity Performance market design that aims to provide incentive s for resource owners to make appropriate investments and maintain their resources

. 141 In addition, a Non

- Performance Charge rate based on Net CONE is likely to discourage non

- performing resources from taking on capacity obligations, be cause over time the penalties are likely to fully offset the capacity revenues from the capacity market auctions.
160. In addition, by r elying on Net CONE , which is known in advance of the auction,
a s the basis for a c apacity Non

- Performance Charge rate , partic ipants know the rate

137 PJM t ransmittal at 9, 17 (Docket No. ER15

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.
138 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 74.

139 PJM Utilities Coalition comments at 12, 61

- 62, 65

- 67; Rockland comments at 7; Coalition of Resource Projects protest at 6

- 8; AEP/Duke E nergy protest at 32

- 33; Invenergy comments at 5

- 6; Dominion protest, Docket No. ER15

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- 000, at 33

- 35; AEMA comments at 22

- 23; Wind Energy and Renewables Coalition comments at 10

- 11.

140 See PJM Interconnection, L.L.C. , 149 FERC ¶ 61,183, at PP 55 & n.41, 1 25

- 126 (2014); PJM Interconnection, L.L.C 143 FERC ¶ 61,090 (2013).

141 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 70.Docket No. ER15

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before they submit their offers. This is a reasonable component of the penalty mechanics as it allows for some degree of certainty before the capacity auction. While resource owners will not know the quantity and timing of Performanc e Assessment H ours in the relevant delivery year , they will at least be able to rely on a known Non

- Performance Charge rate as a basis to assess risk and develop sound investment decisions and offer strategies.
161. Intervenors request that PJM base the capacit y Non

- Performance Charge rate on energy prices or actual clearing prices, or some variant thereof, rather than on Net CONE. While multiple reasonable approaches could exist, we find, on balance, that the Net CONE penalty approach is just and reasonable. With regard to the PJM Utilities Coalition’s concerns about the lack of a penalty phase

- in, we note that we are accepting PJM’s proposed transition mechanism, which provides for incremental quantities of resource participation and lower Non

- Performance Charge rates for B ase C apacity R esources, as discussed further below in Section V.E of this order (addressing PJM’s proposed transition mechanisms).
162. The PJM Utilities Coalition also asserts that the Non

- P erformance Charge rate for Base Capacity Resources is too low. We find it acceptable to have a lower Non

Performance Charge rate for Base Capacity Resources tha n for Capacity Performance Resources , given that Base Capacity Resources will not receive the h igher revenues associated with the Capacity Performance product. A lower Non

- Performance Charge rate for Base Capacity Resources also allow s resources the opportunity to gain experience with the new mechanism and give s Base Capacity Resources that may lat er offer as Capacity Performance the time to make the investments necessary to meet the stringent requirements of the full Capacity Performance product while still providing strong incentives to perform during summer Performance Assessment H ours.
163. We also a ccept PJM’s proposal to rely on an estimate of 30 hours of Emergency Action s to formulate the Non

- Performance Charge rate. PJM’s reliance on the historical Emergency Action hours experienced during the 2013

- 14 commitment period to approximate the number o f Performance Assessment Hours, with an adder for the possibility that even more Emergency Action hours may occur, represents a reasonable approximation of the upper bound of hours during which the system is likely to experience Emergency Action s over the relevant commitment period. However, given that the Performance Assessment Hour estimate affects core components of the Capacity Performance design, including the Non

- Performance Charge rate and the default offer cap, we condition our acceptance of PJM’s proposal on PJM making annual informational filings with the Commission to provide updates on the use of 30 hours forDocket No. ER15

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this parameter. 142 PJM should submit an informational filing within 180 days of the conclusion of each delivery year for five years, beg inning with the 2016

- 2017 delivery year. Each informational filing should describe average net capacity revenues ( i.e

. capacity auction revenues plus Performance Bonus Payments minus Non

- Performance Charges) for groups of Capacity Performance Resources with varying levels of performance during Performance Assessment Hours ( i.e. with varying values for the parameter “A,” a s described in the Deficiency Letter Response and in section V.F of this order) under : (i) the actual Non

- Performanc e Charge rate based on 30 hours; and (ii) higher and lower alternative Non

- Performance Charge rates based on less than and greater than 30 hours. 143 W e also encourage PJM to reassess the assumed number of P erformance Assessment H ours after it has gained more experience with Capacity Performance and submit a filing if it finds a revision is warranted.
164. We also accept , as just and rea sonable, PJM’s proposed annual Non

- Performance Charge stop

- loss limit equal to 1.5 times annual Net CONE

. We agree with interven ors that, because PJM’s annual stop

- loss limit is based on Net CONE rather than the auction clearing price, PJM’s stop

- loss lim it will likely be higher than ISO

- NE’s. 144 However, this discrepancy does not alone render PJM’s approach unjust or unreasonable. First, as noted above, an important element of PJM’s overall proposal is to put at risk full capacity auction revenues if a re source completely fails to perform during Performance Assessment Hours. Because the proposed annual stop

- loss limit is equal to the maximum clearing price allowed by PJM’s Variable Resource Requirement curve, it meets this criterion. In addition, basing the limit on Net CONE ensures that market participants will know their maximum risk exposure in assuming a Capacity Performance commitment and be in a position to formulate their sell offers accordingly

.

142 The filing will be for informational purposes only and will not be noticed for comment or subject to Commission or der.

143 For example, PJM could present the average net capacity revenues of groups of Capacity Performance Resources with “A” values in the 25 th , 50 th , and 75 th percentiles of all Capacity Performance Resources under (i) the actual Non

- Performance Charge ra te based on 30 hours, and (ii) higher and lower alternative Non

- Performance Charge rates based on less than and greater than 30 hours.

144 ISO

- NE’s annual stop

- loss limit is set at a resource’s annual capacity revenues plus three months of the difference bet ween the auction clearing price and the auction starting price (the greater of gross CONE or 1.6 times Net CONE). See ISO New England Inc. Transmission, Markets and Services Tariff at III.13.7.3.2 Annual Stop

- Loss (38.0.0).Docket No. ER15

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-

165. However, we agree with PJM that the monthly stop

- los s limit equal to 0.5 times annual Net CONE significantly weakens the incentives created by the Non

- Performance Charge by allowing under

- performance without consequence once a resource has reached the monthly stop

- loss limit. A monthly stop

- loss limit at this level c ould mean that a Capacity Performance Resource ’s penalties would be capped after failing to perform in only 15 Performance Assessment Hours in a month

. H istorical data submitted by PJM in its Deficiency Letter Response suggests that the majority of Performance Assessment Hours in PJM are likely to occur during a few peak months of the year. 145 For a ny delivery year during which Performance Assessment Hours are highly concentrated in a single month , such as delivery year 201 3

- 1 4, the mo nthly stop

- loss limit will inappropriately increase the likelihood that a non

- performing resource could earn positive net capacity revenues over the long run, and thus severely dilute the very performance incentives that the Capacity Performance design is intended to create. We find that the likely high concentration of Performance Assessment Hour s in a few peak months in PJM warrants removal of PJM’s proposed monthly stop

- loss limit , and we therefore recognize PJM’s commitment to eliminate the monthly sto p

- loss limit and condition our acceptance of PJM’s proposal on such removal.
166. We are not persuaded by PJM Utilities Coalition’s argument that the stop

- loss levels fail to account for energy price penalties that non

- performing resources may face. PJM’s prop osed stop

- loss provisions are intended to limit the amount of capacity revenue that can be lost due to failures to perform in the energy market. They are not designed to provide absolute limits to all forms of risk that resources may face.
167. PJM proposes tw o N on

- P erformance Charge exemptions whereby a capacity resource that does not deliver its share of energy or reserves during a Performance Assessment Hour will nonetheless not be assessed a Non

- Performance Charge. 146 The first is if the resource is on a PJM

- approved Generator Planned Outage or Generator Maintenance Outage and PJM determines that the resource was unavailable during the hour solely because it was on such an outage . The second is if PJM did not schedul e the resource to operate for reasons other than seller

- specified operating parameter limitations
or the seller’s submission of a market

- based offer price higher than its cost

- based offer price. As PJM indicates, these exemptions are strictly circumscribe d and can be traced to a determination by PJM that the resource’s unavailability is appropriate in a given hour. PJM’s proposal also reinforces the incentive to follow PJM’s dispatch instructions,

145 PJM Deficiency Letter Respo nse at Appendix 2. We note that, in the 2013

- 14 delivery year, over 70 percent of the RTO

- wide Performance Assessment Hours occurred in one month, and in each of the 2012

- 13 and 2011

- 12 delivery years, 100 percent of the RTO

- wide Performance Assessment Ho urs occurred in one month.

146 P r opos ed OATT, Attachment DD, s ec t i on 10A ( d).Docket No. ER15

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because capacity resources are not penalized for being on an PJM

- approved outage or for PJM’s determination, based on its independent assessment of the needs of the bulk power system at a given point in time, not to schedule a capacity resource or to dispatch the capacity resource down. For these reasons, we fin d the proposed exemptions reasonable and unlikely to undermine the resource performance incentives that are at the core of the Capacity Performance construct. 147 We therefore accept them, subject to the condition described below

. 168. PJM Utilities Coalition, LS Power, and Dominion protest an aspect of PJM’s proposed scheduling exemption whereby a resource will not be exempt from Non

Performance Charges if the resource is not scheduled by PJM due to the seller’s submission of a market

- based offer price greater than its cost

- based offer price . The parties state that this application of the scheduling exemption will serve as additional mitigation of resources’ energy market offers without those resources having been found to possess market power. We disagree tha t the scheduling exemption as proposed will
serve as de facto mitigation. Without the limited application of the exemption that PJM proposes, a resource that is experiencing performance challenges could attempt to avoid Non

- Performance Charges by offering well above cost in the hope of not being scheduled. Therefore, we find that PJM’s proposed application of the scheduling exemption is needed to preserve the incentives embodied by the rest of its proposal. PJM’s proposal does not preclude resources from submitting market

- based offers in excess of their cost

- based offers. W e recognize that the scheduling exemption rules could have the effect of compelling a capacity resource to submit a market

- based offer price equal to its cost

- based offer price at time s when the resource perceives that a

147 As discussed in greater detail in section VI.C, we recognize value in allowing a Capacity Performance Resource to designate all or a portion of its capacity as a Maximum Emergency offer in all conditions, and therefore determine that it is not just and re asonable to preclude Capacity Performance Resources from submitting Maximum Emergency offers during emergency conditions and hot or cold weather alerts. Nevertheless, consistent with PJM’s proposal and our finding in the paragraph above, we note that PJM should treat any portion of a Capacity Performance Resource’s cleared capacity that is designated as a Maximum Emergency offer as non

- performing for purposes of applying Non

- Performance Charges if, due to the capacity’s designation as a Maximum Emergency o ffer, the offer does not reflect the unit

- specific operating parameter limits and PJM does not schedule that capacity during a Performance Assessment Hour for that reason. Similarly, any portion of the Maximum Emergency offer capacity that PJM schedules a nd that is delivered to the system as energy or reserves during a Performance Assessment Hour should be credited to the resource’s performance when determining Non

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Performance Assessment Hour may occur

. However, we agree with PJM that a seller exercising its option to only be scheduled based on its market

- based offer price is making an economic decision . In such a scenario, we f ind it reasonable for the seller to assume the risk of non

- performance resulting from its offer strategy.
169. NRG/Dynegy argue s that a resource’s short

- run marginal cost for a given hour will often exceed the price of its cost

- based offer, particularly during Performance Assessment Hours when fuel prices can be highly volatile , and that this possibility renders the proposed schedu ling exemption unjust and unreasonable

. W e appreciate the issue raised by NRG/Dynegy, but we are not persuaded that the Capacity Performance proposal exacerbates it

. NRG/Dynegy is argu ing that a resource’s cost

- based offer may not reflect the resource’s true marginal costs, but PJM’s cost

- based offer rules are not directly before us in this proceeding. 148 W e also anticipate that NRG/Dynegy ’ s concern will be limited by the fact that during the emergency conditions that trigger Performance Assessment Hours, PJM will typically be scheduling all resources that are available to perform

. 170. W hile w e accept the proposed scheduling exemption, we find that two clarification s are appropriate with regard to the tariff language in proposed section 10A(d) of the OATT to avoid ambiguity or misinterpretation . In relevant part, section 10A(d) states the following: [A] Capacity Resource or Locational UCAP of a Capacity Market Seller or Locational UCAP Seller shall not be considered in the calculation of a Performan ce Shortfall for a Performance Assessment Hour to the extent such Capacity Resource or Locational UCAP was unavailable during such Performance Assessment Hour solely because the resource on which such Capacity Resource or Locational UCAP is based...was not s cheduled to operate by the Office of the Interconnection, or was online but was scheduled down, by the Office of the Interconnection, for reasons other than (i) limitations specified by such seller in the resource

148 See Duke Energy Corp. , et al. v. PJM Interconnection, L.L.C. , 151 FERC ¶ 61,206 (2015) (directing PJM to submit a filing either to : (1) report whether it will propose tariff changes that (a) allow market participants to submit day

- ahead offers that vary by hour and to update their offers in real time , including during emergency situations , and (b) make any associated modifications to its market power mitigation rules; such report must include a proposed timeline from PJM explaining how it will implement such changes by Novembe r 1, 2015, or as soon as practicable thereafter; or (2) explain why such changes are not necessary)

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operating parameters, or (ii) the sub mission by such seller of a market

- based offer higher than its cost

- based offer. 149

171. First, we interpret the clause on seller

- s pecified limitations on resource operating parameters to mean that if PJM does not schedule a resource during a Performance Assessment Hour due to any operating parameter limitation specified in a market seller’s energy offer , 150 the resource will be subject to Non

- Performance Charges. In other words, a capacity resource will only be exempt from Non

- Performance Charges if it is not scheduled by PJM because the resource was not needed to alleviate the capacity shortage. This interpretation is consistent with PJM’s statements in its transmittal letter, including the following: [N]ot scheduling a resource, or dispatching it down, due to parameter limitations specified by the seller in its energy market offer are attributable to choices made by the seller, rather than actions dictated by PJM. Even physically based resource para meter limits reflect choices controlled by the seller as to the nature of the resource that it is offering to the PJM Region as capacity. Parameter limits should not be viewed as a permanent entitlement to underperform. Instead, those limits should be ex posed to financial and market consequences: if sellers of resources with fewer operating limits earn more from the capacity market (after taking Non

Performance Charge and Performance credits into account) than sellers of resources with more restrictive o perating limits, then all sellers will be incented to find ways to minimize those operating limits, which should over time increase overall fleet performance and benefit loads in the region. 151

Thus , we find that the proposed wording, “limitations specified by such seller in the resource operating parameters,” could be mis interpreted to mean only those operating parameter limitations that are less flexible than a resource’s pre

- determined parameter

limited schedule and, in turn, allow less flexible resources to avoid N on

- Performance

149 PJM OATT Attachment DD, section 10A

- Charges for Non

- Performance and Credit for Performance (emphasis added).

150 Including limitations consistent with th e resource’s pre

- determined parameter

limited schedule in Attachment K, section 6.6, of the OATT.

151 PJM transmittal at 46 (Docket No. ER15

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Charges more often than more flexible resources . To prevent misinterpretation, we find that a clarification is warranted to make clear what parameter limitations are at issue in this provision.
172. Second, w e interpret th e clause on submission of a market

- based offer higher than the cost

- based offer to mean that if a capacity resource is not scheduled by PJM after submitting a market

- based offer higher than it cost

- based offer, but would also not have been scheduled even if its market

- based offer had been equal to its cost

- based offer, any undelivered megawatts will not be counted as a performance shortfall. In this scenario, the reason that PJM did not schedule the resource is not that the resource’s market

- based offer was higher than its cost

- based offer. Rather, PJM did not schedule the resource because it was not needed, even at its cost

- based offer price. This interpretation is based on our literal reading of the provision, and we find it to be the appropriate interpre tation in light of PJM’s stated intent for the scheduling exemption. Nonetheless, we find that, as written, this provision may be ambiguous and open to different interpretations.
173. Accordingly, t o provide maximum clarity, we accept PJM’s proposal , subject to the condition that PJM submit modification s to proposed section 10A(d) of the OATT to make clear that : (i) if a capacity resource is not scheduled by PJM due to any operating parameter limitation s submitted in the resource’s offer, any undelivered meg awatts will be counted as a performance shortfall ; and (ii) if a capacity resource is not scheduled by PJM after submitting a market

- based offer higher than it s cost

- based offer but would have been scheduled if its market

- based offer had been equal to its cost

- based offer, any undelivered megawatts will be counted as a performance shortfall.
174. Several intervenors 152 request that PJM extend additional performance exemptions to resources for a number of reasons. However, in submitting proposed tariff changes pur suant to a FPA section 205 filing, PJM need only demonstrate that its proposed revisions are just and reasonable, not that its proposal is the most just and reasonable among all possible alternatives. Therefore, having found PJM’s proposed exemptions to b e just and reasonable and not unduly discriminatory , subject to the condition described above, w e decline to address the proposed alternative or additional exemptions in the context of this section 205 proceeding. 153

152 See Coalition of Resource Projects p rotest at 15; Dominion p rotest at 38.

153 City of Bethany v. FERC , 727 F.2d 1131, 1136 (D.C. Cir. 1984) (the Commission's authority to review rates under the FPA is limited to an inquiry into whether the rates proposed by a utility are reasonable

– and not to extend to determining whether a proposed rate schedule is more or less reasonable than alternative rate designs); Louisville Gas and Elec. Co. , 114 FERC ¶ 61,282 at P 29 (2006) (the just and reasonable standard under the FPA is not so rigid as to limit rates to a “best rate” or “most efficientDocket No. ER15

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175. Turning now to PJM’s proposed performan ce evaluation mechanics, we agree with the Market Monitor that PJM’s proposal does not specify how PJM will assess performance for energy imports and when Emergency Action hours only occur within individual zones or sub

- zones. 154 In proposed PJM OATT Attach ment DD, section 10A(c), PJM proposes to measure a resource’s actual performance against its expected performance to determine performance payments. For generation and storage resources, PJM proposes to calculate the expected performance by multiplying th e resource’s cleared UCAP quantity by the Balancing Ratio , which is the ratio of all actual generation and storage performance, Net Energy Import s, and demand response bonus performance to all committed generation and storage. PJM proposes to define Net Energy Import s as “the sum of interchange transactions importing energy into PJM not including those associated with external Capacity Resources and therefore included in All Actual Generation Performance minus the sum of interchange transactions exporting energy out of PJM, but not less than zero.” 155 However, PJM does not explain why system

- wide net imports and exports for PJM would factor into the calculation of the Balancing Ratio for a zonal

- or sub

- zonal

- only Emergency Action . We agree with the Market Monitor that if
an Emergency Action is limited to a zone or sub

- zone region, transmission into the affected region is likely restricted, so including a system

- wide measure of Net Energy Import s would likely distort the Balancing Ratio

. 176. Additionally, pro posed PJM OATT Attachment DD, section 10A(c), indicates that PJM will apply the performance assessment calculation only to resources “located in the area defined by the Emergency Action.” Proposed section 10A(g) also points to proposed section 10A(c) as g overning PJM’s calculat ion of actual performance in determin ing P erformance Bonus P ayments. Together, the proposed sections imply that energy imported from resources outside the Emergency Action area will not be eligible for P erformance Bonus P ayments. T o the extent that the Emergency Action area is at the zonal or sub

- zonal level, we find this treatment reasonable. However, if the Emergency Action area is PJM

- wide, these tariff sections imply that PJM will not calculate either an expected performance value or an actual performance value for resources external to the

rate” standard; rather, a r ange of alternative approaches often may be just and reasonable), reh'g denied, E. ON U.S. LLC , 116 FERC ¶ 61,020 (2006); see PJM Interconnection, L.L.C. , 147 FERC ¶ 61,103, at P 59 (2014); Cal. Indep. Sys. Operator Corp. , 149 FERC ¶ 61,058, at P 38 (2014); Cal. Indep. Sys. Operator Corp. , 128 FERC ¶ 61,265, at P 21 (2009).

154 See Market Monitor January 20, 2015 comments at 23

- 24 and Market Monitor February 25, 2015 answer at 7.

155 See proposed OATT at Attachment DD, section 10A(c).Docket No. ER15

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PJM region , regardless of whether or not th ey have capacity commitments in PJM. As a result, external resources would neither be subject to Non

- Performance Charges nor be eligible for Performance Bonus Payments. With respect to external resources with capacity commitments, s uch treatment would be inconsistent with PJM’s proposed treatm ent of internal capacity resources within the Capacity Performance design. We find that a clarification is warranted to avoid any ambiguity as to how PJM will assess the performance of external resources.
177. We also agree with Panda and the Coalition of Reso urce Projects that, as proposed, the Balancing Ratio could exceed one and , thereby, cause capacity resources ’ expected performance during a Performance Assessment Hour to exceed their full cleared UCAP quantity. Such an outcome is inconsistent with the ca pacity obligation within the Capacity Performance design.
178. For the reasons discussed above , we accept PJM’s proposed performance evaluation mechanics, subject to PJM submi tting tariff revisions to clar ify the definition of Net Energy Imports 156 to avoid the distortion of the Balancing Ratio described above for Emergency Action hours limited to a zonal or sub

- zonal area , and to reflect the performance calculation for imports from outside an Emergency Action area to ensure proper compensation for Performance B onus Payments to resources outside the Emergency Action area

. In addition, we accept PJM’s proposed performance evaluation mechanics, subject to PJM clarifying how it will apply the performance assessment calculation to external resources with and without a capacity commitment when an Emergency Action is triggered PJM

- wide

. Lastly, we accept PJM’s proposed performance evaluation mechanics, subject to PJM clarifying in section 10A(c) that a capacity resource’s expected performance for any Performance Assessment Hour shall not exceed 100 percent of its cleared UCAP quantity , or explaining why the absence of such a statement is just and reasonable

. 179. Regarding the Market Monitor’s concern about how D emand R eso urce and E nergy E fficiency R esource performance is incorporated into the B alanc ing R atio, we agree with PJM’s answer 157 that incorporating such resources would produce a ratio that does not correspond to what PJM’s system expects or needs because these resources are subject to different performance expec tations. We find that PJM’s proposal to measure performance of demand response and energy efficiency resources using a different Balancing Ratio accurately accounts for differences inherent in these products.

156 Id

.
157 PJM Februa ry 13, 2015 answer at 35

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180. We also accept PJM’s proposal to use Customer Baseline Load as the measure of a D emand R esource’s performance during non

- summer Emergency Action hours. 158 We are not persuaded by AEM A ’s claims that it is inappropriate to use an energy market measure for performance of a capacity resource. We note that the stated aim of PJM’s capacity performance revisions is to tie capacity revenue to resource’s performance in the energy markets during Emergency Action hours . B ecause Customer Baseline Load is an appropriate measure of such performance, we find that it is a reasonable measure for assessing performance and penalties during non

- summer Emergency Action hours.
181. Concerning the penalty assessment calculation for resources that submit coupled offers, we find that the clarification PJM has provided in its ans wer

– that credit for performance will be assigned to a resource’s C apacity P erformance obligation first with any remaining performance awarded to the resource’s B ase C apacity obligation 159

– to be just and reasonable because it allows resources to satisfy their highest priority obligations first. We therefore accept PJM’s proposed treatment of coupled offers , subject to PJM modifying the relevant tariff pro visions to reflect the clarificat ion that PJM provides in its
answer.
182. Regarding PJM’s proposal to allocate Non

- P erformance Charge revenues to over

performing resources, we find PJM’s proposal to distribute these penalties to generators to be just and reasonable

. Th e redistribution of cap acity revenues from under

- performing resources to over

- performing resources provides the appropriate incentive s for all
resources to perform when they are most needed. PJM’s proposal balances a capacity resource’s risk of paying Non

- Performance Charges ag ainst the potential to receive Performance Bonus Payments. D istributing all or a portion of Non

- Performance Charge revenues to load would de

- link the Performance Bonus Payment rate from the Non

Performance Charge rate, reduce the Performance Bonus Payment rate , and disproportionately increase the risk exposure of capacity resources. To the extent their additional risk is reflected in capacity offers, it may raise capacity auction clearing prices such that the increased cost to load exceeds the amount of N on

- Performance Charge
revenue being dis tributed to load. Further, a reduc ed Performance Bonus Payment rate would also dampen the incentive for resources without capacity commitments to provide energy during emergency conditions.
183. T he strong incentives for resources to perform should r educ e the number of hours that the system is in or approaching shortage conditions, resulting in a more reliable system . Over the long term, the fleet

- wide outage rate may even decrease to an extent

158 See proposed RAA, Schedule 6, section G; proposed PJM OATT, Attachment DD

- 1, section G.

159 See PJM February 13, 2015 answer at 22.Docket No. ER15

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that PJM can achieve it s reliability goals with fewer MW s of installed capacity , and therefore lower costs, per unit of demand

. For these reasons, we find that PJM’s proposed method of allocating Non

- Performance Charge revenues is appropriate.
184. With r egard to PJM’s proposal to assess Non

- Performance C harges no later than three calendar months after the calendar month of the Performance Assessment Hour and to bill and credit appropriate charges over the remaining months of the relevant delivery year, 160 Calpine argues that PJM sho uld be required to bill and credit the Non

Performance Charges at the time of assessment or allow the balances to accrue interest. 161 While PJM’s proposal to delay payment without interest may reduce the value of over

performance payments by not accounting for the time

- value of such funds, we find reasonable PJM’s argument 162 that not assessing interest reduce s the liquidity risk for resources that may be subject to Non

- Performance Charges and increas es the probability of full recovery of Performance Bonus Pay ments by the over

- performer

. W e thus find PJM’s proposed process to be just and reasonable and accept it.
185. The PJM Utilities Coalition notes that PJM’s propos ed tariff revisions contain an apparent drafting error whereby a Capacity Performance Resource can face both Non

Performance Charges, per section 10A of Attachment DD of the OATT , and Peak Season Maintenance Compliance penalties or Peak Hour Period Availability penalties, per sections 9 and 10 of Attachment DD of the OATT , for the same event during the transition period. Such application runs contrary to PJM’s statement in its transmittal letter that any resource that voluntarily commits to be a Capacity Performance Resource for the 2016

- 17 or 2017

- 18 delivery years will be subject only to the Non

- P erformance Charge provisions in section 10A and will not be subject to the penalty provisions in sections 9 and 10. 163 Accordingly, we accept PJM ’s proposal subject to PJM correct ing this apparent oversight, or otherwise clarify ing how its proposed tariff p rovisions achieve the stated intent.
186. Finally, we accept PJM’s propos al to use the declaration of Emergency Actions as the trigger for Performance Assessment Hours. We note that ISO

- NE triggers performance assessments when it experiences a shortage of syst em 30

- minute reserves, system 10

- minute reserves, or zonal 30

- minute reserves. 164 While PJM’s proposed

160 PJM transmittal at 48 (Docket No. ER15

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161 Calpine comments at 9

- 10.

162 PJM Febru ary 13, 2015 answer at 96 (Docket No. ER15

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163 PJM transmittal at 53 (Docket No. ER15

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164 See ISO

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trigger is more expansive, to include certain w arnings and p re

- Emergency Action s , 165 w e find that PJM’s approach would accurately correspond with conditions and events during which the system is experiencing , or may reasonably expect to experience, a shortage of capacity . We find that this approach will appropriately trigger Performance Assessment Hours when performance is most critical to the PJM system.

D. Fi xed Resource Requirement Plans

187. Under PJM’s existing rules, the capacity requirements of a load serving entity may be met either through participation in PJM’s capacity auctions, or through the submission of an alternative Fixed Resource Requirement plan, i.e. , through a self

- supply arrangement providing for the long

- term commitment of resources. 166 PJM’s rules require a Fixed Resource Requirement entity to submit its plan at least one month prior to the Base Residual Auction and subject that entity to defic iency and Non

- Performance Charge s similar to those applicable to auction participants.
1. PJM’s Proposal

188. In conjunction with its transition mechanisms, as discussed in Section V.D, below, PJM proposes to limit the quantity of Base Capacity that a Fixed Resource Requirement entity will be permitted to include in its plan for the 2018

- 19 and 2019

- 20 delivery years, consistent with the limitations proposed as to auction participants. 167 PJM proposes that,

165 Proposed PJM OATT a t Attachment DD, section 2.23A (“‘Emergency Action’ shall mean any Emergency Action for locational or system

- wide capacity shortages that either utilizes pre

- emergency mandatory load management reductions or other emergency capacity, or initiates a more severe action including, but not limited to, a Voltage Redu ction Warning, Voltage Reduction Action, Manual Load Dump Warning, or Manual Load Dump Action.”)

.
166 See RAA at Schedule 8.1. A load

- serving entity seeking to satisfy its capacity obligation, through such plan, is required to obtain sufficient capacity for all load and expected load growth in its service area.

167 PJM proposes that these limitations also be applied to any updated amounts that the Fixed Resource Requirement entity may be required to include in its plan due, for example, to increased load expec tations. See proposed RAA at Schedule 8.1, section D.2. PJM also proposes that resources committed in a Fixed Resource Requirement plan not be permitted to participate in PJM’s proposed Transition Incremental Auctions ( see Section V.D of this order, belo w), given that these plans are submitted and approved three years in advance of the delivery year.Docket No. ER15

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at the conclusion of the transition period, all resou rces included in a Fixed Resource Requirement plan meet the requirements of a Capacity Performance Resource.
189. PJM also proposes t o permi t Fixed Resource Requirement entities to choose between financial or physical satisfaction of the Non

- Performance Charg e when a resource in the entity’s Fixed Resource Requirement plan fails to meet its expected perform ance during a Performance Assessment Hour. 168 Under the financial option, the entity pays the same Non

- Performance Charge that applies to RPM Capacity Perfor mance Resource s. Under the physical option, the entity must commit an addition al 0.5 MW of capacity in the subsequent delivery year for each MW of performance shortfall. 169

2. Protests and Comments

190. The Ohio Commission argues that, because PJM’s Capacity Perf ormance proposal is predicated on a demonstrated reliability need, it must be applied on equal terms to all resources, including any resource commitments, as reflected in a Fixed Resource Requirement plan.
191. Other intervenors object to PJM’s proposal to r equire a resource included in a Fixed Resource Requirement plan to meet the requirements applicable to a Capacity Performance Resource. The Indiana Commission and Indiana Consumer Counselor assert that applying these requirements to Fixed Resource Require ment entities is unnecessary, given that the states overseeing these entities ’ supply arrangements have not experienced the performance degradation issues giving rise to PJM’s filing. The Indiana Commission and Indiana Consumer Counselor add that the ince ntives that resources face in these retail jurisdictions differ from the circumstances at play in PJM’s markets. AEP/Duke Energy agree, noting that Fixed Resource Requirement entities are already subject to strong performance incentives and that applying PJM’s additional requirements, as proposed, could subject these entities to conflicting reliability requirements.
192. Intervenors also argue that PJM’s proposal is incompatible with the cost

- of

service model under which a Fixed Resource Requirement entity operates and the extent to which this model may prohibit such an entity to pass through penalty charges. AEP/Duke Energy argue that the Fixed Resource Requirement model was adopted because a utility that would continue to operate as a vertically

- integrate d utility should not be forced to participate in PJM’s bid

- based auctions. The Indiana Commission and

168 Proposed RAA at Schedule 8.1, sections G.1.

169 Proposed RAA at Schedule 8, section G.Docket No. ER15

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Indiana Consumer Counselor argue that applying PJM’s proposed Capacity Performance requirements to these entities runs contrary to the carefully construc ted settlement giving rise to PJM’s capacity market. OPSI adds that, as proposed, PJM’s approach would impermissibly infringe on state authority by altering the Fixed Resource Requirement option to the extent that it no longer meets the opt

- out requiremen t. Michigan Commission also expresses concern that PJM’s proposal infringes on state jurisdictional authority by limiting the types of generation resources that Fixed Resource Requirement entities can rely upon. For example, Michigan Commission observes that PJM’s definition of capacity resources excludes Intermittent Resource s such as wind and solar, and these resources have made significant contributions to reliability during emergency conditions.
193. AEP/Duke Energy argue that subjecting a Fixed Resource Requirement entity to PJM’s Capacity Performance requirements would unduly impede upon that entity’s reasonable expectations, as manifested in its long

- term resource commitments. The Indiana Commission and Indiana Consumer Counselor add that PJM’s proposa l would place unreasonable financial burdens on such an entity, noting that as few as one or two outages at an entity’s larger facilities could result in significant penalties that could threaten its economic viability. AEP/Duke Energy argue that, if the Commission accepts PJM’s proposal, a Fixed Resource Requirement entity should be permitted to elect between the physical and financial Non

- Performance Charge at the time that the Non

Performance Charge is assessed, not at the time proposed by PJM, i.e. , wh en the plan is submitted. AEP/Duke Energy further argue that PJM’s proposed physical satisfaction option should be based on 0.5 times the average performance shortfall, not on the maximum shortfall, as proposed by PJM. 170 Michigan Commission also argues th at PJM’s proposal is unjust and reasonable because PJM has failed to adequately support its reasoning for not allocating performance payments to over

- performing resources that select the physical payment option. 171

194. Finally, AEP/Duke Energy further argue that the effective date proposed by PJM, as to the 2015 auction, is unworkable, requiring that a Fixed Resource Requirement entity give notice to PJM by March 11, 2015 and submit a plan by April 11, 2015, leaving little time for that entity to evaluate its opt ions following the Commission’s issuance of its order herein.

170 See also Market Monitor comments at 24 (characterizing PJM’ s proposed physical alternative as inadequate).

171 Michigan Commission protest at 9

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3. PJM’s Answer

195. PJM, in its answer, responds to intervenors’ concerns regarding its proposal to allow Fixed Resource Requirement entities to elect either financial or physical satisf action of any Non

- Performance Charge s they incur . With respect to PJM’s proposed physical option (requiring the commitment of increased capacity in the entity’s plan for the following delivery year), PJM states that it is willing to include a monthly stop

- loss lim it similar to the monthly stop

- loss limit that will apply under the financial option, i.e. , a stop

- loss limit equal to one third of the maximum Non

- Performance Charge for each month in which there are Performance Assessment Hours. Under the monthly stop

- l oss limit, PJM explains that a resource would accrue an obligation to add no more than 0.166 MW to its plan for the next delivery year for any one month during which it incurs a Non

- Performance Charge . PJM also states that, if directed to do so, it will i nclude an annual stop

- loss limit whereby an entity choosing the physical option will incur an obligation for the following delivery year to add no more than 0.5 MW for each MW of non

- performance. 172

196. PJM also responds to AEP/Duke Energy’s request that PJM allow Fixed Resource Requirement entities to elect financial or physical payment at the time of the non

performance assessment. PJM states that it would be willing to revise its proposal to allow such an election prior to the start of each delivery year. PJM explains that this proposal would be consistent with its goal of aligning the election with the time Fixed Resource Requirement entities submit their first Fixed Resource Requirement capacity plans.
197. PJM also responds to AEP/Duke Energy’s concerns rega rding the timing aspects relating to the May 2015 auction. PJM asserts that if a load serving entity needs additional time to make its election as to a submission of a plan following the Commission’s issuance of its order in this proceeding, PJM would be agreeable to a waiver of the March 11 notice deadline.
4. Additional Answers

198. The Indiana Commission, in its answer, responds to the Ohio Commission’s argument that Fixed Resource Requirement entities should not be permitted to opt out of PJM’s Capacity Perf ormance requirements (as PJM proposes) in order to treat these entities on an equal basis vis a vis sellers participating in PJM’s capacity market. The Indiana Commission argues that this asserted equality is inappropriate and unnecessary, given that trad itionally regulated states already have adequate mechanisms in place to assure reliable performance.

172 See PJM February 13, 2015 answer at 114 (Docket No. ER15

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199. Exelon, in its answer, responds to the AEP/Duke Energy argument that PJM’s Capacity Performance proposal should not be applied to Fixed Resource Require ment entities, given that the Commission lacks jurisdiction to require these entities to procure Capacity Performance Resource s. Exelon argues that Non

- Performance Charges are deficiency charges that will be imposed in order to prevent Fixed Resource Requ irement entities from relying on resources located elsewhere in PJM to meet their peak load requirements. Exelon asserts that, as such, Non

- Performance Charges are a federal wholesale charge.
200. Duke, in its answer, argues that PJM’s proposal, even as revi sed by PJM in its answer, should be rejected, given that any such rules, as designed for PJM’s capacity auctions, should not apply to existing Fixed Resource Requirement entities. Duke argues that if the Commission does accept PJM’s proposal, Fixed Resour ce Requirement entities should be given a reasonable period, namely until 2020

- 21 delivery year, to adjust to these rule changes.
201. Finally, Duke responds to PJM’s proposal to allow Fixed Resource Requirement entities to choose between the financial or the p hysical penalty prior to the start of a delivery year, rather than three years in advance of that delivery year. Duke argues that the physical option, while a potential beneficial alternative to the financial penalty, would be viable only if the Fixed Res ource Requirement entity has a reasonable opportunity to obtain additional capacity. 173

5. Commission Determination

202. For the reasons discussed below, we accept PJM’s Fixed Resource Requirement proposal, subject to the modifications outlined in this section. As an initial matter, we find it generally appropriate to apply the increased performance expectations, including more stringent consequences for failing to deliver energy or reserves during emergency conditions, to Fixed Resource Requirement entities.
203. I ntervenors argue that PJM’s proposal should be rejected, given that Fixed Resource Requirement entities are already subject to strong performance incentives from state regulators. Fixed Resource Requirement entities that already meet comparable performanc e standards, however, will not be unduly burdened by a requirement that they also meet PJM’s standards. To the contrary, these resources can be expected to benefit,

173 Duke adds that if a non

- performance event occurs late in the delivery year, Fixed Resource Requirement entities may not have a reasonable way to purchase capacity to meet the physical assessment in time for the upcoming delivery year. See Duke answer at 8.Docket No. ER15

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to the extent that their good performance, relative to other PJM resources, yields additio nal revenue in the form of Performance Bonus Payment s.
204. We are not persuaded that a strong historical record of performance supports the conclusion that Fixed Resource Requirement entities warrant exemption from PJM’s Capacity Performance requirements. I n fact, while Fixed Resource Requirement entities do not procure their capacity commitments through PJM’s capacity auctions, the ability of these resources to perform is equally critical to system reliability. Under these circumstances, applying a lesser performance standard to such entities could undermine the very purpose of PJM’s Capacity Performance proposal

– to ensure resources that receive capacity payments perform reliably

. 205. With regard to OPSI’s argument that PJM’s proposed revisions would impermissibly infringe on state authority by effectively eliminating states’ choice to opt out of the RPM auction process, 174 we note that PJM is making additional changes outlined below to ensure that the Fixed Resource Requirement option remains a viable
m echanism to afford states such a choice. We are not persuaded that further changes are necessary to satisfy the opt

- out requirement.
206. Regarding the Michigan Commission’s allegation that PJM’s proposal infringes on state jurisdictional authority by limiti ng the types of generation resources that Fixed Resource Requirement entities can rely upon, 175 we find that PJM’s proposal makes no such limitation. Specifically, the Michigan Commission cites PJM’s omission of Intermittent Resource s in the definition of c apacity resources as an example of how PJM’s proposal restricts the Michigan Commission’s choice of resources to satisfy its capacity requirements. However, as clarified in its answer and conditionally accept ed in this order, PJM’s proposal allows for suc h resources to participate individually or in combination with other such resources.
207. Intervenors also argue that PJM’s new performance rules should not be applied to Fixed Resource Requirement entities because these rules are inconsistent with the cost

o f

- service model under which Fixed Resource Requirement entities operate. However, under PJM’s existing rules, Fixed Resource Requirement entities are already subject to penalties similar to those to which resources participating in PJM’s capacity auctions are subject. 176 Moreover, while PJM’s proposed Non

- Performance Charges are purposely

174 OPSI comments at 10.

175 Michigan Commission protest at 3

- 6.

176 PJM RAA at Schedule 8.1, section G (“Any Capacity Resource committed by an FRR Entity in an FRR Capacity Plan for a Delivery Year shall be subject during suchDocket No. ER15

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more stringent than PJM’s existing penalties, we are not persuaded that these charges are any less consistent with the cost

- of

- service model under which a Fixed Resource R equirement entity operates.
208. We also find that PJM’s proposed physical non

- performance assessment option is generally appropriate and should be adopted as an accommodation for the difficulties Fixed Resource Requirement entities may face to cover their ris k of non

- performance through their retail tariffs. While PJM did not originally propose an annual stop

- loss limit for resources choosing the physical non

- performance assessment option, PJM clarifies in its answer that the total physical penalty would not exceed 0.5 MW for each MW of non

- performance in a delivery year

. 177 We agree with PJM that subjecting Fixed Resource Requirement entities to an annual maximum Non

- Performance Charge of adding 50 percent of the entities’ committed MW to its Capacity Plan for the next delivery year is reasonably comparable to the maximum financial penalty of 150 percent of Net CONE. We therefore accept PJM’s proposal subject to the condition that PJM add an annual stop

- loss limit for Fixed Resource Requirement resources selec ting the physical option, consistent with th e clarification PJM provides in its answer. In its answer, PJM also offers to add a monthly stop

- loss limit for resources selecting the physical option. However, consistent with our finding in section V.C above , we do not find that a monthly stop

- loss limit is necessary or appropriate within the Capacity Performance design.
209. However, while adding an annual stop

- loss limit offers a n improvement, we find that PJM’s proposed physical option penalty rate is not just and reasonable because it could unduly penalize Fixed Resource Requirement entities. Specifically , the physical penalty option PJM outlines lacks an hourly charge rate relative to the additional capacity per MW of non

- performance. As original ly proposed, PJM’s physical penalty rate appears to apply a penalty of procuring 0.5 additional MW per MW of non

- performance any time P erformance A ssessment H ours are triggered , potentially resulting in disproportionate penalties

. 178 In its answer, PJM prop oses an alternative mechanism that
Delivery Year to the charges set forth in sections 7, 9, 10, 11, and 13 of Attachment DD to the PJM Tariff

... ”).

177 PJM February 13, 2015 answer at 114.

178 See proposed RAA at Schedule 8.1, section G.2. A Fixed Resource Requirement entity subject to the physical payment option will be “required to update its Fixed Resource Requirement Capacity Plan with an additional 0.5 MW of Capacity Performance Resources for each MW of Performance Shortfall using the formulae contained in section 10A(c).” Under section 10A(c), a non

- performing resource with a 100 MW commitment could have as much as a 100 MW shortfall for a one

- hour event, and would be responsible for adding 50 MW to its Fixed Resource Requirement capacityDocket No. ER15

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would instead automatically apply the maximum monthly penalty rate, adjusted for the resource’s performance, regardless of the duration or number of Emergency Action events that occur in that month. 179 This could have the effect of penalizing a non

performing Fixed Resource Requirement entity at the proposed maximum monthly level, even if there is just one Performance Assessment Hour in a given month. Accordingly,
we accept PJM’s proposal subject to t he condition that PJM derive and incorporate a comparable Non

- Performance Charge rate for the physical payment option in terms of additional capacity per MWh of non

- performance.
210. We also condition our acceptance on PJM modify ing its proposal , consistent with its answer, 180 to allow a Fixed Resource Requirement entity to choose between the physical non

- performance assessment option and the financial non

- performance assessment option at the start of the relevant delivery year, rather than when the Fixed Resou rce Requirement entity submits its first Fixed Resource Requirement Capacity Plan

. We find that this delay will allow a Fixed Resource Requirement entity to make its decision on the best information available.
211. We dismiss the Michigan Commission’s sugges tion that Fixed Resource Requirement entities that choose the physical non

- performance assessment option should also be eligible for Performance Bonus Payment s. As discussed above, PJM included the physical non

- performance assessment option as an accommod ation for Fixed Resource Requirement entities which may be unable to pay Non

- Performance Charges due to retail rate constraints. We find it appropriate that a Fixed Resource Requirement resource that
plan. This would suggest that if there were 10 separate one

- hour events in a year, a non

performing resource with a 100 MW commitment could be resp onsible for adding 500 MW to its FRR Capacity plan. With the annual stop

- loss limit, such a resource could reach its maximum annual physical penalty level with one hour of non

- performance.

179 PJM February 13, 2015 a nswer at 114 (“PJM would modify the Tariff to provide that an FRR Entity that chooses the physical payment option and incurs a non

performance penalty would accrue an obligation to add 0.166 MW to its Capacity Plan for the next delivery year for each month that includ es Performance Assessment Hours...” We interpret this to mean that, when Performance Assessment Hours occur in a month, PJM would establish a resource’s shortfall in terms of MW using the calculations in section 10A(c), regardless of the number of Emergency Action hours or events occurring in that month. So, a non

- performing resource with a 100 MW commitment could have a performance shortfall of 100 MW and would be obligated to add 16.6 MW to its FRR capacity plan, regardless of whether there was one Perfor mance Assessment Hour or 15 Performance Assessment Hours in the month.)

.
180 Id

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selects the physical option is excluded from sharing in Performance Bonus Payments. The Fixed Resource Requirement resource is earning revenue by selling its capacity but is voluntarily opting out of the financial penalty

- and

- reward construct, and therefore not contributing to the Non

- Performance Charge reven ues collected when it under

- performs. While we agree that the physical option is a reasonable accommodation for Fixed Resource Requirement entities, we find that its voluntary nature also makes it reasonable that resources choosing the physical option be ineligible for Performance Bonus Payments.
212. Finally, because Fixed Resource Requirement entities are subject to long planning horizons and multi

- year plans , and because they must coordinate with state commissions in developing such plans , we find that a p hase

- in of the Capacity Performance rules for these entities is appropriate. We therefore accept PJM’s proposal on the condition that PJM apply the Capacity Performance rules to Fixed Resource Requirement entities only after the conclusion of the Fixed Re source Requirement plans to which these entities are currently obligated as of the date of this order.

E. Transition Mechanisms

1. PJM’s Proposal

213. On an interim basis, through May 31, 2020, PJM proposes to reclassify its existing capacity market product as a B ase Capacity product, subject to certain conditions and requirements summarized below. PJM proposes to permit Base Capacity Resources to participate in PJM’s capacity auctions, as applicable to the 2018

- 19 and 2019

- 20 delivery years. 181 PJM asserts that th is transitional approach is appropriate, given that not all capacity resources will be able to perform as a Capacity Performance Resource in the near term.
214. PJM states that its incremental transition period provides opportunity for resources to invest in, and sufficient time to build, improvements necessary to meet the operational and performance requirements expected of Capacity Performance Resources. PJM argues that this period also allows resources to make gradual improvements, and thereby ease any burd en such improvements may impose. This transition mechanism is contrasted with an immediate switch to 100 percent Capacity Performance Resources, which PJM argues could impose significant burdens on resources, and create risks of increased price volatility or shortage concerns.

181 P roposed PJM OATT at Attachment DD, sections 2.2B and proposed RAA at sections 1.2A.Docket No. ER15

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215. PJM states that, under its proposal, Base Capacity Resources will include : (i) internal and external generation capacity resources; (ii) Intermittent Resources; (iii) Capacity Storage Resources; (iv) Annual Demand R esources; (v) Base Capacity Demand Resources; and (vi) Base Capacity Energy Efficiency Resources. 182 PJM states that summer

- only resources seeking to submit offers as a Base Capacity Resource will be required to demonstrate that they are, or will be, physic ally incapable of meeting the year

- round performance expected of a Capacity Performance Resource. PJM proposes to calculate the constraints on clearing Base Capacity R esources by applying a ten percent increase in its loss

- of

- load expectation, from a 1

- ev ent

- in

- 10 years standard to a 1.1

- event

- in

- 10 years standard, as an appropriate reliability tolerance.
216. With respect to Base Capacity Resources and Base Capacity Energy Efficiency Resources, PJM proposes to allocate this tolerance level equally ( i. e

. , as a loss

- of

- load expectation equal to 1.05

- events

- in

- 10

- years standard). PJM states that these constraints will be determined in a manner similar to that for existing resource constraints. PJM also proposes to divide the 10 percent increase in loss

- of

- load expectation evenly, as between : (i) Base Capacity Demand Resources and Base Capacity Energy Efficiency Resources; and (ii) generation resources that clear as Base Capacity Resources.
217. PJM proposes to determine its Base Capacity resource constra int, for both the PJM region and each modeled Locational Deliverability Area , through an iterative process. PJM states that this methodology is similar to the approach recently accepted by the Commission in the case of sub

- annual resources. 183

218. In determinin g the clearing price for a Base Capacity Resource, PJM proposes to use the price decrement methodology it currently applies in the case of lower

- availability products ( i.e. , in the case of Limited and Extended Summer Demand Response). First, PJM proposes to establish a Base Capacity Demand Resource price decrement equal to

182 Proposed PJM OATT at Attachment DD, section 5.5A(ii)(b).

183 See PJM transmittal at 69 (Do cket No. ER15

- 623

- 000) (citing PJM Interconnection, L.L.C. , 146 FERC ¶ 61,052 at P 74 and P 66 (2014)). PJM states that, accordingly, for the Base Capacity Resource constraint, it proposes to model the commitment of varying levels of Base Capacity Resourc es and Energy Efficiency Resources as interruptible, from June 1 through September 30, and otherwise unavailable for the remainder of the delivery year, and then proposes to reduce the level of Capacity Performance Resources committed and calculate the res ulting impact on its loss

- of

- load expectation. For the Base Capacity Resource constraint, PJM proposes to model the amount of Base Capacity Resource and Energy Efficiency permitted by the Base Capacity Resource constraint, and then model the commitment of varying levels of generation Base Capacity Resources that will be available.Docket No. ER15

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the difference between the clearing price for Base Capacity Demand Resources and Base Capacity Energy Efficiency Resources , and the clearing price for all other Base Capacity Resources. 184 Second, PJM proposes to establish a price decrement for Base Capacity Resources equal to the difference between the clearing prices for Base Capacity Resources and Capacity Performance Resources, representing the cost to procure additional Capacity Perfo rmance Resources out

- of

- merit when the sub

- annual resource constraint is binding. 185

219. PJM states that a Base Capacity Resource will also be subject to a Non

Performance Charge, if it fails to perform under emergency conditions during the months of June thro ugh September. 186 PJM further states that, while a Base Capacity Resource will face a reduced exposure to Non

- Performance Charges (relative to a Capacity Performance Resource), it can be expected to clear the auction at a lower price and will not be permitt ed to invoke an offer cap, absent the submission of a unit

- specific review request. 187 PJM also proposes certain conditions and requirements to facilitate its transition to a fully

- implemented Capacity Performance Resource model, beginning June 2020. PJM s tates that these provisions are necessary to carry out the transition in an orderly fashion and to mitigate potential price volatility, or shortage concerns. 188

220. To accomplish these objectives, PJM proposes to hold two Incremental Auctions to seek voluntary o ffers of Capacity Performance Resources: one for the 2016

- 17 delivery year, covering up to 60 percent of PJM’s reliability requirement; and the second for the 2017

- 18 delivery year, covering up to 70 percent of PJM’s reliability

184 See proposed PJM OATT at Attachment DD, section 2.2C. PJM notes that this decrement would represent the cost to procure additional Capacity Performance Resources, or other Ba se Capacity Resources out of merit order, when the Base Capacity Resource is binding.

185 P roposed PJM OATT at Attachment DD, sections 2.2G and 5.14(a).

186 Proposed PJM OATT at Attachment DD, section 5.5A(b). PJM’s Non

Performance Charges are discuss ed above, at Section V.C of this order.

187 Proposed PJM OATT at Attachment DD, section 6.4.

188 PJM asserts, for example, that its proposed transition allowances provide an opportunity for resource owners to invest in, and sufficient time to build, improveme nts necessary to meet PJM’s new performance requirements, including improvements incorporating dual

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requirement. 189 PJM states that external generation resources will generally be permitted to offer into these auctions, subject to their receipt of a capacity import limit exception. 190 PJM states that, unlike in PJM’s other capacity auctions, no locational requirements will be model ed in its transition auctions

. 191 PJM notes that, as such, it will procure its specified capacity commitments, without regard to where the relevant resources are located.
221. PJM proposes to phase

- in its proposed price and Non

- Performance Charges. Specifically , PJM proposes to reduce these prices and charges by 50 percent, for the 2016

- 17 delivery year, and by 40 percent, for the 2017

- 18 delivery year. PJM states that resource offers will be capped at the relevant clearing price cap, i.e. , at 0.5 Net CONE for 2016

- 17 and 0.6 Net CONE for 2017

- 18. 192 PJM adds that maximum Non

- Performance Charge exposure in the stop

- loss limit calculation will be correspondingly reduced such that, for 2016

- 17, the stop

- loss limit will be based on 0.75 times Net CONE for the PJM
re gion and 0.9 times Net CONE for PJM region, for 2017

- 18. 193

222. For the 2018

- 19 and 2019

- 20 delivery years, PJM proposes to procure, at a minimum, sufficient quantities of Capacity Performance Resources consistent with reliability, i.e

. , an amount that corresp onds to a 1.1

- events

- in

- 10

- years standard

. 194 PJM states that, for these delivery years, it will allow resources that are physically incapable of

189 P roposed PJM OATT at Attachment DD, section 5.14D (allowing any generati on resource to be offered, regardless of whether it is already committed to provide capacity for the relevant delivery year). PJM originally stated that it expected to hold these Incremental Auctions in late April and early May 2015, based on auction para meters that it would post on its website.

190 See proposed PJM OATT at Attachment DD, section 5.14D(B)(3) (requiring, among other things, that the external generation resource be “reasonab ly expected” to be pseudo

- tied into PJM by the applicable delivery ye ar).

191 See proposed PJM OATT at Attachment DD, section 5.14D(B)(3)

.
192 See proposed PJM OATT at Attachment DD, section 5.14D( B)(2). PJM states that, while the clearing price for each transition auction will be set by marginal resource offers, if the target commitment level is not cleared, the clearing price will be capped.

193 See proposed PJM OATT at Attachment DD, sections 10 A(h) and (i).

194 PJM states that it expects this amount to be approximately 80 percent of total procurement for delivery years 2018

- 19 and 2019

- 20. PJM transmittal at 27

- 28 (Docket No. ER15

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meeting the Capacity Performance standard , or that are otherwise categorically exempt under the must

- offer provisions, discussed below, to submit sell offers as a Base Capacity Resource. PJM also proposes, on an interim basis ( i.e

. , for 2018

- 19 and 2019

- 20 delivery years), and up to a maximum of 20 percent of PJM’s reliability requirement, that certain
resourc es not capable of sustained, predictable operation (namely, Intermittent Resources, Capacity Storage Resources, D emand R esources, and Energy Efficiency Resources) be allowed to submit, on an aggregated basis, Capacity Performance Resource offers, Base Capa city Demand Resource offers, or coupled offers, provided that the relevant resources are located within the same Locational Deliverability Area

. 195

223. PJM asserts that its proposed transition period, and the market conditions supporting this approach, are di stinguishable from the circumstances considered by the Commission in the ISO

- NE Capacity Performance Order, in which a quicker implementation date ( i.e. , June 1, 2018) was accepted. 196 PJM argues that it is significantly larger than ISO

- NE, relative to bot h geographic scope and peak demand, and has a more diverse resource mix. PJM concludes that its proposed transition period represents an appropriate balance, considering : (i) the cost and required timelines applicable to resource investment; (ii) the nee d to protect consumers from unnecessary price spikes; and (iii) resource adequacy and system reliability needs.
2. Protests and Comments

224. PPL argues that PJM’s proposed five

- year phase

- in of its Capacity Performance Resource product constitutes an unwarranted delay, given that the three

- year forward procurements made in PJM’s capacity auctions provide sufficient time for sellers to make any investments or operational adjustments that may be required to meet PJM’s Capacity Performance requirements. PPL asserts that, as such, there is no reason to permit a Base Capacity Resource to participate in PJM’s capacity auctions for any delivery year for which a Base Residual Auction has already been held. PPL adds that PJM should be required to adopt the no

- transition approach approved by the Commission in the ISO

- NE Capacity Performance Order

. 225. RESA argues that paying higher Capacity Performance clearing prices in PJM’s proposed Transition Incremental Auctions to resources that have already cleared in a

195 See proposed PJM OATT at Attachment DD, section 5.6.1( h). PJM states that, for any coupled offer, the offer price for the Capacity Performance Resource must be at least $0.1 per MW

- day greater than the offer price for the Base Capacity Resource, consistent with PJM’s existing treatment of coupled offers for demand response
resources. See PJM OATT at Attachment DD, section 5.6.1(3e).

196 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 1

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prior aucti on constitutes unlawful retroactive ratemaking and violates the filed rate doctrine , because load

- serving entities rely on the capacity clearing price for a given Base Residual Auction when negotiating long

- term fixed

- price contracts to serve retail custom ers

. 197

226. Dominion argues that PJM should be required to revise its proposed transition schedule to reflect a more gradual increase in Capacity Performance Resources over time. In particular, Dominion requests that PJM “ provide for an annual 5 percent increas e to the reliability requirement of for Capacity Performance Resources beginning in the [2020

- 21] [d]elivery [y]ear and to transition to 100 percent reliance of Capacity Performance Resources based upon these smaller annual increases. ” 198 Dominion argues th at extending the transition period is reasonable given the degree of investment expected, the uncertainty about future environmental regulations, and the need to further evaluate issues associated with aggregated resources. Dominion also argues that a mor e measured phase

- in will reduce price volatility, particularly in the first years of the transition, and better insure that reliability is not undermined. 199

227. The Pennsylvania Commission questions the cost effectiveness of an early implementation approach, given that the cost increases attributable to PJM’s proposed rule changes will not be offset, over the near term by any substantive improvements in reliability. Direct Energy adds that there has been no compelling need shown to implement PJM’s transition proposal for the 2016

- 17 and 2017

- 18 delivery years. EquiPower argues that the timing of PJM’s proposal provides insufficient time for generation owners to complete the improvements required to prepare and submit accurate cost data and offers. The Penns ylvania Commission requests that PJM’s proposed changes not be implemented, to the extent they would affect existing retail electricity supplier contracts, particularly commitments extending into the 2015

- 16 and 2017

- 18 delivery years. OPSI argues that PJ M’s proposed transition period will impede price certainty, as established in state retail auctions.
228. Public Interest Organizations and Concerned Scientists object to PJM’s proposed cap on Base Capacity Resources, during the transition period, as unsuppo rted, noting that PJM’s assumed limit on outside transfers are far lower than the capacity transfer limits

197 RESA protest at 9

- 11.

198 Dominion protest at 2.

199 In contrast, Exelon contends that PJM’s Capacity Performance Resource procurement targets for the transition years are inadequate and must be adjusted upward. Exelon argues that, consistent with this adjustment, PJM should be required to increase the offer cap for the transition years to Net CONE

. See Exelon protest at 34.Docket No. ER15

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experienced during the events of January 2014. In addition, Public Interest Organizations assert that PJM’s assumption that no Base Capacity Resourc e will be available during the winter peak is contradicted by the fact that demand response, as well as wind resources, performed well during the Polar Vortex. Public Interest Organizations add that, in calculating a cap, a more appropriate assumption reg arding availability, would be 50 percent. Concerned Scientists argue that PJM’s proposal phase

- out Base Capacity Resources fails to adequately account for renewable resources’ value and thus will place undue influence on natural gas investments.
229. Public Interest Organizations also object to PJM’s proposed phase

- out of Base Capacity Resources beginning in June 2020, as unwarranted. Public Interest Organizations note that, under PJM’s existing rules, sub

- annual Demand Resource s are permitted to commit up to a level maintaining a 1.1

- in

- 10 loss

- of

- load expectation. 200 The Ohio Commission adds that rather than create a hybrid Base Capacity Resource product for the final two years of the transition period, PJM should instead eliminate Limited and Ext ended Summer Demand Response products at the end of the 2017

- 18 delivery year and procure only Annual Demand Resources starting with the 2018

- 29 delivery year.
230. Brookfield argues that PJM’s proposal fails to address how coupled offers will clear in the auct ions for the 2018

- 19 and 2019

- 20 delivery years. Brookfield asserts that it would not be appropriate to clear all of a joint offer as Base Capacity, to achieve a least

- cost solution, when a resource is willing to provide Capacity Performance.
231. The Transition Coalition argues that PJM’s reliance on Transition Incremental Auctions to procure Capacity Performance Resources will inappropriately compensate highly

- available resources that have already made capacity commitments in PJM’s auctions. The Tran sition Coalition further argues that, in advancing its proposal, PJM has failed to address whether other, less expensive, options are available for improving resource performance, including an initiative designed to enhance dual

- fuel capabilities. 201

200 Public Interest Organizations argue that given this existing allowance and given that an exclusive reliance on Capacity Performance Resources will not be required to maintain a 1.1

- in

- 10 standard, PJM has not supported its proposed phase

- out of Base Capacity Resources

.
201 Compare Invenergy comment at 10 (arguing that, for Transition Incremental Auctions for the 2016

- 17 and 2017

- 18 delivery years, fairness dictates that market sellers that have already committed to provide capacity dur ing these delivery years be given the first opportunity to satisfy PJM’s Capacity Performance Resource needs)

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232. The PJM Utilities Coalition argues that PJM’s transition proposal fails to adequately address the longstanding undervaluation of generation capacity resources in PJM, and the reliability risk this poses. The P JM Utilities Coalition argue s that to achieve revenue adequacy, PJM’s capacity auctions must, on average, establish clearing prices that approximate Net CONE, a level that has rarely been approached. To achieve higher clearing prices, the PJM Utilities Coalition argue, among other things, that PJM’s auction s must be designed to clear products with similar performance obligations, without an allowance for coupling of higher and lower quality offers, as PJM proposes. The PJM Utilities Coalition further argues that a revenue security mechanism is required. 202

233. Exelon and the PJM Utilities Coalition argue that, for the 2016

- 17 and 2017

- 18 delivery years, PJM should be required to procure Capacity Performance Resources at a level higher and subject to a higher offer cap than PJM proposes, in order to avoid price
s uppression. 203

234. Intervenors also protest PJM’s proposed transition period price caps, as applicable to Capacity Performance Resources for the 2016

- 17 and 2017

- 18 delivery years. The P JM Utilities Coalition asserts that these price caps have not been justifi ed relative to the underlying cost of investment, or related risk exposures. LS Power agrees, arguing that PJM’s proposed price caps inadequately incent resources to make the investments necessary to become Capacity Performance Resources and take on the a dded risk of significant Non

- Performance Charges. LS Power asserts that PJM should instead be required to calculate its Non

- Performance Charge for the transition period years based on the difference between the clearing price in the transition auction and the price the resource will receive for its prior capacity commitment. EquiPower argues that PJM should be required to institute a floor price for Base Capacity Resources in the Base Residual Auction for the 2018

- 19 delivery year.

202 Two alternative mechanisms are proposed: first, a competitive offer requirement for existing resources using a revised default Avoidable Cost Rate formula; second, an administratively

- determined two

- year transitional price floor, equal to 0.6 time Net CONE for use in the Base Residual Auctions applicable to the 2018

- 19 and 2019

- 20 delivery years.

203 The PJM Utilities Coalition note that, in the White Paper prepared by PJM in October 2014, PJM acknowledged that, for the 2017

- 18 delivery year, Base Capacity would have to be capped at 20 percent to maintain a loss

- of

- load expectation at an appropriate level. The PJM Utilities Coalition argu es that, given this prior analysis, PJM’s filing proposal (recommending an extension of this cap up to a 30 percent level) cannot be regarded as just and reasonable.Docket No. ER15

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235. LS Power argues that PJM’s transition mechanism fails to address how PJM will avoid under

- or over

- procurement of Capacity Performance Resources during the transition period. Accordingly, LS Power argues that, in PJM’s Incremental Auctions for the 2016

- 17 and 2017

- 18 delivery years, sellers should be permitted to purchase replacement Capacity Performance Resources. Additionally, LS Power requests clarification that PJM will be required to sell back any commitments from a Base Capacity Resource during the Incremental Transitio n Auctions, if such commitments are determined to be unnecessary in light of PJM’s procuring sufficient Capacity Performance Resources. LS Power argues that, without this requirement, PJM’s proposed transition mechanism could subject customers to excessiv e costs at distorted price levels.
236. Finally, intervenors challenge PJM’s proposed transition mechanisms, as applicable to demand response and renewable resources. EMC protests PJM’s proposal to allow energy efficiency and Demand Resource s to satisfy only a portion of the Base Capacity required during the transition years. EMC argues that this proposal unjustifiably prefers base generation with summer

- only obligations at the expense of energy efficiency. Wind Energy and Renewables Coalition argues that the performance requirements for Base Capacity Resources should only apply to summer months and that resources clearing as Base Capacity should be paid for all winter performance.
3. PJM’s Answer

237. PJM, in its answer, responds to intervenors ’ varying concerns re garding PJM’s proposed transition towards a fully

- implemented Capacity Performance product. PJM asserts that its approach appropriately balances : (i) the investments and time resources will need to meet the operational and performance requirements estab lished under PJM’s proposal; (ii) consumers’ interest in price stability; and (iii) the need to ensure resource adequacy and system reliability.
238. PJM also responds to PPL’s argument that PJM should be required to implement its Capacity Performance Resource product, without a transition mechanism, consistent with the approach approved by the Commission in the ISO

- NE Capacity Performance Order. PJM argues that, under FPA section 205, its burden in this case is limited to a showing that its transition mechani sm, as proposed, is just and reasonable. PJM argues that, in making a section 205 proposal, it is not required to demonstrate that alternative approaches are unjust and unreasonable, or that other options have less merit than PJM’s proposal.
239. PJM also responds to RESA’s argument that paying higher Capacity Performance clearing prices to resources that have already cleared in a prior auction constitutes unlawful retroactive ratemaking. PJM argues that its Transition Incremental Auctions will procure a n ew capacity product for which no price has yet been established in any prior auction. PJM adds that the Commission has previously rejected arguments thatDocket No. ER15

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PJM is prohibited from implementing prospective rule changes for a given delivery year once it has he ld an auction applicable to that delivery year. 204

240. PJM also responds to the Transition Coalition’s argument that PJM’s proposed Transition Incremental Auctions will unnecessarily pay generators more for capacity commitments they have already made. PJM argue s that while a higher clearing price may be expected, Capacity Performance Resources that clear in the Transition Incremental Auctions will be exposed to higher risks, as compared to prior auctions, namely, exposure to Non

- Performance Charges.
241. PJM also re sponds to Invenergy’s argument that previously

- cleared commitments for the 2016

- 17 and 2017

- 18 delivery years should be given a clearance preference in the Transition Incremental Auctions . PJM argues that no such preference would be warranted, given that participation in the Transition Incremental Auction is voluntary, and given that any previously

- cleared resource seeking not to participate will still have its commitments honored.
242. With respect to challenges to the Transition Incremental Auctions for the 2 016

- 17 and 2017

- 18 delivery years, PJM argues that its proposal mitigates concerns about price volatility and the potential for shortages, particularly in light of other factors driving changes in its existing generation fleet. 205 PJM also responds to Inven ergy’s argument that resources with prior capacity auction commitments should receive priority in the Transition Incremental Auction s. PJM argues that participation in the Transition Incremental Auction s is voluntary.
243. PJM also responds to LS Power’s ar gument that capacity market sellers should be allowed to purchase replacement Capacity Performance Resources in the Transition Incremental Auction s. PJM argues that such an approach would be infeasible, given that the new Capacity Performance product is n ot a direct substitute for existing capacity and is not subject to all of the same constraints that apply to capacity resources, currently. PJM argues that, while bilateral transactions may be entered into for the purpose of procuring replacement of a Cap acity Performance Resource commitment, such replacement option cannot be integrated into PJM’s scheduled Incremental Auctions.

204 PJM February 13, 2015 answer at 42 (Docket No. ER15

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- 000) (citing PJM Interconnection , L.L.C. , 150 FERC ¶ 61,020 , at P 38 (2015)).

205 PJM answer at 41and n.66

- 67 (citing the U.S. Environmental Protection Agency’s Mercury and Air Toxics Standards emission rules beginning in 2015, as well as its pending Clean Power Plan).Docket No. ER15

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244. In respons e to Exelon’s and the PJM Utilities Coalition’s argument that PJM should be required to increase the target amounts of Capacity Performance Resources and offer caps in the Transition Incremental Auctions , PJM asserts that these requests underscore the careful balance its proposal achieves as between the uncertainty about resource availability, reliability considerations, and potential cost increases. PJM adds that the expedited implementation schedule sought by Exelon and the PJM Utilities Coalition would risk significantly higher clearing prices in the Transition Incremental Auctions, relative to the prior auctions held for those delivery years, without a corresponding assurance that new and existing resources would be able, in that timeframe, to make the investments necessary to meet PJM’s proposed Capacity Performance requirements.
245. With regard to intervenors’ argument that capacity prices under PJM’s proposal will be excessive , PJM argues that the reliability value of every resource that clears, under its transition mechanism, will be reflected by the net revenues that resource earns. PJM argues that intermittent and D emand Resource s must accept the same performance risk as all other resources. PJM adds that this risk can be appropriately managed through coupling or maintaining a portfolio of resources. PJM also responds to intervenors’ argument that PJM should be req uired to maintain a Base Capacity procurement allowance, given that PJM will remain a summer peaking system and given that there has been no asserted need for a single, annual capacity product. PJM argues that Base Capacity must be phased

- out, under the t imetable it proposes, because, when called upon during an emergency, resources must be counted on to fulfill their capacity commitments.
246. Finally, PJM responds to Public Interest Organizations’ objection to PJM’s proposed method for determining Base Capacit y constraints for the 2018

- 19 and 2019

- 20 delivery years. PJM argues that it is appropriate to base its constraint calculation on Base Capacity Resource availability during the winter peak, given that generation resources with year

- round performance capab ility will be subject to a must

- offer requirement as a Capacity Performance Resource. PJM argues that, as such, Base Capacity Resources will only comprise those resources that PJM and the Market Monitor have determined will not be physically capable of sa tisfying these requirements in the relevant delivery year.
4. Additional Answers

247. Exelon, in its answer, responds to the Transition Coalition’s argument that PJM’s transition mechanism, if approved, will inappropriately permit Capacity Performance Resources to receive compensation for capacity commitments they have already made for the 2016

- 17 and 2017

- 18 delivery years. Exelon argues that, while PJM has already secured the commitments at issue, commitment alone has not been enough to assure performance, espec ially during winter peaks. Exelon further argues that the selection of additional, specific investments via a targeted, supplemental procurement approach, a market

- based solution, as proposed, is the superior approach that will incent unit owners to decid e for themselves what investments need to be made.Docket No. ER15

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248. The PJM Utilities Coalition, in its answer, responds to the Transition Coalition’s argument that PJM’s transition mechanism, if approved, will result in windfall revenues without delivering any incrementa l improvement in reliability. The PJM Utilities Coalition argues that, during the transition period, resources that choose to take on the higher performance obligations associated with a Capacity Performance Resource will face penalty risks attributable t o that designation and should be compensated, accordingly.
249. The Transition Coalition, in its answer, responds to PJM’s answer regarding the asserted need for transition auctions for the 2016

- 17 and 2017

- 18 delivery years. The Transition Coalition argues that PJM’s defense of these auctions, as a market

- based solution for incenting enhanced performance, fails to acknowledge that most, if not all, of the resources that will clear in these auctions are already performing at capacity performance levels. The Transition Coalition adds that PJM’s proposal to pay previously

- committed resources more to operate exactly as they otherwise would cannot be justified. The Transition Coalition further asserts that virtually all Capacity Resource Resources expected to c lear in the transition auctions (77

- 100 percent) are highly reliable resources that will not be required to make significant investments in order to satisfy their obligations. The Transition Coalition argues that these resources will earn unwarranted prof its ranging from $2.1 to $2.8 billion in the 2016

- 17 delivery year and $0.4 to $2.4 billion in the 2017

- 18 delivery year, based on the analysis of its consultant. The Transition coalition asserts that profits to these generators will range from 67

- 84 perc ent of total Incremental Auction costs for the 2016

- 17 delivery year and 41

- 79 percent for the 2017

- 18 delivery year.

250. The Transition Coalition also responds to Exelon’s argument that the funding of performance

- enhancing investments, over the near

- term, wi ll improve performance for the relevant transition period delivery years. The Transition Coalition argues that such actions have already been taken, in response to the Polar Vortex. The Transition Coalition notes that, as a result of these actions, PJM h ad almost 20 GW of excess capacity available when it hit a new all

- time winter peak on February 20, 2015.

251. Direct Energy, in its answer, responds to PJM’s answer that, while many generators have already improved their operational capability following the Polar Vortex, higher Capacity Performance payments are nonetheless appropriate, given the increased risks these resources will face. Direct Energy argues that the fact that operational gains are already in place negates the need for the increased payment s PJM proposes, while any residual risks have not been shown to be cost

- justified. Direct Energy adds that, in the event that PJM’s transition proposal is not rejected, in the alternative hearing procedures are required to consider : (i) whether the costs attributable to PJM’s proposal are outweighed by improved system performance; (ii) the extent to which would

- be Capacity Performance Resources have already invested in performance enhancements; andDocket No. ER15

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(iii) whether and to what extent reliability gain s will be in place prior to the achievement of PJM’s proposed transition targets

. 252. The Transition Coalition requests that the Commission reject PJM’s I ncremental A uction proposal as unsupported and defer implementation of its B ase R esidual A uction reforms until next year. 206 The Transition Coalition suggests that it is unclear how, if at all, PJM could implement its proposal in the Base Residual Auction for the 2018

- 19 delivery year . As PJM’s D eficiency L etter R esponse fundamentally alters core aspe cts of its proposal, which , if accepted by the Commission , would require a further compliance filing and action by the Commission , as well as by market participants attempting to comply with final bidding requirements. 207 The Transition Coalition conten d s t hat the variability of PJM’s proposal has made it impossible for market participants to have any clarity with respect to their future obligations. 208

5. Commission Determination

253. For the reasons discussed below, we accept PJM’s proposed transition mechanisms. PJM asserts, and we agree, that implementing the transition over five years will allow resources to make gradual improvements and reduce the burdens such improvements may impose. It will also mitigate the potential for short

- term shortage that might resul t from an immediate requirement of 100 percent Capacity Performance Resources. Such a short

- term shortage could create price volatility that does not provide a useful price signal for investment. PJM’s proposal to acquire a mix of Capacity Performance an d non

- Capacity Performance Resource s throughout the transition mechanism strikes an appropriate balance between the costs associated with procuring Capacity Performance Resource s throughout the transition period with the needed reliability improvements ove r that same period. Similarly, the use of a lower Non

P erformance Charge rate and annual stop

- loss limit for the 2016

- 17 and 2017

- 18 delivery years will help phase in the necessary reliability benefits. We also find that the institution of price caps in the Transition Incremental Auctions will help limit load’s exposure to cost increases in the applicable delivery years.
254. LS Power argues that, in keeping with its current practices, in the Incremental Auctions leading up to the 2016

- 17 and 2017

- 18 d elivery years, PJM should be required to sell back any Base Capacity Resources it may not need. We note that, under PJM’s existing rules, PJM is required to sell

- back capacity in its Incremental Auctions in the

206 Transition Coalition comments to PJM’s Deficiency Letter Response at 4

- 5.

207 Id . at 4.

208 Id . at 6.Docket No. ER15

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event its load forecasts are adjusted downwa rd. 209 Under PJM’s proposal, this existing requirement will remain in place. Accordingly, we interpret this provision to require PJM to sell back any excess capacity resources

– specifically what will be identified as Base Capacity Resources in future auc tions

– in the appropriate Incremental Auction if the load forecast is adjusted downward

. 255. We dismiss LS Power’s request that, in the scheduled Incremental Auctions for the 2016

- 17 and 2017

- 18 delivery years, PJM be required to buy and sell Capacity Perfor mance Resources. PJM’s scheduled Incremental Auctions for 2016

- 17 and 2017

- 18 delivery years only provide for the buying and selling of PJM’s existing capacity product. PJM has established special, additional Incremental Auctions to procure its proposed Capacity Performance product. We find that integrating the Capacity Performance product into PJM’s scheduled Incremental Auctions for the 2016

- 17 and 2017

- 18 delivery years would introduce needless complexity, given the transitional nature of these auctio ns. We also find that PJM has made adequate accommodations for the buying and selling of the Capacity Performance product by allowing sellers with Capacity Performance Resource commitments to seek replacement commitments, as necessary, through bilateral t ransactions.
256. We next consider intervenors’ arguments that, as proposed, PJM’s transition mechanisms will procure either too much, or too little, capacity able to qualify as a Capacity Performance Resource, or should otherwise be deferred. 210 For the reasons

209 See PJM OATT at Attachment DD, section 5.4(c). The Commission recently waived the requirement to sell

- back excess capacity for the third Incremental Aucti on for the 2015

- 16 delivery year only, explaining that PJM’s reliance on committed capacity resources, the poor performance of generating capacity resources during the previous year, and the expected high level of generation retirements justified granting waiver. See PJM Interconnection, L.L.C. , 150 FERC ¶ 61,122 , at P 46 (2015).

210 Compare Transition Coalition protest at 4

- 6 (arguing that there has been no showing, here, that PJM will improve reliability by acquiring Capacity Performance Resources through its Transition Incremental Auctions) with PPL protest at 6

- 8 (arguing that PJM should be required to procure Capacity Performance Resources alone in its May 2015 Base Residual Auction), Pennsylvania Commission comment at 32 (requesting that the transition period and full implementation of PJM’s proposal be delayed for a year), Dominion protest at 24 and 28

- 29 (requesting that PJM acquire Capacity Performance Resources more slowly, delaying the transition to 100 percent reliance on Capacity Performance Reso urces) and Exelon’s protest at 50 (arguing that PJM should increase the quantity of capacity purchased in the Transition Incremental Auctions, and that the offer cap be raised to Net CONE.).Docket No. ER15

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discussed above, we find that PJM’s approach strikes an appropriate balance between these competing claims. While, in the ISO

- NE Capacity Performance Order , the Commission accepted ISO

- NE’s proposal to acquire only its performance product in its next auc tion, PJM has demonstrated that a phased

- in approach is also just and reasonable.
257. We also disagree with intervenors’ arguments that the costs attributable to PJM’s proposed transition mechanisms will either not be offset by any additional reliability bene fits, 211 or at a minimum, will not outweigh any such reliability benefits. 212 As we have found above, PJM’s establishment of a Capacity Performance Resource product is intended to address a concrete problem of resource non

- performance through the creation of performance incentives and a penalty structure that will improve overall reliability. Phasing in these same risks and rewards over the transition period in a balanced manner per PJM’s proposal is reasonable . Capacity Performance Resources accept greater risks for non

- performance than Base Capacity Resources, in exchange for potentially higher capacity revenues and performance payments. PJM’s proposal simply allows some resources to begin taking on these additional risks and benefits earlier.
258. LS Power a rgues that penalties for Capacity Performance Resources purchased in the Transition Incremental Auctions should be lowered to encourage more resources to participate as Capacity Performance Resources. We note that PJM has already proposed penalties for th e transition period that are less than the penalties contemplated under the 100 percent Capacity Performance construct ( i.e

. , 50 percent of Net CONE for the 2016

- 20 17 delivery year and 60 percent of Net CONE for the 2017

- 18 delivery year). We also note th at resources will have an opportunity for additional payments if they over

- perform during Performance Assessment Hour s. We are not persuaded that any additional incentives are required to encourage the participation of Capacity Performance Resources.
259. We also deny Invenergy’s request that PJM be required to modify its transition proposal, such that existing capacity commitments will clear first in the Transition Incremental Auctions. We also are not persuaded by Brookfield’s argument that PJM’s transition auction clearing algorithm should be revised to prioritize the Capacity Performance part of a coupled offer over a Base Capacity offer. As PJM points out, its auction clearing algorithm is appropriately designed to attain the lowest overall cost solution to meet PJM’s capacity needs. Neither Brookfield nor Invenergy have demonstrated that the algorithm fails in this regard, or provide a compelling reason for the algorithm to move away from the least cost solution. In response to some of Invenergy’s conc erns, we note that resources with existing capacity commitments, whose

211 See Pennsylvania Commission protest at 32.

212 See Transition Co alition protest at 5

- 6; RESA protest at 11

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offers fail to clear in the Transition Incremental Auctions, will not be deprived of the value of these pre

- existing commitments.
260. We dismiss , as beyond the scope of this proceeding, the PJM Utilit ies Coalition’s argument that PJM should move to a single capacity product sooner than the 2020

- 20 21 delivery year because PJM’s capacity auctions have previously undervalued generation. We disagree with the PJM Utilities Coalition that thei r concerns warrant moving to a single capacity product more quickly . We note that the Commission has previously accepted, as just and reasonable, elements of PJM’s market design construct that clear different capacity products at different prices, based o n the rationale that “lower” quality products should be paid the same, or more likely less, than “higher” quality products. 213

261. Finally, we disagree with RESA’s argument that the transition mechanism violates the filed rate doctrine, to the extent these pros pective rule changes may affect existing commercial arrangements, as based on the clearing prices from prior auctions. Contrary to RESA’s characterization, PJM’s transition proposal does not impermissibly propose to revise the already

- cleared BRAs for the 2016

- 2017 and 2017

- 2018 delivery years; rather, like the incremental auctions PJM already conducts, and will continue to conduct, between the initial BRA for a particular delivery year and the commencement of the delivery year, the transition auctions al low PJM to adjust the type and amount of resources needed to ensure reliability in the appropriate delivery year, and to ensure that those resources are fairly compensated. PJM does not seek to retroactively revise the rules upon which it conducted the or iginal 2016

- 2017 and 2017

- 2018 BRAs, but instead proposes incremental procurements, with separate payment structures, to ensure that reliability is met in those delivery years. However, under RESA’s view of the filed rate doctrine, the three

- year forward nature of the capacity market would bar PJM from making these types of incremental adjustments in advance of the actual delivery year, an outcome that is not consistent with Commission precedent

. 214 We further note that t he instant proceeding concerns prosp ective changes only and provides ratepayers with sufficient notice that PJM proposed to change its tariff on file

. 215

213 See PJM Interconnection, L.L.C . 134 FERC ¶ 61,066 , at P 29 (2011).

214 See, e.g., PJM Interconnection, L.L.C., 149 FERC ¶ 61,059, at P 18 (2014); ISO New England Inc. , 145 FERC ¶ 61,095, at P 28 (2013) ; see a lso Columbia Gas Transmission Corp. v. FERC , 895 F.2d 791, 795 (1990).

215 See Pub. Utils. Comm’n of Cal. v. FERC , 988 F.2d 154, 160

- 61, 164 (D.C. Cir. 1993); N atural Gas Clearinghouse v. FERC , 965 F.2d 1066, 1075 (D.C. Cir. 1992) (“The filed rate doctrine simply does not extend to cases in which buyers are on adequate notice that resolution of some specific issue may cause a later adjustment to the rate being collected at the time of service.”); Columbia Gas Transmission Corp. v. FERC , 895Docket No. ER15

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F. Market Power Mitigation

262. Due to high market share concentrations in PJM’s capacity market, sell offers submitted by existing generation capac ity resources are typically cost

- capped by PJM, at a cost level known as the Avoidable Cost Rate, or avoidable costs of the resource. 216 However, PJM’s Avoidable Cost Rate rules do not take account of the costs of firm transportation of natural gas. PJM as serts that these rules fail to allow recovery of capital costs reasonably needed to allow an existing generator to remain in service or improve its peak

- hour availability. PJM argues that, as such, these rules promote biased fuel choices favoring natural gas

- fired resources that involve dual

- fuel arrangements, or which rely on interruptible transportation service.
1. PJM’s Proposal

263. PJM proposes to revise its existing market power mitigation rules to allow for sell offers that will cover : (i) the seller’s ex pected new costs of improving the performance of their resources; and (ii) the perceived risks of non

- performance. PJM proposes a default offer cap, available to all resources. PJM also proposes to allow each resource to seek a unit

- specific offer cap i f it can provide data demonstrating that its costs exceed the default cap. Specifically, PJM proposes that the Market Seller Offer Cap for Capacity Performance Resources be set at the applicable Net CONE for the delivery year and Locational Deliverability Area for which the resource is offered. 217 PJM also proposes to clarify in its tariff that the submission of a sell offer with an offer price at, or below, the revised Market Seller Offer Cap will not be deemed an exercise of market power in

F.2d at 797 (“Notice does not relieve the Commission from the prohibition against retroactive ratemaking. Instead, it changes what would be purely retroactive ratemaking into a functionally prospective process by placing the relevant audience on notice at the outset that the rates being promulgated are provisional only and subject to later revision.”).

216 See OATT at Attachment DD, section 6.8 (defining the Avoidable Rate as the annual expenses that would not be incurred if a unit chose not to be a capacity resource fo r year.) Default Avoidable Cost Rates vary by technology type, and are specified in the Tariff at Attachment DD, Section 6.7. A resource may also seek a unit

- specific Avoidable Cost Rate by providing its unit

- specific cost data to the IMM. Each offer ca p is net of Project PJM Market Revenues, which is defined in section 6.8(d) to include “all actual unit

- specific revenues from PJM energy markets, ancillary services, and unit

specific bilateral contracts from such Generation Capacity Resource, net of marg inal costs for providing such energy. . . . ”

217 See proposed OATT at Attachment DD, section 6.4(a).Docket No. ER15

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PJM’s capacity market. 218 PJM also proposes that the Market Seller Offer Cap, as applied to the third Incremental Auction, will be the greater of Net CONE, or 1.1 times the Base Residual Auction price. 219

264. In addition, PJM proposes to clarify that a Market Seller Offer Cap may, at the election of the seller, exceed the Net CONE default offer cap , subject to PJM’s Avoidable Cost Rate rules, as revised , i.e. , subject to an Avoidable Cost Rate that will permit the costs of natural gas transportation, other gas service, and a ri sk premium.
265. With respect to a seller’s costs to obtain fuel on a firm basis, PJM proposes to establish Avoidable Fuel Availability Expenses, as an input to its Avoidable Cost Rate formula. PJM proposes to define this allowance as “avoidable operating expenses related directly to fuel availability and delivery for the generating unit that can be demonstrated by the Capacity Market Seller based on data for the twelve months preceding the month in which the data must be provided, or on reasonable projecti ons for the delivery year supported by executed contracts, published tariffs, or other data sufficient to demonstrate with reasonable certainty the level of costs that have been or shall be incurred for such purpose.” 220

266. With respect to PJM’s proposed allowa nce of a risk premium input in its Avoidable Cost Rate formula, PJM asserts that its proposed input, the Capacity Performance Quantifiable Risk, tracks the risk premium accepted by the Commission in the ISO

- NE Capacity Performance Order. 221 PJM proposes to define this input as the documented and quantifiable costs of mitigating the risks associated with submission of a Capacity Resource Offer, such as insurance expenses solely attributable to the risk of being a Capacity Performance Resource. 222

218 See proposed OATT at Attachment DD, section 6.4(a).

219 See proposed OATT at Attachment DD, section 6.4(d).

220 See proposed OATT at Attachment DD, section 6.8 (listing, as examples of such expenses, costs that may include, but not be limited to, costs “incurred for: (a) firm natural gas pipeline transportation; (b) natural gas storage costs; (c) costs of gas balancing agreements; and (d) costs of gas park and loan services.”).

221 See ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P P 96 , 98 (rejecting intervenors’ arguments that ISO

- NE’s proposed risk premium allowance created an overly vague standard of review or hindered the detection and mitigation of market power)

.
222 See proposed OATT at Attachment DD, section 6.8

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267. PJM als o proposes to apply its existing must

- offer requirement to Capacity Performance Resources to prevent physical withholding of resources with the capability to meet the region’s needs for resources that are capable of performing during emergencies. 223 PJM not es that, under its existing rules, any resource that is capable of qualifying as a capacity resource is required to submit an offer into PJM’s annual capacity auction, subject to certain specified exceptions. 224 PJM asserts that a similar requirement is ap propriate for a Capacity Performance Resource, given the incentives these resources may have over the near term to withhold a certain amount of their capacity and offer it only as Base Capacity Resources. Accordingly, PJM proposes that, beginning with the 2018

- 19 delivery year, “the installed capacity of every Generation Capacity Resource located in the PJM Region that is capable (or that reasonably can become capable) or qualifying as a Capacity Performance Resource shall be offered as a Capacity Performa nce Resource,” subject to applicable EFORd and Unforced Capacity determinations and an exceptions process. 225

268. With respect to its proposed exceptions process, PJM proposes that a must

- offer exemption request be denied if the seller’s claim is based on its fa ilure to make the investments required, or to allocate the operating budget needed. PJM states that, under this standard, the term “physically incapable,” will not be construed to operate as an economic feasibility test, but rather will be limited to a r esource that requires capital improvements, or new fuel delivery infrastructure, that cannot be arranged, permitted, and completed in advance of the relevant delivery year. PJM states, however, that economic considerations may be reflected through the sub mission of coupled offers.
269. PJM also proposes to permit, but not require, sell offers into its capacity auctions for resources that are not yet in commercial operation, but that are expected by the seller to be in operation prior to the relevant delivery y ear. 226 In addition, PJM proposes to

223 See proposed OATT at Attachment DD, section 6.6A.

224 See OATT at Attachment DD, section 6.6 (excusing units, through an exceptions process, that, for the relevant delivery year, will retir e or be committed to a firm sale outside of the PJM region)

.
225 See proposed OATT at Attachment DD, section 6.6 A(a).

226 See proposed Attachment DD, section 6.6 (g).Docket No. ER15

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characterize a resource as “planned” until such time as it achieves full commercial operations and interconnection service has commenced. 227

270. Finally, with respect to a P lanned G eneration C apacity R esource that is greater than 20 MW in size, PJM proposes to modify its existing rules as to when such a resource will be permitted to submit an offer into PJM’s capacity auction. Specifically, to increase the likelihood that such a resource will reach com mercial operation (and thus be able to perform) during the relevant delivery year, PJM proposes, as of the 2019

- 20 20 delivery year, to require the completion of an Interconnection Facilities Study, as a pre

- condition to participation in a Base Residual Au ction. 228

2. Protests and Comments

271. Comments generally supportive of PJM’s proposal were filed by the Coalition of Resource Projects, Calpine, NGSA, EPSA, EquiPower, and Exelon. 229 Calpine emphasizes that it is essential for the Commission to accept both PJM’s proposal that resources be allowed to offer up to Net CONE without having their offers subject to mitigation . Exelon asserts that PJM’s existing Avoidable Cost Rate method fails to account for numerous energy market risks and applying the method to the Ca pacity Performance construct will exacerbate this problem. Exelon argues that PJM’s proposed Net CONE approach balances the risk of over

- mitigation against the risks of under

mitigation.
272. Intervenors challenge PJM’s assumption that its Capacity Performance proposals require PJM to modify its existing market mitigation rules. The Pennsylvania Commission argues that adopting rules to incent increased performance capabilities will do nothing to alter the underlying market power parameters in PJM’s markets, wh ich have been (and will remain) non

- competitive.
273. Intervenors also object to PJM’s proposal to replace its existing market mitigation rules, which rely on mitigated price offers at a unit

- specific Avoidable Cost Rate (an offer

- capping approach overseen by the Market Monitor), with an administratively

determined Net CONE approach based on a representative resource ( i.e

. , a combustion

227 See proposed RAA at sections 1.20B (defining an Existing Generation Capacity Resource), 1.70 (defining a Planned Generation Capacity Resource), and 1.69 (defining a Planned External Generation Capacity Resource)

.
228 See proposed RAA at sections 1.69B and 1.70

.
229 The Market Monitor initially filed comments supporting PJM’s proposal, but as discusse d below, later submitted an answer retracting its support.Docket No. ER15

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turbine unit). Joint Consumers assert that PJM’s existing approach appropriately recognizes that PJM’s capacity markets have been, and will remain, characterized by structural market power on the part of pivotal suppliers. OPSI and Rockland add that PJM’s proposal actually increases concerns regarding the exercise of market power, particularly by incorporating a market power m itigation safe harbor up to Net CONE. 230

274. Intervenors protest PJM’s proposal to set the offer cap at a single, uniform level, rather than determine unit

- specific limits. The Pennsylvania Commission argues that eliminating the existing review of Base Residua l Auction cost

- based bids below Net CONE is inconsistent with PJM’s acknowledgment that generation owners with multiple units may engage in economic withholding. 231 Illinois Commission argues that PJM has overstated the burden of verifying the costs of investments and upgrades necessary to meet the Capacity Performance requirements. The Market Monitor notes that it is willing and able to apply unit

- specific offer c aps, particularly as explicit risk adders are appropriate in the Capacity Performance construct.
275. Others protest that Net CONE is an inappropriate level for the offer cap. Rockland argues that PJM’s proposal threatens to become a “self

- fulfilling prophec y” that would allow clearing prices to reach Net CONE even where there is a significant surplus of supply, especially because suppliers offering below Net CONE do not need to demonstrate costs. Direct Energy similarly argues that allowing unmitigated offe rs up to Net CONE offers market sellers with concentrated market power the ability to use it. The Pennsylvania Commission adds that PJM has failed to demonstrate whether Net CONE is a reasonable proxy for PJM capacity prices, given that historically, PJM’ s capacity auctions have been cleared at price levels falling well below Net CONE. Public Citizen argues that PJM must show how its proposed offer cap methodology will, in fact, protect ratepayers from anticompetitive behavior in the capacity market aucti ons, for example by reviewing of the results of every auction to determine whether the results reflect objectively just and reasonable prices

. 232

276. The Illinois Commission contends that setting the offer cap at Net CONE creates “significant upward pressure” on capacity market clearing prices and has the potential to significantly increase future capacity costs incurred by ratepayers. Joint Consumers challenge PJM’s claim that a price offer equal to Net CONE may be justified, given the increased risks (and expo sure) attributable to PJM’s proposed Non

- Performance Charge.

230 See also Illinois Commission comments at 9

- 10.

231 See Pennsylvania Commission comments at 20 (citing PJM’s Capacity Performance Filing at 43

- 44).

232 Public Citizen protest at 8

- 9, 14

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They assert that PJM’s claim is unsupported, particularly if the charge is never imposed, as Joint Consumers have asserted. 233 Homer City asserts that, if, in two years of the effective date, fut ure capacity markets consistently clear at less than Net CONE, the Commission should require PJM to review its Capacity Performance proposal to address the unreasonable penalty structure.
277. The Ohio Commission states that, while it generally supports PJM’s p roposal to allow market sellers to offer at or below Net CONE, it does not agree with the presumption that no market power can be exercised so long as a sell offer is at or below Net CONE. Therefore, the Ohio Commission argues that PJM must continue to re quire market sellers to submit unit

- specific cost data to PJM and the Market Monitor to support their capacity market offers.
278. The Market Monitor argues that PJM’s proposal does not sufficiently protect against offers that are too low. The Market Monitor adds that offers that are too low fundamentally threaten the ability of a performance

- based capacity market design to operate as intended and, therefore, PJM must implement a defined mechanism to detect and deter the potential to exercise market power ass ociated with offers significantly below Net CONE and below the net Avoided Cost Rate.
279. Joint Consumers argue that PJM’s proposed use of a combustion turbine unit, as a reference unit for an administratively

- computed value of Net CONE, is unsupported by
rec ent trends of cleared capacity in PJM’s capacity auctions, which point to a development priority given to combined cycle units. Joint Consumers also argue that, under PJM’s proposal, there is a significant possibility that auction clearing prices will be equal to, or exceed, Net CONE in non

- constrained Locational Deliverability Area s, and thus be significantly higher than the offer levels previously determined by the Market Monitor to be competitive.
280. The PJM Utilities Coalition argues that PJM’s proposed Net CONE offer cap fails to address the larger design flaws (and price suppressing trends) associated with price

taking behavior. The PJM Utilities Coalition adds that the actual offer cap level embedded in the proposed safe harbor is unreasonably low, g iven PJM’s failure to include a Capacity Performance risk premium in its calculation of Net CONE.
281. Other intervenors protest the fact that PJM’s proposal offers no protection in the case of alleged market power or market manipulation. Accordingly, they r equest that PJM be required to adopt additional language clarifying that unit owners that avail

233 See supr a section V.C, addressing PJM’s proposed Non

- Performance Charge

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themselves of the safe harbor will not be subject to such allegations and bidding at or below Net CONE is not, in and of itself, an exercise of market power. 234

282. T he Market Monitor objects to PJM’s proposed change to the offer cap available for third Incremental Auctions, arguing that there is no longer any reason to set the default offer cap in these auctions at 1.1 times the Base Residual Auction clearing price. The Market Monitor adds that PJM’s proposal in Docket No. ER14

- 1461

- 000 to reduce the number of Incremental Auctions should be included in the Capacity Performance filing. The Market Monitor reasons that holding three Incremental Auctions encourages specu lative behavior by tending to lower the Incremental Auction prices and providing multiple opportunities for buying back commitments and this problem should be addressed as part of the Capacity Performance changes.
283. Intervenors also address PJM’s proposed ri sk premium allowance for Avoidable Cost Rate offers that exceed Net CONE and for unmitigated offers up to Net CONE. Joint Consumers argue that PJM’s proposal, while relying on the ISO

- NE model accepted by the Commission in the ISO

- NE Capacity Performance Order , is otherwise unsupported by any evidence specifically tied to PJM’s markets. In particular, Joint Consumers argue that PJM cannot justify its proposal based on its proposed Non

Performance Charge, given that this charge is unlikely to impose penalt ies of any kind.
284. The PJM Utilities Coalition, Exelon, and PSEG, by contrast, argue that PJM’s proposed risk premium is unreasonably restrictive. The PJM Utilities Coalition protests PJM’s focus on the costs of mitigating the risks of providing capacity as a Capacity Performance Resource, as opposed to the quantifiable risks associated with providing such a service. The PJM Utilities Coalition adds that this aspect of PJM’s proposal is inconsistent with the ISO

- NE approach accepted by the Commission in t he ISO

- NE Capacity Performance Order

. 235 Exelon argues that PJM’s proposal fails to address the existing flaw in the Avoidable Cost Rate formula, that resources do not have the flexibility to include unit performance and energy market risks. Exelon asserts that PJM should allow offers above Net CONE to reflect a risk premium that is reasonably supported rather than documented and quantifiable.
285. In addition, Exelon argues, PJM should revise its proposal to allow reasonable projections for the delivery year for all Avoidable Cost Rate categories, rather than just new expenditures to obtain firm natural gas supply. PSEG interprets PJM’s reference to

234 See Homer City comments at 7; EPSA comments at 6; Coalition of Resource Projects protest at 17; NGSA comments at 15; and Calpine comments at 5.

235 See PJM Utilities Coalition protest at 54 ( citing ISO

- NE Capacity Performance Order, 147 FERC ¶ 61,172 at P 90))

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insurance documentation to be an example of a means of showing the costs of the risks associated with Capacity Performance offers and assumes that PJM anticipates that suppliers can submit other forms of documentation to demonstrate their own individual assessments of risk. PSEG requests further clarification from PJM that suppliers will be provided the opportunit y and flexibility to develop their own risk assessments consistent with their corporate risk tolerances.
286. Exelon and PSEG also argue that PJM should create additional age categories and assumed remaining lifetimes for the purpose of amortizing capital inves tments, to accommodate units that may not be economic for the currently authorized amortization periods. Exelon adds that PJM should allow all technologies to adopt these remaining

life estimates. PSEG recommends generating units between 26 and 30 years old could be assumed to have five years of remaining life; units between 31 and 35 years old could be assumed to have three years of remaining life; and units between 36 and 40 years old could be assumed to have two years of remaining life. PSEG contends that the risks associated with recovering capital costs for a Capacity Performance Resource that may be reaching the end of its useful life are thus equated to the risks of recovering capital costs for a newer Capacity Performance Unit with many more years of life. 236

287. PSEG further requests that PJM assure that generator owners can include costs associated with improving operational flexibility in their bids for Capacity Performance Resources. PSEG notes that typically Project Investment is the amount of pr oject investment completed prior to June 1 of the delivery year, except for Mandatory Capital Expenditures (“CapEx”) for which the project investment must be completed during the delivery year, that is reasonably required to enable a Generation Capacity Re source that is the subject of a sell offer to continue operating or improve availability during Peak

Hour Periods during the delivery year. PSEG seeks clarification as to whether the existing definition is sufficiently broad so as to include upgrades asso ciated with unit flexibility. PSEG requests PJM modify the definition of Avoidable Operations and Maintenance Labor costs associated with Capacity Performance to include a forward

looking estimate. 237

236 See PSEG comments at 22 ( arguing that PSEG’s proposed revisions are consistent with the original purpose underlying the 40 Plus Alternative Option of enabling the oldest units to reco ver costs for project investments more quickly than newer units in recognition of their elevated recovery risk).

237 PJM defines the term, Avoidable Operations and Maintenance Labor, to consist of the avoidable labor expenses related directly to operations and maintenance of the generating unit for the twelve months preceding the month in which the data must be provided. The categories of expenses included in Avoidable Operations and Maintenance Labor are those incurred for : (i) on

- site based labor engaged in operations andDocket No. ER15

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288. Intervenors also challenge PJM’s must

- offer provisions , as proposed. The Market Monitor protests PJM’s proposed “weakening of the must

- offer rule for units that have offered and cleared in a prior auction” but are not yet in commercial operation, arguing that the flexibility will incent speculative offers, p rice suppression below the competitive level, and the exercise of market power. The Market Monitor adds that PJM has not explained why the performance risk associated with the required certification is only a problem for Generation Capacity Resources that have already cleared in a capacity auction. 238 The Pennsylvania Commission argues that PJM’s proposal is generally acceptable, but that PJM’s filing offers insufficient evidence to support it.
289. Essential Power and the PJM Utilities Coalition argue that se llers cannot be required to make multi

- year investments of the sort PJM’s rule changes would encourage, absent a reasonable opportunity to recover these investments. Essential Power argues that requiring generators to make investments and incur costs that could price the generators out of the capacity market is unjust and unreasonable. The PJM Utilities Coalition argues that the narrow must

- offer excuse proposed by PJM (based on the physical incapability of the resources) should be revised to provide that a resource will be exempted from the must

- offer requirement if the unit, without making significant capital expenditures, is likely to incur substantial penalties in connection with its performance. The PJM Utilities Coalition asserts that accepting PJM’ s proposed provision, as is, could result in a constructive taking of the resource owner’s property. 239

290. In the alternative, the PJM Utilities Coalition requests that P J M be required to adopt tariff language authorizing resources to include the entire cost of any capital improvement in the offer cap as if the unit had a “Remaining Life of Plant” balance of only a year. Dominion asserts that PJM’s proposal should be revised to allow existing resources to decide whether to make the investments necessary to me et the Capacity Performance requirements. Dominion argues that there is no guarantee that, after making significant long

- term investments, such resources will clear in the next, and subsequent,

maintenance activities; (ii) off

- site based labor engaged in on

- site operations and maintenance activities directly related to the generating unit; and (iii) off

- site based labor engaged in off

- site operations and maintenance activities directly related to generating unit equipment removed from the generating unit site. See PJM OATT Attachment DD, section 6.8.

238 Market Monitor comments at 8

- 9 & n.14 (referring to PJM OATT Attachment DD, section 6.6(g) and RAA Article 1

– Definitions, section 1.20B).

239 PJM Utilities Coalition protest at 60 (citing U.S. Const. amend. V and Duquesne Light Co. v. Barasch , 488 U.S. 299, 307 (1989))

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capacity auctions. Therefore, Dominion asserts, resources sh ould be allowed to remain in service but not participate in PJM’s capacity market.
291. Dominion requests that PJM modify its proposal such that Base Capacity Resources that request a unit

- specific Avoidable Cost Rate should also be able to include a risk adder that quantifies the risk associated with the new Base Capacity Performance Penalties. Dominion notes that, while PJM has proposed to allow Capacity Performance Resources to include a premium for quantifiable risks associated with such resources, PJM’s Av oidable Cost Rate formula does not make a specific allowance for Base Capacity Resources. Dominion recognizes that Base Capacity Non

- Performance Charges are likely to be smaller than those applied to Capacity Performance Resources. However, Dominion cont ends that, under PJM’s proposal, Base Capacity Resources face larger performance penalties than they do under the current market rules and they should be permitted to account for the risk of those penalties in their Avoidable Cost Rate.
292. Dominion similarly suggests that PJM create a default offer cap for Base Capacity Resources. Dominion recognizes that the default offer cap should be lower given the added non

- performance risk associated with Base Capacity Resources. Dominion requests the Commission to di rect PJM to extend an offer cap provision to Base Capacity Resources allowing for offers up to the cap to bypass review by the Market Monitor or PJM. Dominion proposes that 50 percent of Net CONE would be an appropriate cap level to support the flexibilit y of pricing associated risk in the market.
293. Dominion argues that the offer requirements for Base Capacity Resources during the transition period are unclear. Dominion asserts that Base Capacity Resources should not be required to offer their capacity in the Base Residual Auctions during the transition period. Dominion argues that PJM’s proposal is unreasonable, because it eliminates a resource’s choice to offer only a portion of its capacity into the Base Residual Auction, or partially de

- list the resour ce, due to restrictions affecting the resource or the risk associated with committing to operate at its full installed capacity.
294. Brookfield states that PJM’s proposed language is ambiguous about whether hydroelectric generation and energy storage facilitie s are considere d Capacity Storage Resources or Generation Capacity Resources. Nevertheless, Brookfield asserts that Capacity Storage Resources and Generation Capacity Resources are “separate and distinct types of capacity resources,” and, therefore, PJM s hould clarify that hydroelectric generation and energy storage facilities as Capacity Storage Resources, are exempt from the Base Capacity Resource must

- offer requirement. Brookfield argues that the same rationales for exempting energy storage resources f rom a must

- offer requirement apply toDocket No. ER15

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both Capacity Performance and Base Capacity Resources, in particular the fact that it is virtually impossible for any Capacity Storage Resource to possess market power. 240

295. Brookfield also requests clarification that Ca pacity Storage Resources may offer any quantity of capacity up to the amount determined under the traditional method for calculating unforced capacity for hydroelectric generation facilities, or require PJM to work with interested market participants and t he Market Monitor to determine a predictable method for quantifying the capacity such resources may offer.
296. Finally, with respect to PJM’s proposed inclusion of natural firm gas supply arrangements in the Avoidable Cost Rate formula, the Pennsylvania Commis sion questions whether the full cost of firm natural gas transportation would be a cost

effective solution for many, if not most, generators that rely on this fuel source, and notes the failure of PJM’s proposed provision to address the treatment of capaci ty release revenues. Accordingly, the Pennsylvania Commission requests that, if this new input is accepted, PJM be required to : (i) add a provision directing the Market Monitor (and the Commission’s enforcement staff) to review all such offers; and (ii) add additional language addressing how capacity release revenues will be treated.
3. PJM’s Answer

297. In response to intervenors’ protests to PJM’s proposed offer cap, PJM asserts that setting the offer cap level at Net CONE is critical for establishing s trong performance incentives while also allowing resources to craft and implement their strategies to deliver a well

- performing resource. PJM argues that a high offer cap is needed to account for the substantial costs and risks that Capacity Performance R esources will face under the new construct. PJM explains that the costs and risks may be difficult to quantify, especially on a three

- year forward basis. Net CONE, PJM contends, represents the expected equilibrium price in a competitive capacity market a nd affords market sellers flexibility to “make their best estimate” of expected returns against costs and performance risk. PJM argues that setting the proposed offer cap at Net CONE strikes a reasonable balance between supplier and load interests.

240 Alternatively, Brookfield argues, if Capacity Storage Resources are subject to a must

- offer requirement with respect to Base Capacity Resources, the Commission should require PJM to allow Capacity Storage Resources to incorporate the additional risk of in curring Non

- Performance Charges into its capacity offers. See Brookfield comments at 13

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298. PJM asserts that its existing rules concerning capacity market offer caps do not account for the new costs and risks that a Capacity Performance Resource may face. 241 PJM adds that, under the new Capacity Performance construct, market sellers determine the meas ures they must take to enable their resources to perform as a Capacity Performance Resources and bear the risk that their resources do not perform when called upon in an emergency. PJM argues that setting the offer cap at Net CONE “supports this fundament al philosophy of seller responsibility for performance” by allowing flexibility to offer at prices reflecting their best estimate of the costs and risk they face.
299. PJM further argues that, even if a market seller could reasonably know three years in advan ce the costs they must incur, market sellers should be allowed some flexibility in how they propose to recover those costs and in the amount of risk they can and must bear. Unlike the current Avoidable Cost Rate rules, allowing resources to bid up to Net CONE both accommodates diverse risk profiles and makes that risk more transparent, PJM argues.
300. PJM reiterates that Net CONE is an appropriate offer cap, because, though not a unit

- specific measure, it is a cost

- based determination that reflects the esti mated replacement cost of capacity in a competitive market at equilibrium. PJM also notes that its OATT already subjects some resources to a Net CONE offer cap under specific circumstances, particularly where the resources face substantial costs to perfor m as capacity resources for a given delivery year.
301. Regarding protests that an offer cap based on Net CONE increases market power concerns, PJM responds that the competitive nature of the single

- clearing

- price capacity market design suggests that few, if an y, resources will be incented to exercise significant market power. PJM argues that the incentive to clear the capacity auctions is a powerful deterrent to the exercise of market power, and the greater the difference between Net CONE and a resour ce’s avoidable costs, the greater the risk of loss from offering at Net CONE.
302. PJM states that it shares the Market Monitor’s concern about the potential for market sellers to submit artificially low offers and would support a compliance filing implementi ng the Market Monitor’s recommendation to adopt a mechanism to detect and deter the potential for such behavior.
303. In response to the PJM Utilities Coalition’s protest that market sellers should not be required to make multi

- year investments without a reason able opportunity to recover

241 PJM answer at 76

- 77 (noting that, under PJM’s existing rules, capacity resources generally only may offer their Avoidable Cost Rate less expected net energy and an cillary service market revenues).Docket No. ER15

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the associated costs, PJM indicates that it appreciates that the time may be ripe to revisit this issue. Therefore, PJM suggests that the Commission direct PJM to further consider “issues of new entry pricing and multi

- year pri cing” with stakeholders and report on the results of these efforts no later than December 2015.
304. In response to the Market Monitor’s proposal that PJM eliminate the special offer cap applied to the third Incremental Auction, PJM argues that the offer cap sh ould be retained. PJM explains that the special offer cap

– 1.1 times the Base Residual Auction clearing price

– can exceed Net CONE. PJM argues that market sellers with excess capacity at the time of the third Incremental Auction should be able to “reco gnize the value of that capacity as a possible source of replacement for their other resources that experience issues during the [d]elivery [y]ear” that could subject them to the higher performance penalty.
305. PJM states that it supports PSEG’s and Exelon’s requests to modify or clarify the risk premium element that PJM proposes to include in the Avoidable Cost Rate formula, given the importance that risk premiums reasonably reflect a market seller’s costs to commit as a Capacity Performance Resource. In pa rticular, PJM supports PSEG’s clarification that a seller can document its risk premium in various ways. 242 PJM also supports Exelon’s proposals that : (1) a seller’s requested risk premium level can be “reasonably supported” rather than “documented and qua ntifiable”; (2) a demonstration that the seller has quantified its risks for this purpose in the same manner it quantifies risks for other corporate or business purposes would be sufficient for PJM and the Market Monitor to accept the risk premium; and (3) energy market and operational risks may be included in the risk premiums for Capacity Performance Resource offers. 243

306. With respect to Homer City’s request for guidance on how a resource’s capability to offer as a Capacity Performance Resource would be determined in the must

- offer review process, PJM clarifies that the resource would need to demonstrate that there is a phy sical reason that it would be unable to provide assurance of the ability to deliver energy during emergency conditions. PJM adds that resources that would be excused from the must

- offer requirement would be those for which there are physical reasons why
o ffering as Capacity Performance is not possible, and for which any reasonably quantifiable investment would not resolve those physical issues. However, if investment would be required to provide the necessary assurance, the market seller must quantify tha t investment and submit a Capacity Performance offer that reflects the costs of that investment.

242 PJM answer at 89 & n.159 (citing PSEG protest at 16

- 17).

243 PJM answer at 89

- 90 & n.162 (citing Exelon protest at 69

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4. Additional Answers

307. The Maryland Commission, in its answer, responds to the arguments raised by the PJM Utilities Commission and PSEG in support of an Avoidabl e Cost Rate input reflecting a risk premium allowance. The Maryland Commission argues that a penalty/reward mechanism that refunds unearned capacity revenues is not designed to provide risk premiums.
308. Exelon, in its answer, responds to Joint Consumers’ ar gument that a Net CONE offer cap, as proposed by PJM, will allow suppliers to exercise market power. Exelon argues that an offer cap at Net CONE is logical based on a market design that imposes N on

- P erformance Charges expected to equal Net CONE o n average over time . Exelon further argues that Net CONE represents the expected long

- term equilibrium price of PJM’s capacity market.
309. Exelon also challenges Dominion’s claim that PJM’s proposal, to vest eligibility review authority in PJM and the Market Monit or, is vague and arbitrary. Exelon argues that the relevant inquiry

– whether a capacity resource has the capability for the entire relevant delivery year to provide energy at any time when called upon

– is an objective standard.
5. Market Monitor Answer a nd Replies

310. Although the Market Monitor initially supported PJM’s proposal to set the offer cap at Net CONE, the Market Monitor withdrew its support in its answer, after conducting a detailed review of the mathematics of the Capacity Performance design. The Market Monitor, in its answer, argues that PJM’s proposed offer cap should not be set at Net CONE, but rather at Net CONE times the expected average Balancing Ratio (defined as the ratio of load plus reserves to total Unforced Capacity). The Market Mo nitor asserts that the default offer is appropriately recognized as less than or equal to Net CONE, given that the expected average Balancing Ratio would always be less than or equal to 1.0. The Market Monitor adds that this recognition is consistent with the seller’s obligation to provide energy during each Performance Assessment Hour.
311. The Market Monitor argues that, under PJM’s proposal, if expected bonus performance by an energy

- only resource is greater than the resource’s net Avoidable Cost Rate, it ca n be concluded that such a resource would not take on a capacity obligation unless it would be better off by doing so. The Market Monitor adds that the willingness of a seller to take on a capacity commitment will be based on the capacity price it will
re ceive for its commitment, which must be equal to, or in excess of, the profits it would make as an energy

- only resource. The Market Monitor asserts that this value is equal to Net CONE times the expected average Balancing Ratio

. The Market Monitor propos es a unit specific review for all other resources, composed of the resource’s net Avoidable Cost Rate plus its expected net performance payments and any appropriate risk premium.Docket No. ER15

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312. In response to the Market Monitor’s alternative offer review mechanism, multi ple intervenors object to the proposed process. NRG/Dynegy argues that adopting the Market Monitor’s alternate mechanism would upset a carefully balanced proposal and likely reduce reliability; setting the offer cap too low presents greater risks than set ting the offer cap too high; the Market Monitor’s calculations are flawed because they rest on the assumption that the Non

- P erformance Charge rate will be equal to the Performance B onus Payment rate; and it is impossible to calculate an accurate Balancing Ratio before the relevant delivery year. PJM, Exelon, and Joint Consumers assert that the Market Monitor’s proposal adds unnecessary complexity without any considerable offsetting benefit and should be rejected. Finally, several intervenors contend that the Market Monitor’s proposal should be rejected due to the late nature of its submission.
6. Deficiency Letter, PJM’s Response, and Protests and Comments

313. The Deficiency Letter asked PJM to answer a series of questions related to its proposed Net CONE default offer cap, how it relates to the methodology presented by the Market Monitor in its answer and employed by ISO

- NE in its Forward Capacity Market, and how certain Cap acity Performance design parameters might be set and interact with the proposed offer cap. 244

314. In its answer PJM proposes an alternative default offer cap which it states was developed consistent with the ISO

- NE methodology (Revised Offer Cap). PJM explain s that it has developed the Revised Offer Cap in consultation with the Market Monitor and that it is based on defining a resource’s competitive offer, which is a function of resource

specific and system variables. The resource

- specific variables include m arginal costs (ACR) and expected average resource performance across all Performance Assessment Hours (A), and the system variables include the Non

- Performance Charge rate (PPR), the expected average Balancing Ratio across all Performance Assessment Hours ( B), and the expected number of Performance Assessment Hours (H).
315. PJM contends that an appropriate competitive offer for a Capacity Performance Resource should include all of the marginal costs faced by that resource. PJM supports its Revised Offer Cap by analyzing the costs and revenues faced by a resource choosing between taking on a Capacity Performance obligation with its associated capacity payment, risk of Non

- Performance Charges and opportunities for Performance Bonus Payments compared to an ener gy

- only without capacity payments or risk of Non

Performance Charges, but increased access to Performance Bonus Payments. PJM explains that t he scenarios also take into account whether the seller expects its particular resource to over

- perform or under

- pe rform relative to the expected average performance levels. Tracking the same logic and analysis used by ISO

- NE, this analysis concludes

244 Deficiency Letter questions 1

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that the rational, profit

- maximizing offer for a seller with avoidable costs below the expected capacity clearing price is Net CONE times the Balancing Ratio

. 316. PJM contends that Net CONE times the Balancing Ratio is the level at which a resource with l ow avoidable costs would choose to take on a Capacity Performance obligation instead of perform as an energy

- only resource

. PJM explains that for resources with high avoidable costs that do not expect to cover their costs unless they earn capacity auction revenue, the formula provides for the inclusion of unit

- specific A voidable C ost R ate and unit

- specific expected performanc e plus a risk premium for those with costs above the Net CONE times Balancing Ratio default offer cap. Under the Revised Offer Cap methodology , PJM will allow such resources to submit unit

- specific offer caps which detail all Avoidable Cost Rate component s , including a quantifiable risk as proposed by PJM in its Capacity Performance filing.
317. PJM states that the data from the previous three delivery year s, 2011/2012, 2012/2013 and 2013/2014, shows that there were a total of 70 hours that would have been Perf ormance Assessment Hours under the currently proposed rules for Capacity Performance. Of those 70 hours, 42 were RTO

- wide emergencies while 28 were locational Performance Assessment Hours only. 245 PJM proposes to use a historical weighted average of the Balancing Ratio s (B) experienced in the previous three delivery year s as the methodology to produce the Balancing Ratio used in determining the default offer cap. PJM asserts that the weighted average Balancing Ratio for the PJM RTO in the most recent thr ee delivery year s is approximately 85 percent. A similar methodology would be used for LDA

- specific Balancing Ratio using the higher of the parent LDA or the LDA itself. 246

318. PJM notes that there is a difference between the Balancing Ratio s during Perform ance Assessment Hours winter and summer months. 247 In the winter of 2014, PJM suggests that it experienced high forced outage rates and therefore had a significant number of hours that would have been considered Performance Assessment Hours. PJM contends th at Capacity Performance provides strong incentives for resource availability and therefore, over time, will eliminate occurrences like those seen in the winter of 2014. As a result the expected value of the Balancing Ratio is anticipated to increase over t ime to a value that is more indicative of the summer Performance Assessment Hours which averaged around 93.5 percent.

245 PJM Deficiency Letter Response at 12.

246 Id . at 7.

247 Id . at 12.Docket No. ER15

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319. Further, in response to questions concerning the number of Performance A ssessment H ours, PJM contends that while Performance Assessment Ho urs could vary across different LDAs in the PJM Region, PJM contends that the variance is not predictable because it is dependent on the number of Emergency Action s declared by PJM operators in each LDA. 248 PJM suggests that the circumstances for an emergen cy declaration are dependent on factors such as load expectations, generator availability, and constraints on the transmission system.
320. AEMA asserts that PJM has not provided the Commission with sufficient information to make a finding that either the orig inal or modified Capacity Performance proposals are just and reasonable, and requests that in lieu of accepting PJM’s Capacity Performance proposal the Commission convene a technical conference under FPA Section 206 to assess whether the currently effectiv e RPM rules are unjust and unreasonable and to investigate just and reasonable alternatives. 249

321. AEMA also states that PJM did not respond to the Commission’s first question in the Deficiency Letter and merely provided a lengthy analysis explaining how Net CO NE, or something close to it, is the rational offer for most suppliers under its proposed Capacity Performance rules

. Other intervenors assert that Net CONE is not an appropriate clearing price or competitive offer because it is an administratively determ ined estimate and not necessarily reflective of the actual cost of new entry. 250

322. Multiple i ntervenors either support or do not oppose PJM’s Revised Offer Cap. 251 Specifically, the Market Monitor suggests that PJM’s Revised Offer Cap is competitive by definition such that offers at or below this level do not require further review of unit specific costs. 252 The Market Monitor asserts that PJM’s response facilitates adoption of

248 Id . at 13.

249 AEMA comments to PJM’s Deficiency Letter Response at 6.

250 Id . at 7; Joint Consumers comments to PJM’s Deficiency Letter Response at 6

- 8; Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 6.

251 Calpine comments to PJM’s Deficiency Letter Response at 3, 14; Exelon comments to PJM’s Deficiency Letter Response at 2

- 3; P3 comments to PJM’s Deficiency Letter Response at 2

- 5; EPSA comments to PJM’s Deficiency Letter Response at 8

- 9; PJM Utilities Coalition com ments to PJM’s Deficiency Letter Response at 5; PSEG comments to PJM’s Deficiency Letter Response at 2

- 3; Coalition of Resource Projects comments to PJM’s Deficiency Letter Response at 8

- 9.

252 Market Monitor comments to PJM’s Deficiency Letter Response at 2.Docket No. ER15

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a method for calculating offer caps that has strong theoretical support and is consistent with the ISO

- NE model . The Market Monitor further states that PJM’s response addresses key concerns about the design details of the Capacity Performance proposal and that the Market Monitor urges the Commission to approve the proposal, with th e proposed modifications included in the Market Monitor’s earlier pleadings, as soon as possible . While P3, PSEG and ESPA request the Commission accept PJM’s original default offer cap proposal of Net CONE, they do not oppose PJM’s Revised Offer Cap

. 253 P3 a nd Coalition of Resource Projects suggest that PJM’s Revised Offer Cap has an administrative simplicity; further suggesting that the administrative burdens associated with calculating risk on a unit

- by

- unit basis are extraordinarily complex and highly subj ective. 254 Coalition of Resource Projects contends that without a default offer cap a unit

- specific mitigation approach is unjust and unreasonable and will unjustly increase costs to consumers. 255 P3 and EPSA contend that without higher offer caps and the op portunity for generation owners to reflect their true costs, resources that could otherwise provide the Capacity Performance product would likely exit PJM, possibly decreasing reliability. 256 Therefore, EPSA requests that the Commission should also accept m odifications proposed by certain generation owners to clarify the risk premium element proposed by PJM for the Avoidable Cost Rate formula. 257

323. Conversely , Panda and Essential P ower oppose PJM’s Revised Offer Cap in favor of the initial default offer cap of Net Cone. 258 Essential Power asserts that PJM has failed to support its Revised Offer Cap. Essential Power suggests that the information in the record supports use of PJM’s initial offer cap proposal of Net CONE as the default offer cap because it represen ts long

- term competitive price levels, is administratively manageable and will encourage competitive behavior. 259 Panda contends that PJM’s

253 P3 comments to PJM’s Deficiency Letter Response at 3; EPSA comments to PJM’s Deficiency Letter Response at 8

- 9; PSEG comments to PJM’s Deficiency Letter Response at 2

- 3.

254 P3 comments to PJM’s Deficiency Letter Response at 3

- 4.

255 Coalition of Resource Projects comments to PJM’s Deficiency Letter Response at 9.

256 P3 comments to PJM’s Deficiency Letter Response at 4

- 5.

257 EPSA comments to PJM’s Deficiency Letter Response at 8

- 9.

258 Panda comments to PJM’s Def iciency Letter Response at 5

- 6; Essential Power comments to PJM’s Deficiency Letter Response at 4.

259 Essential Power comments to PJM’s Deficiency Letter Response at 3.Docket No. ER15

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Revised Offer Cap does not include a risk adjustment to the expected revenues reflective of the Non

- Performance Charg e Rate proposed by PJM. 260 Essential Power argues that PJM and the Market Monitor incorrectly assume that parties will value potential Performance B onus P ayments, when, in reality, such speculative revenues are highly discounted in the financing process. 261 As a result , Essential Power suggests that PJM’s Revised Offer Cap will create additional investment hurdles for new projects which then must be offset by the required revenues from capacity payments, and may result in over mitigation of supply offers. 262

324. Other Interveners oppose the use of a default offer cap based on the proposal’s inability to prevent the exercise of market power. 263 These intervenors request PJM continue its current capacity market mitigation practices, including the unit specific revi ew for resources that fail the three pivotal supplier test. Maryland Commission suggests that PJM’s proposal could cost end users an additional $7.5 billion or more, due to the exercise of market power. 264

325. Joint Consumers suggest that if the capacity marke t were competitive, none of the market power mitigation rules presently in place, including the requisite submission and review of unit

- specific Net Avoidable Cost Rates to the Market Monitor in advance of RPM auctions, would be relevant or necessary. Joi nt Consumers and Joint Protestors note that PJM’s assumption runs counter the Market Monitor’s observations that structural market power has been "endemic" to the market, and market participants have relied on existing market power mitigation rules to assu re the competitiveness of market outcomes. 265 Joint Consumers contend that allowing resources to submit offers up to Net CONE * B without review in such a non

- competitive environment will result in the

260 Panda Utilities Coalition comments to PJM’s Deficiency Letter Response at 5 (citing P oray Testimony at 4).

261 Essential Power comments to PJM’s Deficiency Letter Response at 6.

262 Id . at 7.

263 AEMA comments to PJM’s Deficiency Letter Response at 6 ; Maryland Commission comments to PJM’s Deficiency Letter Response at 4

- 6; Joint Consumers
commen ts to PJM’s Deficiency Letter Response at 6; Joint Protestor comments to PJM’s Deficiency Letter Response at 8

- 9.

264 Maryland Commission Deficiency Letter Comments at 7.

265 Joint Consumers comments to PJM’s Deficiency Letter Response at 6; Joint Protestors comments to PJM’s Deficiency Letter Response at 8.Docket No. ER15

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auction clearing at this inappropriately high level, i mposing higher costs to consumers. Joint Consumers suggest that the present unit

- specific review of price offers reflecting unit

- specific Net Avoidable Cost Rate has resulted in resource clearing prices that the Market Monitor has deemed competitive. Acc ordingly, Joint Consumers request that the Commission require PJM and the Market Monitor to continue evaluating offer caps on a unit

- specific basis using each unit's Net Avoidable Cost Rate value. 266

326. J oint Protestors suggest that PJM has failed to explain how either offer cap proposal will effectively prevent economic withholding in LDAs with high supplier concentration. Joint Protestors argue that a Capacity Market Seller with a portfolio of resources and high concentration in a geographic area could have a greater incentive under PJM’s proposal than under the existing RPM construct to have a resource not clear at all or at least not clear as a Capacity Performance Resource, enabling large fleet owners to directly benefit from the higher clearing price and by gaining insurance against performance risk, in spite of a lower clearing volume. 267 Joint Protestors assert that these concerns are exacerbated during the transition period because resources are allowed to submit coupled offers and may overstate the cos ts necessary to clear as a Capacity Performance Resource . Accordingly, Joint Protestors request that, to the extent the Commission approves PJM’s proposal, it should require PJM to reserve coupled offers for resources that must make a substantial investmen t to meet the Capacity Performance standards, and that large owners of resources that are indisputably and unambiguously capable should not be permitted to submit coupled offers. 268 Joint Protestors also suggest that PJM or the Market Monitor have too much discretion to determine that prospective fuel expense or capital investment is needed. 269

327. AEMA and Pennsylvania Commission contend that PJM ’s logic is flawed such that in order to incent resources to take on the obligation to become a Capacity Resource, the expected revenue from selling capacity would have to be enough to cover the differ ence between a resource’s avoidable cost and its P erformance Bonus P ayments. Pennsylvania Commission asserts that this results in clearing price s that reflect administrative ly

- determined penalty leve ls rather than the actual avoidable costs of the marginal resource. 270 AEMA sugge sts that this results in poorly

- performing units having

266 Joint Consumers comments to PJM’s Deficiency Letter Response at 8

- 12.

267 Joint Protestors comments to PJM’s Deficiency Letter Response at 9.

268 Id . at 11.

269 Id . at 8

- 9.

270 Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 5

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higher offe r caps than well

- performing units, creating perverse incentives for owners of large generation fleets. AEMA explains that large generation fleet owners may be dis suaded fr o m invest ing in reliability improvements if such improvements would lower the clearing price applicable to their generation fleet s

. 271

328. Maryland Commission refutes PJM a nd the Market Monitor’s claims that resources should be able to reflect opportunity costs because PJM’s tariff includes a must offer requirement that mandates that capacity be offered into the Base Residual Auction at its full, reliable level such that gen erators are prohibited from withholding capacity to achieve greater profits. In addition , Maryland Commission asserts that most generators inside of PJM do not have the necessary transmission path available to make sales to neighboring RTOs, and historica l pricing levels are typically higher in PJM markets. 272 The Maryland Commission also requests that the commission reject PJM’s proposal that the Market Monitor not be permitted to evaluate whether an offered Capacity Performance Resource meets the requirements for that status and the appropriate physical basis upon which capacity offers are to be made unless requested to do so by PJM. 273

329. Essential Power, Panda, and AEMA claim that PJM fails to recognize the difference between PJM’s market structure and ISO

- NE. AEMA refutes PJM’s contention that its methodology is appropriate because it is identical to the methodology in ISO

- NE. AEMA asserts that despite the apparent use of the same equation, differences in the definition of the penalty rat e between PJM and ISO

- NE lead to different outcomes. Panda and Pennsylvania Commission suggests that PJM’s Revised Offer Cap assumes that the P erformance B onus Payment rate is equal to the N on

- P erformance C harge rate in its equation representing the tot al cash flow for a resource that has a capacity commitment. Panda indicates that these rates will be equal only if there is no resource that has been exempted from under

- performance. Pennsylvania Commission suggests that PJM assumes that penalties will always equal Net CONE divided by the assumed number of Performance Assessment Hour s. However, Pennsylvania Commission explains that to extent a resource’s penalties exceed the annual and monthly stop loss

271 AEMA notes that From “PJM’s 2018

- 2019 Planning Period Parameters

- Proposed Capacity Performance Filing Provisions,” the Variable Resource Requirement curve between Point A and Point B decreases prices by $0.0481/MW

- day for each additional MW cleared. Assuming a clearing price of $250/MW

- day, an owner of 6,000 MW fleet who clears one additional MW gains $250/day on that MW, but loses $0.0481/MW x 6001MW = $288.64/day in rev enue from the lower clearing price. AEMA comments to PJM’s Deficiency Letter Response at 19

- 20.

272 Maryland Commission comments to PJM’s Deficiency Letter Response at 7

- 8.

273 Id

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provisions it will not be assess ed performance pen alties, therefore the average penalty assessed is likely to be substantially less than Net CONE. 274

330. Maryland Commission and Pennsylvania Commission request that Commission require PJM to modify or remove its provisions regarding a Capacity Performance R esour ce ’s ability to include opportunity costs in its estimation of net avoidable costs in the Avoidable Cost Rate formula. Maryland Commission and Pennsylvania Commission suggests that a generator’s risk is no greater or less than its normal market risk without these penalties or rewards , i.e. , it might not clear in the market and thus might not receive market revenues sufficient to cover its costs. The Maryland Commission and the Pennsylvania Commission suggest that this risk is already includ ed in the c apital cost allowance covering cost recovery risks in a resource’s avoidable costs. 275 Maryland Commission and Pennsylvania Commission suggest that ratepayers should not be required to fund hypothetical “risk premiums” to reflect the asserted potential of severe penalties for non

- performance which likely will not occur.
331. Conversely, Exelon suggests that because PJM’s Revised O ffer C ap proposal is likely to result in a lower default offer cap than its initial proposal, it even more important for the Commissi on to ensure that unit

- specific review of offers in excess of that cap properly accounts for all costs and risks associated with providing Capacity Performance. 276

332. Regarding PJM’s proposed default parameters of the Revised Offer Cap, Exelon endorses PJM’s methodology for determining the Balancing Ratio

– a historical weighted average of the Balancing Ratio s experienced in the previous three delivery years

– as well as PJM’s plan to engage in an annual review based on the most recent data. 277

333. Others oppose PJM ’s proposed methods. Essential Power argues that using a three

- year historical average is unjust and unreasonable because it will use significantly outdated information to set future payments. Essential Power adds that using data from a past period will understate the expected future performance because it will not account

274 Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 5.

275 Maryland Commission comments to PJM’s Deficiency Letter Response at 3

- 4; Pennsylvania Commission comments to PJM’s Deficiency Letter Response at 3.

276 Joint Protestor s comments to PJM’s Deficiency Letter Response at 10.

277 Exelon comments to PJM’ s Deficiency Letter Response at 2.Docket No. ER15

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for changes in the market which may result in improved performance. 278 NRG / Dynegy and Indicated Suppliers request that the Commission make clear that any acceptance of the PJM RTO

- wide Balancing Ratio is without prejudice to further examination of exactly how the Balancing Ratio should be calculated for future auctions. 279 Indicated Suppliers argue that PJM and its stakeholders should consider developing a forward

looking methodology for calculating the Balancing Ratio . In addition, NRG / Dynegy opposes PJM’s suggestion that it calculate Locational Deliverability Area

- specific Balancing Ratio values. NRG/Dynegy asserts that such values are likely to be considerably more volatile and that v olatility could lead to greater variances between the values calculated on a backward

- looking basis and actual Balancing Ratio during a given delivery year. 280

7. Commission Determination

334. For the reasons discussed below, we accept PJM’s market mitigation propo sal , as amended in the Deficiency Letter Response, subject to the condition s described below

. 335. In this proceeding, PJM originally proposed a default offer cap for Capacity Performance Resources equal to Net CONE

. In its Deficiency Letter Response , PJM
am ended its proposal, stat ing that it has collaborated with the Market Monitor to develop the Revised Offer Cap based on the competitive offer for any resource in any Locational Deliverability Area in PJM within the Capacity Performance market design. PJM states that an appropriate competitive offer includes all of the marginal and opportunity costs faced by a resource and that those costs are fully reflected in PJM’s Revised Offer Cap

. 281 Based on this rationale, PJM proposes a default Capacity Performance Resource

278 Essential Power comments to PJM’s Deficiency Letter Response at 65.

279 NRG/Dynegy comments to PJM’s Deficiency Letter Response at 3

- 4; Indicated Suppliers comments to PJM’s Deficiency Letter Response at 5.

280 Indicated Suppliers comments to PJM’s Deficiency Letter Response at 5.

281 PJM Deficiency Letter Response at 1. PJM submits the following equation to represent the competitive offer of a capacity resource:

p = PPR ∗ H ∗ B � + max { 0 , ( ACR

− PPR ∗ H ∗ A � ) } where p = a competitive offer f rom any resource; PPR = Performance Payment Rate = Net CONE/H; H = expected total number of Performance Assessment Hours in a delivery year = 30; B � = expected Balancing Ratio across all Performance Assessment Hours in a delivery year; ACR = net Avoidable C ost Rate, per proposed section 6.8 of Attachment DD of the OATT; and A � = expected availability of the resource across allDocket No. ER15

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offer cap set a t the product of Net CONE times the Balancing Ratio , B, and proposes to allow resources with high avoidable costs to submit unit

- specific offer caps that detail all Avoidable Cost Rate components, including a quantifiable risk premi um

. PJM states that this approach is the same as that which the Commission approved for ISO

- NE and will yield the same results as a detailed cost

- based, unit

- specific offer cap approach.
336. We find the Capacity Performance Resource offer cap set at Net CON E times the Balancing Ratio, as well as a standard of review of unit

- specific offer caps based on the competitive offer equation presented by PJM, to be just and reasonable. The default offer cap that PJM proposes as part of its Revised Offer Cap reflects the amount that a competitive resource with low avoidable costs (Low ACR Resource) would accept in the capacity market. An energy

- only resource will receive the Performance Bonus Payment rate for each MWh that it produces during Performance Assessment Ho urs, and it will incur no Non

- Performance Charges regardless of its performance. A Low ACR Resource is one whose avoidable costs are less than its total expected Performance Bonus Payments as an energy

- only resource. That resource, therefore, will be wil ling to take on a capacity obligation as long as the amount it can earn for capacity (including both capacity auction revenues as well as net Performance Bonus Payments) exceeds the amount it could earn in Performance Bonus Payments by participating in the energy market only.
337. A resource will receive less in Performance Bonus Payments as a capacity resource than as an energy

- only resource. That is because, unlike an energy

- only resource, a capacity resource would receive the Performance Bonus Payment rate d uring Performance Assessment Hours only for any production that exceeds its Balancing Ratio share of its total capacity obligation (and it would incur Non

- Performance Charges during those hours to the extent that its production falls short of this share). For example, if the Balancing Ratio is 80 percent and a resource has a 100 MW capacity obligation, it will receive Performance Bonus Payments during a Performance Assessment Hour only to the extent that its production exceeds 80 MWh ( i.e

. , .80 times 100 M W). So, for example , if the resource produces 85 MWh, it will receive a Performance Bonus Payment equal to the Performance Bonus Payment rate times 5 MWh. By contrast, if the resource were an energy

- only resource, it would receive the Performance Bonus P ayment rate for the full 85 MWh of production, which is 80 MWh more than if it was a capacity resource. By taking on a capacity obligation, the resource must forego the Performance Bonus Payments on 80 MWh of production, i.e

. , its obligation as measured b y the Balancing Ratio times its total capacity obligation, in each Performance Assessment Hour. The

Performance Assessment Hours in a delivery year. The net Avoidable Cost Rate is calculated by deducting all energy and ancillary serv ice revenues net of marginal costs from Avoidable Costs. See PJM OATT Attachment DD, section 6.8.Docket No. ER15

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Performance Bonus Payments associated with these 80 MWh are an opportunity cost incurred by taking on a capacity obligation.
338. In order to accept a capacit y obligation, a competitive resource would require that the capacity payment exceed this opportunity cost. Under PJM’s construct, this capacity payment is represented by the Performance Bonus Payment rate times the Balancing Ratio times the expected number of Performance Assessment Hours. 282 PJM’s proposed Non

- Performance Charge rate is calculated as Net CONE divided by 30 hours. Under the assumption that the number of Performance Assessment Hours is the same as the number used to calculate the Non

- Pe rformance Charge rate, this opportunity cost amount is equivalent to Net CONE times the Balancing Ratio (B). 283

339. For a resource whose avoidable costs exceed the amount that it can earn in Performance Bonus Payments (High ACR Resource) as an energy

- only resource, the default offer cap will be too low and that resource will have to seek a unit

- specific offer cap. A High ACR Resource would thus be expected to submit an offer that reflects its additional costs plus the risk that it may incur significant Non

- Performance Charges as a capacity resource. 284

282 This applies only under a simplifying assumption that the Non

- Performance Charge rate and Performance Bonus Payment rate are equal, but, as discussed below, we find that assumption to be reasonable.

283 Expressed algebraically, the opportunity cost is

P PR ∗ B � ∗ H

where PPR = Performance Payment Rate = Net CONE/H; B � = expected Balancing Ratio across all Performance Assessment Hours in a delivery year; and H = expected total number of Performance Assessment Hours in a delivery year = 30 . The opportunity cost can thus be expressed as

Net CONE 30 � ∗ B � ∗ 30 = Net CONE ∗ B �

.

284 This can be expressed algebraically by rearranging PJM’s equation for the competitive offer of a High ACR Resource as follows:

p = ACR + PPR ∗ H ∗ ( B �

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340. We therefore agree with PJM that it is reasonable to set a default Capacity Performance Resource offer cap equal to the competitive offer estimate for a Low ACR Resource, i.e

. , Net CONE times the Balancing Ra tio, because that estimate will always be lower than the competitive offer estimate for a High ACR Resource. Any Capacity Performance offer below the default offer cap can properly be deemed competitive, and any offer above that level will be scrutinized by the Market Monitor and PJM to ensure that it is based on legitimate costs and reasonable estimates of unit

- specific performance and system parameters.
341. Based on our finding that PJM’s Revised Offer Cap methodology is just and reasonable, we accept PJM’ s offer cap proposal , as amended in the Deficiency Letter Response

. 342. We acknowledge that the Revised Offer Cap methodology reflects the simplifying assumption that Performance Bonus Payments and Non

- Performance Charges will be calculated based on the same payment rate. NRG/Dynegy argue that this assumption is false, given the proposed mechanics of the Capacity Performance construct, and assert that the two rates are actually unlikely to ever be exactly the same. We recognize this criticism and agree that the rates could be unequal. 285

343. However, we find the simplifying assumption to be reasonable nonetheless. Both the Non

- Performance Charge rate and the Performance Bonus Payment rate are represented as dollars per MWh

. The Non

- Performance Charge rate , as discussed earlier in this order, is established in advance as Net CONE divided by 30. The Performance Bonus Payment rate is calculated by spreading total charge revenues collected over the number of over

- performing MWh . As the Market Monitor notes, 286 the Non

Performance Charge rate could equal or exceed, but never be less than, the Performance Bonus Payment rate due to the existence of two exemptions from Non

- Performance

where the difference between the Balancing Ratio and the expected availability of the resource represents the resource’s expected exposure to Non

- Performance Charges or Performance Bonus Payments.

285 This is because the formulas behind the two rates are fundamentally different. While Non

- Performance Charges are based on the charge rate of Net CONE divided by 30, Performance Bonus Payments represent an over

- performing resource’s pro rata share of all Non

- Performance Charges collected.

286 Market Monitor February 25, 2015 answer, Appendix A at 4; and Market Mon itor March 27, 2015 answer at 7.Docket No. ER15

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Charges and the stop

- loss limit

. 287 However, we expect that the number of exemp ted MWh w ill be comparatively small. Exemptions w ill be granted for two categories of
resources. The first is resources that do not deliver energy because they are on a PJM

approved Generator P lanned O utage or Generator Maintenance Outage . We expect tha t PJM w ill not approve a significant number of generator outages during the peak periods of the year when Performance Assessment Hours are most likely to occur. The second is resources that do not deliver energy because PJM did not schedule them . We expe ct that during the emergency conditions that trigger Performance Assessment Hours, there w ill not be a significant number of MWh that PJM does not need to schedule. Since we expect that the number of exempted MWh w ill ordinarily be small during most Performance Assessment Hours, we expect that the Performance Bonus Payment rate will generally not be significantly less than the N on

- P erformance Charge rate. We also expect few resources to reach the annual stop

- loss limi t and note that we condition acceptance of PJM’s proposal in this order on removal of the monthly stop

- loss limit, further reducing the likelihood that the Performance Bonus Payment rate will be significantly lower than the Non

- Performance Charge rate. W e therefore find that the benefit of accepting this assumption, which allows for a simpler mechanism for capacity offer review and mitigation that adequately protects against the exercise of market power, outweighs any minor distortions.

344. Joint Consumers arg ue that PJM ’s change is not just and reasonable and the existing net Avoidable Cost Rate methodology establishes a just and reasonable evaluation of capacity sell offers within the Capacity Performance design. As we note above, we find that given the rede fined capacity product PJM proposes, it is reasonable to allow capacity sellers to factor into their offers the costs and risks associated with assuming the redefined capacity obligation. The existing net Avoidable Cost Rate methodology would not permit i nclusion of such costs and risks and thus could prevent capacity sellers from submitting legitimate, competitive offers. With respect to use of a default offer cap, we agree with PJM that if PJM and the Market Monitor were to instead evaluate all Capacity Performance sell offers on a unit

- specific basis using the competitive offer formula proposed by PJM in its Deficiency Letter Response, the

287 If no MWh are exempted from Non

- Performance Charges, the Performance Bonus Payment rate will equal the Non

- Performance Charge rate. That is because the number of under

- performing MWh will be the same as the number of ove r

- performing MWh, so total charge revenues will be adequate to pay over

- performers at the same rate of Net CONE divided by 30. However, if some resources are either exempt from Non

Performance Charges or have reached the stop

- loss limit, the number of ove r

- performing MWh will exceed the number of MWh deemed to be under

- performing, so total charge revenues will be insufficient to pay over

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outcome would be essentially the same. As PJM explains, for any Low ACR Resource, the competitive offer formula wi ll simplify to Net CONE times the Balancing Ratio as a permissible offer cap. High ACR Resources, which are those most likely to set the clearing price, will, under PJM’s Revised Offer Cap, be subject to unit

- specific offer review and must justify the ass umptions and estimates in their requested offer price. The unit

- specific review for all capacity offers w ill provide additional protections for
consumers. Therefore, we disagree with Joint Consumers that PJM’s proposal is unreasonable.

345. We are not persuad ed by Dominion’s argument that the proposal is unjust and unreasonable unless PJM modifies the default offer cap for Base Capacity. A default offer cap in large part serves to reduce the administrative burden on PJM, the Market Monitor, and market partici pants at offer prices that are clearly competitive. The absence of a new, Base Capacity

- specific default offer cap does not prevent resources offering as Base Capacity from justifying sell offer prices above their relevant technology

- specific default offe r caps through the unit

- specific Avoidable Cost Rate process. In addition, based on our finding infra , Base Capacity Resources may includ e in their offers quantifiable and reasonably

- supported risks of taking on a Base Capacity commitment

. 346. With respect to AEMA’s contention that the Revised Offer Cap may dissuade owners of large portfolios from making investments to improve the performance of their resources because doing so may lower clearing prices, we find this argument to be speculative and flawed. Fir st, AEMA’s argument applies only to High ACR Resources, for which PJM proposes a formula for determining the offer cap . The unit

- specific offer cap formula include s the resource’s Avoidable Cost Rate plus its expected Non

Performance Charges ( i.e. , PPR ti mes H times B

– A). 288 But for Low ACR Resources, for which the offer cap would be the default offer cap of Net CONE times B, the resource’s offer cap does not depend on its Avoidable Cost Rate or on its expected Non

Performance Charges. For a Low ACR Reso urce, expenditures to further improve its availability and reduce its Non

- Performance Charges c ould increase its profits without reduc ing its offer price. Thus, resources with low Avoidable Cost Rates would have strong incentives to further improve their availability.

347. Second, for High ACR Resources, where investing results in a lower net cost and a lower offer cap, AEMA’s argument assumes that the lower offer cap would reduce the capacity market price by the same amount. In AEMA’s example, a $3.00/MW

- da y reduction in the resource’s offer cap would reduce the capacity market price by

288 PPR = Performance Payment R ate = Net CONE/H; H = expected total number of Performance Assessment Hours in a delivery year = 30; and A � = expected availability of the resource across all Performance Assessment Hours in a delivery year.Docket No. ER15

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$3.00/MW

- day. This assumption presumes that the resource would remain marginal whether or not it undertook the investments. However, the slopes of large sections of the cap acity market supply curves have in the past been fairly flat. If the resource in question is located on a flat portion of the supply curve, the resulting cost reductions may remove it from its marginal position on the supply curve. That is, its costs and its offer price could fall by more than the fall in the capacity clearing price. In this case, the benefits to the resource resulting from its cost reductions may outweigh any reduction in the revenues received by its fleet resulting from lower capacity market prices. Moreover, AEMA’s argument applies only to the owner of the marginal resource, and, by definition, there is only one marginal resource in any Locational Deliverability Area that price

separates. AEMA’s argument, to the extent that it has an y merit, applies only to the owner of the resource that would be marginal whether or not it invests to improve availability, but not to any other owners. The owners of fleets of resources that do not include the marginal resource would have strong incenti ves to invest to improve their availability.

348. Lastly, the purpose of offer mitigation is to require that resources with market power submit offers consistent with how they would offer under fully competitive circumstances. As noted above , we find that PJ M’s competitive offer formula reasonably represents a rational seller’s competitive offer within the Capacity Performance market design . Similarly , we also find that mitigating the offer of a seller found to have market power to that estimated competitive level is just and reasonable.

349. AEMA , the Pennsylvania Commission, and Joint Consumers argue that Net CONE is not an appropriate clearing price or competitive offer because it is an administratively

- determined estimate and not necessarily refl ective of the actual cost of new entry. To the extent these commenters object to the Net CONE values used in RPM planning, we find these arguments beyond the scope of this proceeding. With regard to Net CONE representing a competitive offer, Net CONE, or a variant thereof, as discussed elsewhere in this order, is a proxy for a competitive outcome when such an outcome cannot otherwise be reasonably assured

. 350. Essential Power, Indicated Suppliers, and NRG/Dynegy object to PJM’s proposal to use a three

- year historical average in setting the Balancing Ratio for use in the Revised Offer Cap. NRG/Dynegy also opposes use of Locational Deliverability Area

- specific Ba lancing Ratios on the grounds that they will be more volatile than an RTO

- wide historical average Balancing Ratio. While there may be legitimate alternative methods for setting the Balancing Ratio, we find that using a three

- year historical average will p rovide a reasonable estimate of future Balancing Ratios. We acknowledge NRG/Dynegy’s argument that Locational Deliverability Area

- specific Balancing Ratios will experience greater volatility year to year, but we find that this possibility is outweighed by the benefit of using a Balancing Ratio that is more likely to accurately reflect the conditions during Performance Assessment Hours in each LocationalDocket No. ER15

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Deliverability Area. Accordingly, we accept PJM’s proposed method for setting the Balancing Ratio.

351. I n i ts comments, the Market Monitor propos es new buyer

- side mitigation
measures to prevent anticompetitive price suppression. Under its proposal, resources seeking to offer below the default Capacity Performance offer cap would have to seek a unit

- specific re view of their offers. PJM did not propose additional buyer

- side mitigation in its proposal and therefore this request is beyond the scope of the proceeding

. 352. Turning to PJM’s proposed modification to its Avoidable Cost Rate formula, we accept PJM’s propose d revisions to the formula to include Avoidable Fuel Availability Expenses and Capacity Performance Quantifiable Risk , subject to the condition described below

. W e generally find that the r evised Avoidable Cost Rate methodology will properly allow capacit y resources to reflect their estimates of capital costs needed to allow an existing generator to remain in service or improve peak

- hour availability or operating flexibility. With respect to PJM’s proposed definition of A voidable F uel A vailability E xpense s, intervenors claim that PJM’s definition should be expanded to include other fuel sources. We find such clarification is unnecessary given that PJM explains that while the definition includes examples pertaining to natural gas fuel security costs, such examples are not meant to define the universe of allowable costs but rather to explicitly note that these costs are allowed given that the Market Monitor previously determined such costs could not be included. We find that the definition is sufficiently
e xpansive to apply to other fuel costs and as such is not limited to natural gas supply costs. We find it reasonable that resources are able to reflect fuel security costs as the availability of fuel is an integral component of resource performance.

353. PJM no tes that the proposed allowance for a Capacity Performance Quantifiable Risk is intended to explicitly allow suppliers to include in their offers risks that can be quantified and that are not already reflected in the formula. W e agree that the Avoidable Cost Rate calculation should reflect the cost of becoming a capacity resource under the new capacity market construct and that, f or some resources, the overall physical and capital expenditures required to ensure performance during emergency operations are extensive, presenting additional costs which are not currently reflected in the Avoidable Cost Rate calculation. However, we find that PJM’s proposed definition of Performance Quantifiable Risk may be insufficiently narrow to permit resource s to include quantifiable and reasonably

- supported risks in their Avoidable Cost Rate. Further, we agree with Dominion that the ability to submit risk premiums should be afforded to Base Capacity R esources as well

. Within the new market design, Base Capacity R esource s face enhanced performance requirements , and it is reasonable to afford such resources an opportunity to reflect the risks associated with the new compliance obligations in their sell offers

. We therefore accept PJM’s proposed inclusion of a quantifiable risk component of the Avoidable Cost Rate formula, subject to the condition that PJM clarify that both Capacity Performance Resources and Base Capacity ResourcesDocket No. ER15

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will be permitted to include quantifiable and reasonably

- supported risks in their Avoidable C ost Rate

. 354. We next address PJM’s proposal to apply the must

- offer requirement to prospective and established Capacity Performance Resources. We accept PJM’s proposal, subject to the modifications discussed below. The use of a must

- offer requirement is b oth consistent with established capacity market practice and necessary to safeguard against manipulation in the PJM capacity market. We are not persuaded by the PJM Utilities Coalition’s argument that such a requirement forces resources to make capital in vestments without a reasonable opportunity for a return. To the contrary, we find that PJM’s proposal as modified would allow resources the flexibility to weigh the risk of incurring penalties against the cost of additional investment and to reflect the
r esource owner’s desired balance in its capacity offer. Resources that are physically capable of becoming capacity performance but whose costs of doing so would be prohibitive are expected to reflect such costs in their offers. Typically, such resources sh ould either not clear as a Capacity Performance Resource or, if their capacity is required, should be compensated for the cost of the necessary investments. Accordingly, we find that applying the must

- offer requirement coupled with the revised Avoidable C ost Rate formula discussed above will allow Capacity Performance Resources a reasonable opportunity to recover appropriate associated costs and w ill not constitute a taking.

355. PJM proposes two mechanisms through which a resource would not be subject to the Capacity Performance must

- offer requirement. First, Intermittent Resources, Capacity Storage Resources, Demand Resources, and Energy Efficiency Resources will be categorically exempt from the Capacity Performance must

- offer requirement on the grounds that they do not raise the same physical withholding concerns as do existing generation resources because their ownership is not concentrated. Second, using the proposed must

- offer exception process, an individual resource may seek an exception if it demonstr ates that it is reasonably expected to be physically incapable of satisfying the requirements of a Capacity Performance Resource for the delivery year. In the context of the PJM market, we find that these proposed mechanisms are reasonable and sufficientl y narrow to prevent withholding. Regarding Brookfield’s argument that Capacity Storage Resources should also be exempt from PJM’s Base Capacity must

- offer requirement, we interpret PJM’s proposal to apply the existing capacity market must

- offer requiremen ts and exemptions to Base Capacity Resources for delivery years 2018

- 20 19 and 2019

- 20 20. In other words, resources currently subject to the capacity market must

- offer requirement that will not be subject to the new Capacity Performance must

- offer requirem ent will be required to offer as Base Capacity. We find this application to be reasonable given the limited Non

- Performance Charge exposure for Base Capacity Resources.Docket No. ER15

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356. However, we are not persuaded that PJM’s proposal to exempt Planned Generation Capaci ty Resources from the capacity market must

- offer requirement until they become operational is appropriate

. PJM proposes to exempt such resources by altering the definitions of E xisting Generation Capacity Resource, Planned Generation Capacity Resource, an d Planned External Capacity Resource such that a resource will not be considered an existing resource, and therefore subject to the capacity market must

offer requirement, until such time as it achieves full commercial operation and interconnection service has commenced. 289 We are not persuaded by PJM’s concerns that continuing to apply the must

- offer requirement to p lanned r esources that have cleared at least one RPM auction would act as a barrier to entry. In addition, we are concerned that b y clearing an RPM auction with a planned resource but not following through on its construction in a timely manner, a seller c ould effectively withhold capacity and deter a new entrant from taking its place. Regarding PJM’s expressed concerns about subjecting resour ces in question to the must

- offer requirement, we note that PJM’s current provisions allow for a resource that likely will not become operational as planned to seek an exception to the must

- offer requirement. 290 We thus accept PJM’s proposal subject to the condition that PJM remove the revisions proposed in RAA Article 1, Definition 1.20B Existing Generation Capacity Resource; RAA Definitions 1.69 and 1.70; and PJM OATT at Attachment DD, section 6.5.

357. Dominion argues that for delivery years 2018

- 20 19 and 2019

- 20 20, any portion of a resource’s capacity that it offers as Base Capacity should be exe m pt from the Capacity Performance must

- offer requirement. Dominion provides an example of a hypothetical combined

- cycle unit which can only acquire firm natural gas t ransportation for a portion of its total capacity, and thus can only provide a portion of its capacity as Capacity Performance. Dominion argues that the generator might want to split its offer between Capacity Performance and Base Capacity in this circums tance, but states that PJM’s proposal does not allow for such an offer. However, to the extent a resource cannot make the physical adjustments necessary to become a Capacity Performance Resource, it may seek an exception from PJM’s Capacity Performance mu st

- offer requirement. We find that it is appropriate that PJM have the opportunity to approve such requests, since allowing a resource to split its offer creates an opportunity for economic withholding. To the extent that a resource may find it too expen sive to invest in necessary changes, the

289 See proposed RAA at sections 1.20B (defining an Existing Generation Capacity Resource), 1.70 (defining a Planned Generation Capacity Resource), and 1.69 (defining a Planned External Generation Capacity Resource)

. The current definition of Existing Generation Capacity Resource includes resources not ye t in service, but which have cleared an RPM Auction.

290 See PJM OATT at Attachment DD, section 6.6(g)D.Docket No. ER15

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resource can submit a coupled offer with the costs of any necessary investments reflected in the resource’s Capacity Performance offer.
358. Finally, regarding the Market Monitor’s observation that PJM’s reliance on unforced capacity could allow resources to withhold capacity, 291 we do not find that such
a concern renders PJM’s instant proposal not just and reasonable . The Market Monitor suggest s that PJM should adopt ISO

- NE’s market design wherein ISO

- NE uses
resource s’ installed capacity values to define the demand for capacity and to define the required performance of its capacity market resources. The Market Monitor contends that the use of unforced capacity could allow a supplier with a large portfolio to reduce i ts available capacity from some of its resources to result in a higher clearing price for the entire portfolio. Alternatively, the Market Monitor suggests that a supplier with a large portfolio could also reduce unforced capacity available from some of it s resources to retain a hedge against unexpected outages on other units. We appreciate the concern of the Market Monitor but think that the likelihood of such a strategy is mitigated by a resource deliberately forgo ing considerable energy revenue in the h opes that the withholding strategy and any additional performance payments during Emergency Action s would outweigh the forgone energy revenue. T he Market Monitor has the ability to closely observe market participant behavior and take the appropriate actions if such strategies are employed, including, but not limited to, working with PJM to devise an alternative mitigation mechanism.

G. Credit Requirements

359. PJM’s existing credit requirements address the risk s generally attributable to the forward commitment of capacity in PJM’s capacity auctions, including specific credit requirements for planned resources. PJM currently requires a capacity market seller submitting a sell offer to satisfy a credit requiremen t equal to the MW offered times an Auction Credit Rate. The Auction Credit Rate is based on : (i) the expected final per

MW price to be paid to capacity resources in the relevant delivery year ; and (ii) the seller’s possible deficiency charge exposure, as based on its “net charge exposure,” i.e

. , on that portion of its payment obligation that would not be covered by its capacity
revenues.
360. According to PJM’s existing tariff, the Auction Credit Rate for these sellers will be the greater of : (i) 0.3 times th e Net CONE for the relevant delivery year; or (ii) $20 / MW

- day times the number of day s in that delivery year. 292 With respect to the period following the posting of the Base Residual Auction results, the PJM tariff defines

291 Market Monitor comment s at 14.

292 See PJM’s OATT at Attachment Q, section IV.D.a(i).Docket No. ER15

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the Auction Credit Ra te as the number of the days in the delivery year times the greater of : (i) $20 / MW

- day ; or (ii) 0.2 times the capacity resource clearing price , in MW

- day. 293

361. Additionally, PJM’s rules recognize that the risk of non

- performance is higher for a resource that does not exist at the time that the corresponding commitment for that resource is made. 294 PJM requires market sellers offering capacity resources “for which there is a materially increased risk of non

- performance” to comply with certain credit support requ irements both prior to the posting of Base Residual Auction results, defined as Pre

- Auction Security Requirement, and after the posting of Base Residual Auction results, defined as Post

- Auction Security Requirement. The Current Post

- Auction Security Requi rement is based on the capacity resource clearing price, not Net CONE. Accordingly, PJM’s rules require a seller submitting an offer for a planned resource to satisfy a credit requirement equal to the MW offered times the Auction Credit Rate. 295

362. PJM states that, absent revision, the Auction Credit Rate (and the “net charge exposure” input on which it is based) will increase only for Capacity Performance Resources, which will face Non

- Performance Charges as high as the annual stop

- loss limit of 1.5 times Net CONE times all of the resource’s committed capacity, with the capacity clearing price, in most cases, falling below 1.5 times Net CONE.
1. PJM’s Proposal

363. PJM proposes to revise the Auction Credit Rate for sellers seeking to submit offers for a Capacity Perfor mance Resource. PJM states that, under its proposal, the Auction Credit Rate for these sellers will be the greater of : (i) 0.5 times the Net CONE for the relevant delivery year; or (ii) $20 /MW

- day times the number of day s in that delivery year. 296

364. PJM note s that, because the clearing price cannot be known before a Base Residual Auction is held, the net charge exposure input to its Auction Credit Rate is also

293 Id. at Attachment Q, section IV.D.b(i).

294 See PJM OATT at Attachment Q, section IV (providing that a resource that clears but then fails to perform, when called upon, may be subject to one or more deficiency, or non

- performance, charges). Resources subject to this additional credit requirement includ e Planned Generation Capacity Resources, Planned Demand Resources or Energy Efficiency Resources, and Qualifying Transmission Upgrades.

295 PJM OATT at Attachment Q, section IV.B.

296 Proposed OATT at Attachment Q, section IV.D.a(ii).Docket No. ER15

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an unknown and must be estimated. Accordingly, PJM proposes to establish a proxy clearing price, fo r this purpose, at Net CONE. PJM asserts that, with a Net CONE clearing price, and potential Non

- Performance Charge exposure of up to 1.5 times Net CONE, an Auction Credit Rate of 0.5 times New CONE is reasonable for Capacity Performance Resources offering into PJM’s Base Residual Auction. PJM adds that the $20 /MW

- day minimum Auction Credit Rate is the same minimum rate used for all other provisions of the capacity market credit requirement.
365. With respect to the period following the posting of the B ase Residual Auction results, PJM proposes that the Auction Credit Rate for Capacity Performance Resources be the number of the days in the delivery year times the greater of : (i) $20 /MW

- day; or (ii) 0.2 times the capacity resource clearing price , in MW

- d ay ; or (iii) the lesser of 0.5 times Net CONE, or 1.5 times Net CONE (stated on an installed capacity basis) minus the applicable capacity resource clearing price for the resource, in MW

- day

. 297 With respect to a Capacity Performance Resource that ha s not previously been committed for a delivery year and that a seller seeks to offer in an Incremental Auction, PJM proposes that the Auction Credit Rate will be greater of : (i) 0.5 times Net CONE; or (ii) $20 /MW

- day , times the number of days in such d elivery year. 298

366. Finally, with respect to Capacity Performance Resources committed in the Incremental Auction, PJM proposes to calculate the applicable credit requirements by using the same standard that applies to resources committed in the Base Residual Au ction, subject to the use of the Incremental Auction clearing price in place of the Base Residual Auction clearing price. According to PJM’s proposed tariff, the Auction Credit Rate for these sellers will be the number of days in that delivery year times the greater of : ( i ) 0.2 times the Incremental Auction clearing price for the relevant delivery year or $20/ MW

- day; or ( ii ) the lesser of .5 times the Net CONE for the relevant delivery year, or 1.5 times Net CONE for the relevant delivery year minus the Incremental Auction clearing price. 299

367. PJM proposes to require planned resources to provide greater financial security until their respective in

- service dates. Prior to posting the results of a particular Base Residual Auction, planned resources are curren tly required to provide, as financial security, credit support equal to the greater of : (i) 0.3 times the Net CONE ; or (ii) $20/MW

- day. 300 Under PJM’s proposal, f ollowing posting of the Base Residual

297 Proposed OATT at Attachment Q, section IV.D.b(ii).

298 Proposed OATT at Attachment Q, section IV.D.c(ii).

299 Proposed OATT at Attachment Q, section IV.D.d(ii).

300 Proposed OATT at Attachment Q, section IV.D.Docket No. ER15

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Auction results, planned resources that cle ared the Capacity Performance auction would be required to provide credit support equal to the greater of : (i) 0.2 times the Base Residual Auction clearing price for the Locational Deliverability Area withi n which the resource is located; (ii) $20/MW

- day; and (iii) the lesser of (a) 0.5 times Net CONE and (b) 1.5 times Net CONE minus the Base Residual Auction clearing price for the Locational Deliverability Area within which the resource is located. 301

368. In support of its proposal, PJM suggests that planned r esources require more collateral to provide reasonable assurance that a capacity market seller can satisfy the potentially substantially higher payments associated with the Capacity Performance Resource product. 302

2. Protests and Comments

369. Coalition of Resource Projects protests PJM’s proposal to modify its existing credit requirements, asserting that stakeholders were not given the opportunity to review or comment on the revised credit provisions during the stakeholder process. Coalition of Resource Projects a rgues that PJM’s proposal to use Net CONE as the basis for the pre

auction and post

- auction security requirements, rather than basing the requirements on exposure, will ultimately require resources to obtain collateral in excess of their maximum penalty ex posure. Coalition of Resource Projects contends that PJM should instead revise the credit requirements to reflect resources’ capacity revenues and the amount of the potential penalty above the capacity revenue, i.e. , the risks associated with the proposed non

- performance requirements.
370. Invenergy similarly asserts that that the credit requirements should reasonably reflect the difference between the annual stop

- loss limit and a resource’s capacity revenue. Invenery argues, however, that, given its recomme ndation to adjust the stop

loss provision to reflect annual capacity revenues, the credit requirements should accordingly be revised to cover the different between annual capacity revenues and risk exposure.
371. EMC protests that PJM’s proposal is unduly discr iminatory, because it increases the credit requirements for some suppliers but not others without sufficient justification. EMC explains that, energy efficiency resources are disproportionately affected by the new requirements, because PJM considers them to be planned for three quarters of their lifetime. EMC argues that, contrary PJM’s assertions, planned resources do not create such a significant risk of incurring performance penalties, especially when the primary

301 Proposed OATT at Attachment Q, section IV.D.

302 PJM transmittal at 72 (Docket No. ER15

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justification for the ensure suite of m arket reforms is non

- performance by existing generation. EMC adds that increasing credit requirements on energy efficiency resources will unreasonably increase costs to load with no corresponding benefit, because the proposal will reduce the quantity and increase the cost of energy efficiency offers into the capacity market.
372. Panda, in its answer, objects to PJM’s proposed revision to its existing credit requirements on the grounds that Panda, in planning for the development of an existing project, relied o n PJM’s existing provisions. Panda further asserts that PJM’s revisions should not apply to projects that have an executed Interconnection Study Agreement and are fully project

- financed prior to the 2015 Base Residual Auction, given that the risk of
non

- p erformance for the relevant delivery year ( i.e. , the 2018

- 19 delivery year) is negligible.
373. Panda also requests that PJM be directed to tie its credit requirements for financed resources and planned resources to specific milestones, including a certificat ion that the project is, in fact, fully financed, or that full funding is available, prior to the commencement of the Base Residual Auction, and other standard milestones that would allow the security requirement to be reduced as the project nears a timely in

- service date.
3. PJM’s Answer

374. In its answer, PJM agrees with Coalition of Resource Projects, noting that the credit requirements will increase for planned resources under the proposal. PJM suggests that its proposal correctly defines a resource ’ s exposur e to Non

- Performance Charge s. However, PJM proposes to modify the proposed credit requirements to utilize Net CONE for the relevant Locational Deliverability Area in the credit calculations, where applicable, rather than Net CONE for the PJM region. PJM indicates that it will make this change in a compliance filing, subject to the Commission so directing.
375. PJM refutes EMC’s implication that the new credit provisions treat energy efficiency resources differently from other resource types. PJM notes that w hile the credit requirement for planned Capacity Performance Resources is higher than the current credit requirement for planned resources offering into the capacity auctions, the increased credit requirement applies equally to all resource types. PJM con tends that an enhanced credit requirement is reasonable for planned resources because a resource that does not exist when it clears a Base Residual Auction presents a materially greater risk of non

performance than an existing resource.
376. PJM adds that enha nced credit requirements for planned resources are also justified, in part, on a greater potential exposure to Non

- Performance Charges. PJM argues that, if a planned resource is not completed, there is a 100 percent risk that the resource will fail to per form when called on during the delivery year , requiring PJM toDocket No. ER15

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find other resources. PJM also suggests that its pre

- auction credit requirements are consistent with Commission precedent. 303

377. PJM states that, in principle, it sees merit in Panda’s suggested m odifications to the proposed credit requirements for planned resources and financed resources, i.e

. , projects that have an executed Interconnection Study Agreement and are fully project

financed prior to the 2015 Base Residual Auction. PJM states that it is willing to modify the proposed credit requirements for such resources, in accordance with Panda’s suggestions, to allow the security requirement to be reduced as the project nears a timely in

- service date. PJM adds that, should the Commission direct it to revise the credit requirements for planned resources and financed resources, it should also require such resources to provide an independent engineer’s certification that each relevant milestone has been achieved.
4. Commission Determination

378. As discussed below, we find that PJM’s proposed revisions, as modified herein, to increase the credit requirements commensurate with Capacity Performance Resources’ increased risk of financial exposure are just and reasonable. Accordingly, we accept the proposal subject to PJM modifying the proposed tariff revisions consistent with the discussion below

. 379. As PJM explains, the proposed security deposit is designed to ensure that PJM is made whole if a resource fails to honor its contract to provide c apacity in a given delivery year. Pursuant to PJM’s proposal, PJM calculates the required deposit amount based on its assessment of the funds it will need to procure new capacity, possibly on very short notice, if a resource fails to honor its capacity co mmitment. Accordingly, should the resource fulfill its commitments, PJM will return the required collateral to the resource. PJM’s proposal reasonably balances the interests of market participants by not raising costs to an unreasonable amount while stil l protecting the markets and their participants from unacceptable defaults. We thus find this aspect of PJM’s proposal just and reasonable.
380. We disagree with EMC’s assertion that PJM’s proposal unduly discriminates against energy efficiency resources and thus deny the request for modification. As PJM notes in its answer, the increased credit requirement applies equally to all resource types and EMC has not persuaded us that the risks energy efficiency resources face, as planned resources, are significant ly less than the risks faced by other resources types.

303 PJM answer at 99 (Docket No. ER15

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381. We also disagree with intervenors’ assertions that it is unreasonable for PJM to determine a resource’s riskiness based on Net CONE, rather than the difference between the resource’s potential penalty exposure and its capacity market revenues. We find that Net CONE is a reasonable proxy for quantifying the obligations that a market seller undertakes, and thus the overall risk posed to the capacity market. Under these proposed rules, a seller that offe rs a planned resource as a Capacity Performance Resource will now face financial consequences (in the form of Non

- Performance Charges) for failure to deliver its resource that are potentially much higher than the consequences such a resource would face und er the existing rules.
382. While we find that PJM has demonstrated that t he risk of non

- performance is higher for resources that do not exist at the time a seller submits an offer committing to deliver that resource in three years, PJM’s proposal fails to rec ognize changes in the risk a market seller faces as it transitions through various stages of development towards commercial operation. We note that PJM has committed to modifying its proposal to reflect the differences in credit requirements for financed resources and planned resources. Accordingly, we accept PJM’s proposal subject to the condition that PJM modify the proposed credit requirements for planned resources and financed resources, in accordance with Panda’s suggestions, to allow the security re quirement to be reduced as the project nears a timely in

- service date

. 383. We similarly recognize that PJM has committed to modify the proposed credit requirements to utilize Net CONE for the relevant Locational Deliverability Area in the credit calculations, where applicable, rather than Net CONE for the PJM Region. As indicated above, without such revisions, PJM’s proposal is unjust and unreasonable, because the amount of security required under the credit provisions should increase and decrease commensurate with the associated risk. Accordingly, we accept PJM’s proposal subject to the condition that PJM revis e the proposed credit requirements as necessary to recognize Locational Deliverability Area

- specific Net CONE values in determining a market seller’s A uction Credit Rate.

H. Short

- Term Resource Procurement

384. Under PJM’s existing rules, the amount of capacity PJM is required to procure in its Base Residual Auction is reduced by 2.5 percent, for the purpose of procuring this set

aside capacity, or holdback, o ver the over the course of PJM’s three Incremental Auctions, i.e. , on a date that is closer in time to the relevant deliver year. The 2.5 percent holdback requirement was implemented by PJM, in 2009, to ensure participation in PJM’s capacity market by sho rt

- lead time resources. 304

304 See PJM Interconnection, L.L.C. , 126 FERC ¶ 61,275 at PP 68, 83

- 85 (2009)

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1. PJM’s Proposal

385. PJM proposes to eliminate the 2.5 percent holdback, as unnecessary, to become effective as of the 2018

- 19 delivery year. 305 PJM asserts that the longer

- lead time associated with its Base Residual Auction has not im peded participation by short

- lead time resources, including Demand Resource s, energy efficiency resources, uprated generation resources, and external resources. PJM also argues that the 2.5 percent holdback warrants elimination, given that it withholds de mand and thus operates to suppress market clearing prices in PJM’s Base Residual Auction.
2. Protests and Comments

386. Intervenors object to PJM’s proposal, citing the role that PJM’s holdback has played in partially mitigating the effects of using an overstated load forecast in the Base Residual Auction. Joint Consumers argue that, since the inception of PJM’s capacity auctions, PJM’s load forecast, as of the date of the Base Residual Auction, has been overstated, on average, by 6.25 percent.
387. Intervenors also assert that maintaining (or even increasing) the holdback is necessary to protect customers from the increased costs associated with systemic over

procurement. Rockland and Allegheny add that PJM has not shown how eliminating the holdback is a necessary component of PJM’s Capacity Performance proposal or is otherwise required at this time. The Ohio Commission similarly argues that PJM should retain the 2.5 percent holdback, because it has not demonstrated that its forecasting changes for the upcoming Ba se Residual Auction will provide better results.
388. The Illinois Commission argues that the three

- year forward nature of PJM’s capacity construct requires some mechanism to ameliorate the impact of an over

- forecast of PJM’s reliability requirements. The P ennsylvania Commission adds that PJM’s holdback continues to be necessary to enable Demand Resource s to participate effectively in PJM’s capacity market. OPSI and the Illinois Commission similarly argue that the holdback provides an opportunity for short

- term resources to participate in PJM’s capacity markets, including demand reduction plans.
389. Intervenors also challenge PJM’s claim that the 2.5 percent holdback suppresses market clearing prices. Public Interest Organizations argue that additional over

pro curement in the Base Residual Auction (as attributable to the elimination of the holdback) would itself increase costs. The Pennsylvania Commission adds that, while the elimination of the holdback may cause a temporary increase in market clearing prices,

305 See proposed OATT at Attachment DD, sections 2.69A, 5.4(c)(2)(i), 5.10(a), and 5.12(a) and (b).Docket No. ER15

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under certain circumstances, the net price impact of requiring demand response to bid into the Base Residual Auction may well be zero. Finally, the Illinois Commission contends that PJM’s holdback proposal is unrelated to Capacity Performance.
3. PJM’s Answ er
390. PJM, in its answer, responds to intervenors’ argument that the holdback should be retained to accommodate short lead

- time resources. PJM argues that, based on the results of recent Base Residual Auctions, participation by Demand Resource s has grown to an extent that, last year, required PJM to impose limits on the quantities of sub

- annual Demand Resources and Energy Efficiency Resources that may clear in PJM’s capacity auctions. 306 PJM adds that the fact that the holdback has artificially suppressed clea ring prices in Base Residual Auctions remains unchallenged. PJM also responds to intervenors’ assertion that the holdback is necessary to mitigate load forecasting inaccuracies. PJM argues that it has improved its load forecasts. PJM argues that, regard less, any past over

- statements do not, of themselves, justify maintaining the holdback.
4. Additional Answers

391. The PJM Utilities Coalition and Exelon, in their answers, respond to Joint Consumers’ argument that PJM’s holdback should be retained, given that PJ M’s load forecasts have been historically overstated. The PJM Utilities Coalition asserts that PJM’s holdback was designed, not as a load

- forecasting mechanism, but to foster the participation of short

- lead time resources, a purpose for which it is no lon ger needed. Exelon argues that to the extent these forecasts have been overstated the appropriate solution is not to retain the holdback but to adjust the load forecast methodology, as PJM, in fact, has done in its 2015 forecast. 307

392. Joint Protestors, in the ir answer, acknowledge the robust participation by Demand Resource s in PJM’s Base Residual Auctions, but assert that these resources represent only one of four such short lead

- time resources that is the focus of PJM’s existing holdback policy. Joint Prote stors add that PJM has not shown that elimination of the holdback will materially affect Base Residual Auction clearing prices.

306 PJM answer at 102

- 103 (citing PJM Interconnection, L.L.C. , 146 FERC ¶ 61,052 (2014)).

307 See Exelon answer at 33 (citing PJM Interconnection, L .L.C., “PJM Load Forecast Report: January 2015” (Dec. 30, 2014) at 1).Docket No. ER15

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393. The Maryland Commission requests the Commission reject PJM’s proposed elimination of the 2.5 percent holdback because it is proposed solely to increase market prices, and will not improve reliability. The Maryland Commission suggests that PJM’s load forecasting on av erage over the past five years has averaged approximately 6 percent above actual delivery year load levels. Maryland Commission contends that an excessive load forecast results directly and improperly in higher prices to end users as demand in the demand/ supply auction balance is improperly inflated by the overstatement, which causes a $2.4 billion RPM revenue increase. Maryland Commission urges retention of the holdback as necessary to achieve just and reasonable pricing for end users until PJM demonstra tes that it has corrected this practice. 308

5. Commission Determination

394. For the reasons discussed below, we accept PJM’s proposed elimination of its existing capacity holdback provision, to be made effective for the Base Residual Auction for delivery ye ar 2018

- 19. PJM’s capacity market is a three

- year forward market and, under this existing design, we do not find unjust and unreasonable the application of the same rules to all resources. While PJM sought to accommodate short

- term resource procurement, as of the establishment of its market, PJM is not obligated to propose to retain this provision. Moreover, PJM contends that elimination of this provision will help promote reliability by ensuring that PJM has obtained committed capacity and is not relian t on short

- term procurement. Given the purpose and nature of PJM’s Capacity Performance proposal, we concur.
395. PJM’s existing requirement reduces, by 2.5 percent, the amount of capacity PJM is required to procure in its Base Residual Auction and requires th at this capacity be procured at a later date in PJM’s Incremental Auctions. PJM implemented this requirement in 2009 to ensure that short

- lead time resources would be permitted to participate in PJM’s capacity market. 309 PJM asserts in its filing, however , and we agree, that the three

- year lead time element associated with PJM’s annual May capacity auctions has not impeded the ability of most resources (including demand response, energy efficiency, generation uprates, or external resources) to participate in these auctions. PJM further relies on the findings made by the Market Monitor that PJM’s existing holdback, by withholding demand from the Base Residual Auction, operates to suppress market clearing prices.
396. Joint Consumers assert that PJM’s holdback should be retained because it mitigates the effects of overstated load forecasts. However, we are not persuaded that a

308 Maryland Commission comments to PJM Deficiency Letter Response at 9

- 10.

309 PJM Interconnection, L.L.C. , 126 FERC ¶ 61, 275 (2009) at P 83

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holdback requirement is necessary to address load forecast errors, or that the historical
ove rstatements experien ced to date are unavoidable or likely to recur at a level that requires mitigation. In fact, PJM’s stakeholders have discussed these issues, including proposed modeling changes, with load forecast adjustments recently adopted by PJM. 310

397. The Pennsylvania Commission argues that PJM’s holdback requirement is necessary to incent additional Demand Resources to participate in PJM’s capacity market. However, we are not persuaded that PJM’s elimination of its holdback requirement will unduly impede the ability of Demand Resources to participate in PJM’s capacity market . We also are not convinced that the benefit of any incremental Demand Resource participation resulting from retaining the holdback requirement will necessarily outweigh the eco nomic efficiency benefit of no longer withholding demand from the Base Residual Auction , an action that can suppress market clearing prices.

398. We also disagree with the Maryland Commission ’s request to reject the elimination of the 2.5 percent holdback on the grounds that it is proposed solely to increase market prices and will not improve reliability. As stated above, the elimination of this provision will help ensur e that PJM has obtained committed capacity.

399. Finally, we are not persuaded by Allegheny’ s argument that PJM’s proposed elimination of its holdback requirement should be rejected on the grounds that it is unrelated to the problem that PJM purports to address in its Capacity Performance proposal. PJM has the authority to file revisions to its tariff under section 205 of the FPA and must demonstrate that the change is just and reasonable . PJM has met that burden here.

V. Energy Market Revisions

400. For the reasons discussed below, we grant, in part, and deny, in part, PJM’s complaint in its Energy Ma rket Filing and direct PJM to submit a compliance filing within 30 days of the date of this order. W e agree with PJM that given the changes we are accepting to its capacity market provisions, its existing energy market rules with respect to operating para meters, force majeure, and generator outages are unjust and unreasonable and must be revised

. We accept PJM’s proposed revisions to rules related to force majeure and generator outages, accept , in part , and reject , in part , PJM’s proposed revisions to rul es related to operating parameters, and direct further modifications to the operating parameters rules , consistent with the discussion below , to be submitted in the a forementioned compliance filing . Lastly, we find that PJM has not

310 See PJM Interconnection, L.L.C., Load Analysis Subcommittee report, available at: www.pjm.com/committees

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demonstrated that its rules related to Maximum Emergency Offers are unjust and unreasonable and therefore deny this aspect of PJM’s complaint

. A. Operating Parameters

401. PJM states that the operatin g parameters of individual generation resources can limit PJM’s flexibility in schedu ling and dispatching resources on a day

- ahead and real

time basis. 311 PJM argues that the current energy market rules allow market sellers in certain circumstances to condition their day

- ahead energy market offers on acceptance of parameter limitations that extend beyond the operating design characteristics of their specific resources and include economic or budgetary concerns. PJM asserts that, when operating its system during the adverse weather conditions of January 2014, PJM was required to dispatch gen eration that was relatively inflexible, and was further required to keep these resources online during uneconomic period s in order for them to be available during peak demand hours. PJM states that the ability for resources to be flexible throughout an op erating day is integral to efficiently dispatching the system and minimizing uplift, especially during winter peaks.
1. PJM’s Proposal

402. PJM proposes to clarify that a capacity market seller will be required to limit its energy offer output parameters to its pre

- determined limits on cost

- based offers, including limiting its offer parameters for market

- based offers as provided under PJM’s existing rules. 312 Specifically, PJM proposes to require market

- based offers for capacity resources to be parameter limited, i.e. , based on the specific physical characteristics of that resource, rather than based on economic and budgetary considerations, under circumstances that would typically precede an emergency event. PJM further proposes to clarify that, if a resource can not actually be operated within these more flexible parameters, then it must inform PJM of the parameters to which it is capable of being

311 PJM notes, for example, that a generator relying on natural gas as its fuel source may have the need for early com mitment to ensure deliverability, days ahead of PJM’s day

- ahead market. In addition, PJM states that resources may submit scheduling criteria that includes 24

- hour, or multi

- day gas commitment requirements, or the purchase of gas for an entire weekend to operate for only a few hours. PJM further notes that these generation resources may become subject to natural gas pipeline operational flow orders ( e.g. , an order requiring the generator to take natural gas in even, incremental amounts over a 24

- hour natu ral gas day), forcing generators to run during periods when they traditionally would be uneconomic.

312 See proposed Operating Agreement at Schedule 1, section 6.6 and the proposed parallel provision of the PJM OATT.Docket No. ER15

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operated. However, any operation outside of the more flexible parameter limited values will be considered inconsisten t with PJM’s direction. If PJM dispatches the resource only within its unit

- specific physical parameter limits, costs that are not recovered as a result of operation outside of the more flexible parameter limited values would not be eligible for make

- whol e payments. Make

- whole payments will be made to a resource only to the extent that the resource’s operation is based on the more flexible parameter limited values. 313

403. PJM also proposes to establish a standardized start

- up and notification time of 24 ho urs, or less, for Capacity Performance Resources bidding into PJM’s energy markets, absent the issuance of a hot or cold weather alert. PJM states that when a weather alert has been issued, the combined notice and start

- up time would not be permitted to e xceed 14 hours.
2. Protests and Comments

404. Comments generally supportive of PJM’s proposal were filed by the Market Monitor, NGSA, and Exelon. The Market Monitor argues that, to properly protect the market from the exercise of market power and manipulation, it is essential to ensure that resources cannot avoid their performance obligations by the use of parameters and essential that the ability to perform is not tied to greater energy costs.
405. Some intervenors protest that PJM’s proposal to apply parameter limite d schedules to market

- based offers is an unjust and unreasonable step towards eliminating market

based energy offers altogether. Dominion argues that PJM has not demonstrated that the relevant existing provisions of the Operating Agreement a re unjust and unreasonable. Dominion argues that adopting the stringent operating parameters in PJM’s proposal could force less flexible units out of the market and threaten future reliability by undermining efforts to promote and maintain fuel diversity. The PJM Util ities Coalition and Joint Protestors assert that PJM’s proposal creates unreasonable and immitigable risk for market sellers, by restricting their ability to reflect operational considerations in their energy market offers. Specifically, Joint Protestors argue that PJM’s proposal provides PJM and the Market Monitor overly broad discretion in determining a unit’s “operating

313 The resource would be eligible for make

- whole payments to the extent that PJM dispatches the resource outside of the parameter limits. For example, suppose that a resource’s minimum run time based on its physical characteristics is four hours, but the resource faces a 24

- hour ratable take requirement from its natural gas pipeline supplier that requires it to run at a constant rate for 24 hours. Under PJM’s proposal, if PJM dispatches the resource to operate for 24 hours, the resource will be eligible for make

whole payments for the entire 24 hours. However, if PJM dispatches the resource for 4 hours, it will not be eligible for make

- whole payments from hour 4 to 24.Docket No. ER15

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design characteristics” without any indication how those determinations will be made. 314 They state that the effect will be that generat ors will be held to perform notwithstanding operational constraints that may not be reflected in the parameter limitations determined by PJM.
406. Joint Protestors argue that PJM’s proposal evidences a “clear misunderstanding of pipeline operational issues,” be cause it shifts to resources the risk of operational constraints outside of their control. LS Power argues that it is unjust and unreasonable to determine minimum standards based on a resource’s physically achievable operating design characteristics, beca use a unit may “not be able to achieve its maximal performance in adverse weather conditions” or may be subject to greater stress if consistently asked to perform at the “outer limits” of its physically achievable operating design characteristics. PSEG si milarly asserts that theoretical operating parameters based on the unit’s original design or capabilities may not provide a fair indication of its current physical characteristics, particularly in the case of older units.
407. Some intervenors object to PJM’s p roposal to establish a standardized start

- up and notification time for capacity resources bidding into PJM’s energy market. The PJM Utilities Coalition argues that PJM’s proposal is a one

- size

- fits

- all approach that is based on unilateral market design ch oices, rather than physical and operational considerations. The PJM Utilities Coalition characterize this approach as unduly discriminatory by failing to account for : (i) the diversity of assets needed for long

- term reliability; or (ii) the costs a ssociated with operating certain classes of generation assets. 315

408. The PJM Utilities Coalition adds that, by asking generators to absorb the cost of meeting arbitrary deadlines that they are incapable of meeting, PJM’s rules may be confiscatory, in violatio n of the Takings Clause of the U.S. Constitution. 316 Joint Protestors argue that PJM’s proposed start

- up and notification times are “at odds with fundamental natural gas nomination and scheduling” practices and present particularly high risk, and potentially confiscatory costs, for combustion turbines that might operate only a few days each year. Rockland adds that PJM’s standardized start

- up and notification time limits discriminate against natural gas

- fired units compared to onsite fuel alternatives.

314 Joint Protestors protest at 11

- 12.

315 PJM Utilities Coalition states that the start

- up and notification time limitations
a re discriminatory against coal

- fired and nuclear generation resources. PJM Utilities Coalition protest at 3, 11.

316 See PJM Utilities Coalition protest at 12 (citing U.S. Const, amend. V and Duquesne Light Co. v. Barasch , 488 U.S. 299, 307 (1989)).Docket No. ER15

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409. With respect to PJM’s proposal for developing unit

- spe cific operating parameters, some protest that PJM’s proposal affords PJM too much discretion. The Pennsylvania Commission asserts that the authority to establish parameter limited schedule values should remain with the Market Monitor. LS Power and Coalit ion of Resource Projects argue that resource owners must have a role in determining the resource’s parameter limits, otherwise PJM’s approach will usurp owners’ control of their resources. Essential Power agrees, adding that market participants appear to be excluded from the process of developing unit

- specific parameters.
410. The Market Monitor contends that the respective roles that market sellers, PJM, and the Market Monitor will play in developing and approving unit

- specific parameters must be more clearly defined. The Market Monitor asserts that it must be clarified that : (i) market participants determine their own offers, and take full responsibility for their market behavior; (ii) PJM determines whether an offer complies with PJM’s market rules; and (iii) the Market Monitor interacts directly with market participants in a defined process to review whether offers raise market power concerns. The Market Monitor argues that PJM’s current proposal does not do enough to ensure objective, critical, and thorough review of market participants’ calculation of unit

- specific parameters, noting, however, that if the Market Monitor determines that a proposed value raises market power or manipulation concerns, it will raise the issue with the Commission through a section 206 complaint or other available option. 317

411. Homer City argues that PJM must specify the parameter limitations in the OATT, rather than engaging in an annual prudency review with each unit to determine whether it is under

- performing relative to an unspecified standard. Essential Power, too, protests PJM’s departure from using published parameters limitations, arguing that transparency and consistency across unit types is important.
412. LS Power protests PJM’s proposal to require different operating p arameters for different resources. LS Power argues that, because all Capacity Performance Resources will be paid a single clearing price for providing a single product, subjecting resources to different requirements and performance obligations violates th e prohibition against undue discrimination. LS Power asserts that PJM must adopt the same minimum criteria for all resources and assets classes, even if it means adopting a more stringent system

- wide standard.

317 Mar ket Monitor comments at 3, 36 (noting that, because the operating parameters rules were included in a separate section 206 filing, the Commission is not required to afford PJM’s proposal the same level of deference and should, therefore, approve the best p roposed elements, or revised elements, regardless of their source).Docket No. ER15

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413. Intervenors also seek specific clarification as to what constitutes a “physical characteristic” and how the physical characteristic of units will be determined. Rockland and Joint Protestors assert that variations in fuel delivery are physical characteristics that PJM should recognize, arguing that natural gas

- fired generators may not be able to purchase relief from the physical constraints pipeline operators impose. PSEG notes that there may be instances in which a unit, in its current conditions and configuration, may have a given set of physical operating parameters that could be improved based on capital expenditures. PSEG further notes, however, that PJM’s proposed tariff language is unclear whether, in such a case, the physical capabilities of the unit would be viewed in its present state or as enhanced through capital upgrades and whether there would ever be any financial limit to the amount of an expenditure needed to improve the unit’s physical characteristics.
414. Intervenors also protest that PJM’s proposal is unclear as to how and when PJM
w ill consider Capacity Performance Resources’ under

- performance to be unexcused in circumstances when the resource is not scheduled or is dispatched down due to the parameter limitations the market seller specified in its energy market offer. The Market Mo nitor argues that PJM’s proposal must be clarified to ensure that Capacity Performance Resources operating and offered in accordance with parameters approved by PJM and the Market Monitor are not subject to Non

- Performance Charges. Coalition of Resource P rojects argues that PJM must clarify either the market seller representation requirement in Section 5.5A to provide energy at any time or the definition of expected performance in Section 10A, to account for each unit’s PJM

- determined physical limitations and characteristics. LS Power argues that PJM should be required to clarify when a resource owner will become aware that its non

- performance is unexcused and, therefore, subject to a Non

- Performance Charge. 318

415. Joint Protestors add that PJM’s provisions reg arding exceptions are overly burdensome and impose duplicative requirements on natural gas

- fired resources facing the risk of pipeline constraints because, in order to be eligible for make

- whole payments, those resources would have to seek an exception for multiple parameters, such as minimum run time and notification time. 319 PSEG asserts that PJM’s dispatch software does not adequately model the actual capabilities of combined cycle units and that, under these circumstances, it is not reasonable to impose operating requirements that cannot be accurately reflected in units’ offers, or dispatched in the PJM software.

318 LS Power protest at 8 (adding that if PJM informs a market seller that it is not being dispatched because of the operating parameter limitations specified in its offer, the seller could take steps, such as self

- scheduling, to ensure the unit could be available within the required timeframe).

319 Joint Protestors protest at 12.Docket No. ER15

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416. The Market Monitor argues on the other hand that, while resources may request exceptions to the parameter limitation requirements, the exception s should not be an excuse for non

- performance or enable resources to receive make

- whole payments. The Market Monitor also recommends excluding economic maximum from the list of parameters, because resources are already required to offer their installed ca pacity unless on an outage. The Market Monitor also requests clarification that resources with start

- up and notification times that exceed the values agreed upon by PJM, the Market Monitor and generation owners under section 6.6 of Schedule 1, or that ope rate outside their unit

specific parameter limits will not be eligible for make

- whole payments for their operation. 320

417. While the Market Monitor supports PJM’s revisions to the current operating parameters, it recommends including ramp rate and boiler tempera ture retention times as parameters with defined limits, because such parameters could also be used to limit generation performance. In addition, the Market Monitor argues that resources should be subject to original equipment manufacturer operating parame ters, rather than parameters developed based on historical operational information. Essential Power protests that PJM does not propose to include environmental considerations in the unit

- specific operating parameter determinations. Coalition of Resource Projects adds that PJM should not require the same level of flexibility on critical and non

- critical days.
418. The Market Monitor asserts that, to ensure a properly functioning capacity market, PJM should be required to revise its energy market rules to treat Demand Resource s in the same way as other capacity resources if they are to remain on the supply side of the capacity market. For example, the Market Monitor argues that Demand Resource s should be subject to a must

- offer requirement in the day

- ahead energ y market and should have their output metered, on five

- minute intervals, rather than estimated. The Market Monitor argues that Demand Resource s should be dispatched nodally, to ensure that all capacity is performing as required. The Market Monitor sugge sts that the Commission should require PJM to revise its methodology for collecting data and calculating compliance for Demand Resource s to require real

- time submissions.
419. The Market Monitor also argues that there is no reason for PJM to enforce an energy market offer cap that is higher for Demand Resource s than generation, adding that, if a higher offer cap is warranted, it should be raised for all resource types. Further, the Market Monitor asserts that PJM should eliminate the provisions allowing Deman d Resources to request relief from Capacity Resource Deficiency Charges under certain circumstances, arguing that the provision creates a loophole that is inconsistent with the intent and goal of the Capacity Performance proposal.

320 Market Monitor comments at 26 (citing PJM Operating Agreement, Schedule 1, sections 3.2.3(e) and 6.6).Docket No. ER15

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420. ESA asserts that PJM’s p roposal to allow energy storage resources to self

schedule to meet their obligation to provide energy, rather than offering into the day

ahead energy market, is necessary for energy storage resources to participate in energy markets. ESA points out that t his allowance “in no way excuses” Capacity Storage Resources from their Capacity Performance obligations and does not reduce the penalty such a resource would face for failing to perform. Rather, ESA asserts, the allowance responds to and provides for the fact that PJM’s day

- ahead energy market clearing mechanism and other energy market rules otherwise do not accommodate energy storage
resources.
3. PJM’s Answer

421. PJM, in its answer, responds to assertions that it has not shown that the existing relevant prov isions of the Operating Agreement are unjust and unreasonable. PJM argues that the existing rules unjustly and unreasonably allow resources to submit inflexible operating parameters based on inflexible fuel supply arrangements or due to a failure to make needed investment in their resources. PJM adds that if its Capacity Performance proposal is implemented, the existing rules addressing parameter limited schedules would undermine the benefits that PJM’s proposed rule changes are designed to provide.
422. PJM a lso responds to the Market Monitor’s observation that PJM’s proposal fails to identify what physically

- achievable operating characteristics would be considered in a unit

- specific review, and whether changes in resources that can no longer operate based
on their original design, or capabilities, would be taken into account. PJM argues that, in undertaking these reviews, it will be guided by the standards set forth in section 2.3.4 of Manual 11, which “include but are not limited to metallurgical restriction s due to age and long term degradation, physical design modifications, operating permit limitations, operating limits imposed by federal, state or local regulatory requirements or insurance carrier requirements, consent decrees, manufacturer technical bull etins, or environmental permit limitations under non

- emergency conditions.” PJM adds that it will need to revise Manual 11 to incorporate specific guidance regarding the factors that will be considered in determining unit

- specific parameter limited sched ule values.
423. PJM also responds to LS Power’s argument that unit

- specific parameter limited schedules must be based on what the resource owner determines is reasonably achievable. PJM argues that, under its proposal, market seller input and historical evalu ation will be considered when PJM establishes parameter limits. PJM adds that, consistent with Order No. 719, PJM must have the authority to first determine the values on which a resource would be settled, subject to Commission review. 321

321 See PJM February 13, 2015 a nswer at 7 (citing Order No. 719, FERC Stats. & Regs. ¶ 31,281).Docket No. ER15

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424. PJM also responds to Essential Power’s argument that replacing PJM’s existing parameter limited schedule matrix will create uncertainty over the unit

- specific requirements in operation for offers in PJM’s next capacity auction. PJM states that it will provide initial para meter limited schedule values prior to the commencement of its May 2015 auction. PJM adds that, after it has determined the unit

- specific parameter limited schedule for a given resource, that same schedule will continue to apply to that resource, until su ch time that PJM determines that operational conditions warrant a revised schedule. PJM states that, under those circumstances, the seller would be permitted to obtain an exception as to its unit

- specific values.
425. PJM also responds to LS Power’s argument t hat applying different operating parameters and performance obligations to resources, under the standards proposed by PJM, is unduly discriminatory. PJM argues that the parameter limits it proposes are based on physically achievable operating design chara cteristics.
426. PJM also responds to Joint Protestors’ argument that PJM’s revised operating parameters could force older generation resources out of the market. PJM argues that any such resource that cannot start within the shortened time frames that PJM pro poses should operate as a Base Load Generation Resource, i.e

. , a resource capable of operating at least 90 percent of the hours that it is available to operate. PJM asserts that such resources run when they are available to run, without regard to start

- up parameters, or notification. PJM adds that such resources are not, and should not, be subject to a scheduling protocol.
427. PJM also responds to the Market Monitor’s recommendation that PJM use only original equipment manufacturer operating parameter specifi cations for resources, not historical operating date, in determining a resources parameter limits. PJM argues that while historical operating data may not be dispositive in determining a resource’s parameter limitation values, it is relevant.
428. PJM also res ponds to the Market Monitor’s recommendation that PJM include ramp rate and boiler temperature retention times as parameters with defined limits. PJM disagrees that these elements should be recognized as parameter limits, given the difficulty in measuring and tracking this aspect of a resource’s overall performance. However, PJM agrees with the Market Monitor that, under PJM’s proposal, a Capacity Performance Resource may not offer any portion of its capability as Maximum Emergency, such that PJM’s additi onal proposed inclusion of economic maximum as a parameter limit is redundant.
429. PJM also responds to the Market Monitor’s recommendation that PJM clarify that resources with start

- up and notification times that exceed the resource’s unit

- specific values det ermined by PJM should not be made whole for their operation, and that resources with parameters outside of the unit

- specific limits will be subject to N on

P erformance Charges if they do not perform during a Performance Assessment Hour.Docket No. ER15

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PJM argues that the Market Monitor’s recommendation is too absolute. PJM states that Market Sellers that operate their resources at PJM’s direction will be made whole even if these resources exceeded their unit

- specific start

- up and notification time values , but will be sub ject to Non

- Performance Charges if they cannot meet their unit

- specific time frames.
4. Additional Answers

430. Exelon, in its answer, responds to Dominion’s argument that tightening PJM’s existing rules, as to operating parameters, is unreasonable, given that man y older steam resources were designed to be baseload units and, thus, may not have the flexibility to perform a quick start

- up, particularly in cold weather. Exelon argues that nothing will prevent such units from satisfying PJM’s proposed requirements by self

- scheduling when weather forecasts signal the likelihood of a hot or cold weather alert. Exelon adds that units anticipating the need to self

- schedule in order to satisfy PJM’s operatin g parameters can include all associated costs in their capacity o ffers.
431. Exelon also responds to Joint Protestors’ argument that PJM’s proposed operating parameters fail to consider natural gas market realities, including the need to or consequences of nominating natural gas in advance of a potential PJM dispatch. Exelo n argues that that nothing will prevent a unit relying on natural gas a s fuel source from making its natural gas nomination in advance of a potential dispatch when, for example, weather forecasts signal the arrival of extreme cold. Exelon asserts that, wh ile there may be a cost associated with such actions, any such costs are simply to be expected for a unit seeking to serve as a Capacity Performance Resource and may be recovered through the market.
5. Commission Determination

432. PJM file d its proposal regarding parameter limits under section 206 of the FPA. Under that section, PJM must first demonstrate that the existing tariff provisions as they apply to parameter limits are unjust and unreasonable and/or unduly discriminatory. PJM
mus t then demonstrate that its proposed changes are just and reasonable and not unduly discriminatory or preferential. For the reasons discussed below, we accept , in part, and reject, in part, PJM’s proposed revisions and direct further modifications

. 433. We f ind that PJM has shown that the existing tariff provisions as they apply to operating parameter s are unjust and unreasonable because they can allow capacity resources to submi t energy market offers with inflexible operating parameters that do not reflect t heir current, actual operating capabilities . During times of or approaching emergency conditions , it is appropriate that a resource that has sold its capacity to the PJM region offer that capacity in a manner that is no less flexible than its true capabil ity. However, the existing tariff could allow , for instance, a resource to include in its energy offer a minimum run time that exceeds its actual minimum run time. Since the resourceDocket No. ER15

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w ill likely be needed during an emergency condition, such an energy offer could force PJM to also dispatch the resource out

- of

- merit during an unnecessary number of lower

demand hours when the resource’s energy offer price was higher than the locational marginal price, thereby unreasonably increasing the resource’s make

- wh ole payments and imposing higher costs on customers. We find that such an action by a capacity resource is inconsistent with its obligation to make its capacity available to the PJM region , including during the most critical hours of the year.
434. However, while we agree that PJM’s existing rules pertaining to operating parameters for capacity resources are unjust and unreasonable, we find PJM’s proposed modifications to address this problem to be overly restrictive and therefore unjust and
unreason able. We therefore direct three modifications to PJM’s proposed revisions, as described below.
435. PJM proposes to require that, during certain conditions , the parameter limits included in the offers by Capacity Performance Resources and Base Capacity Resour ces must reflect unit

- specific physical constraints, but not actual constraints created by other factors such as physical limitations on natural gas pipeline flows or fuel contract requirements. PJM also proposes that costs incurred as a result of operati ng outside of unit

- specific parameter limits would not be recovered through make

- whole payments. Additionally, PJM proposes that during the 2016

- 20 17 and subsequent delivery years, for all Capacity Performance Resources, other than Capacity Storage Resour ces, the combined start

- up and notification time during pre

- emergency and emergency events shall not exceed 24 hours when a Hot Weather Alert or a Cold Weather Alert has not been issued, and should not exceed 14 hours when a Hot Weather Alert or a Cold Wea ther Alert has been issued. For Capacity Storage Resources, PJM proposes that the combined Start

- up and Notification times shall not exceed 1 hour and that the minimum down time shall not exceed 1 hour, whether or not a Hot Weather Alert or a Cold Weather Alert has been issued. For Base Capacity Resources during the 2018

- 20 19 and 2019

- 20 delivery years, the combined start

- up and notification times shall not exceed 48 hours, and when a Hot Weather Alert has been issued, the notification time shall not
e xceed one hour. We find that it is reasonable, during pre

- emergency and emergency periods, to require that parameter limits for capacity resources reflect actual constraints and to deny make

- whole payments to recover costs due to operations outside of the se actual constraints . However, because PJM’s proposed revisions are based only on physical constraints and generic time restrictions that may prevent a resource from reflecting in its energy market offer certain parameter limitations caused by legitimate , non

- physical constraints, those proposed revisions are not a just and reasonable solution for addressing the potential market power problem identified above

. 436. First , we do not find PJM’s proposals for capping the minimum start

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do not take into account unit

- specific physical constraints faced by resources. Resources with longer minimum start

- up and notification times should be permitted to accurately reflect their actual minimum times in their energy market offers, and Capacity Storage Resources should be permitted to accurately reflect their actual minimum down times if they exc eed 1 hour, so that PJM’s dispatch reflects the actual capabilities of dispatched resources. Additionally, when such resources submit offers that reflect their actual constraints into PJM’s energy markets, they should be allowed the opportunity to recover the costs of complying with PJM’s dispatch instructions through compensation in the energy markets.
437. Second , we reject PJM’s proposal in Operating Agreement Section 6.6, and the parallel provision of the OATT, that the parameter limits included in the of fers of Capacity Performance Resources reflect only unit

- specific physical constraints. We note that actual parameter limits could be the result not only of resource physical constraints, but of other constraints as well, such as contractual limits. For example, a natural gas pipeline may impose, due to physical constraints during peak periods, a requirement that all shippers take uniform delivery throughout the day. 322 Such contractual provisions (which the Commission may have accepted as just and reasona ble) can create an actual parameter limit with respect to a minimum run time, even though the limit is not based on the physical characteristics of the generator. Accordingly, in its compliance filing, we direct PJM to modify proposed Operating Agreement Section 6.6(b) to state that “...the Office of the Interconnection shall determine the unit

- specific achievable operating parameters for each individual resource on the basis of its operating design characteristics and other constraints...” and that “These uni t

- specific values shall apply for the generation resource unless it is operating pursuant to an exception from those values under subsection (h) hereof due to operational limitations that prevent a resource from meeting the minimum parameters.” In addition, we direct PJM to modify proposed Operating Agreement Section 6.6(f)(iv) and Section 6.6(g)(iii) to state that “parameters shall be based on the actual operational limitations” of the relevant resource type.

322 Under such circumstances, a generator dispatched for only one or two hours during the day would nonetheless be required to contract for sufficient natural gas to cover that obligation for each of hour of the day, i.e. , if the generator requires 100 dth of natural gas per hour to fulfill its two hour obligation, it would be required to contract for 2400 dth of natural gas in order to run for those two hours. Fai lure to use that gas might subject the generator to pipeline penalties and it might be unable to resell the unused natural gas at a price approximating its purchase price. Submitting a bid with a 24

- hour run time parameter, therefore, would reflect the c onstraint imposed by the pipeline. Should PJM not require that unit for the full 24 hours, then, the unit should receive make

- whole costs for its losses to help ensure that it follows PJM’s dispatch.Docket No. ER15

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438. Lastly, PJM argues that including parameter limits in a supply offer that do not reflect the resource’s physical characteristics could be an exercise of market power. But we find that an offer that includes parameter limits based on actual constraints experienced by the resource, regardle ss of whether they are resource physical constraints, is reasonable and is not an exercise of market power. PJM’s proposed addition to its Operating Agreement in Section 3.2.3(e), 323 and the parallel provision of the OATT, would deny make

- whole payments to a resource that operate s outside of its physically

determined parameter limitations due to external requirements such as fuel delivery arrangements, for example. We find that such a limitation is not just and reasonable and is unreasonably discriminatory

. Resources should be eligible for make

- whole payments based on actual constraints, including constraints that are not based on a resource’s physical characteristics. Such make

- whole payments provide recovery for costs that are actually incurred and do no t provide compensation in excess of costs.
439. PJM argues that providing make

- whole payments to a resource for costs associated with non

- physical constraints, such as natural gas pipeline limitations, provides an unfair advantage to inflexible resources, and impedes the ability of more flexible resources to compete against the inflexible resource. In PJM’s view such inflexible resources should attempt to recover the costs associated with its inflexibility in its capacity market offer, so that more flexible re sources have an opportunity to compete against and displace the inflexible resource. But PJM currently allows the costs associated with inflexibility created by resource physical constraints to receive make

whole payments. PJM does not propose to require resources subject to its physical constraints to recover the associated costs in the capacity market. We see no reason to treat costs associated with resource physical constraints differently than costs associated with other types of actual constraints a nd find this distinction unduly discriminatory. Moreover, these risks generally are short

- term and based on daily conditions that would be difficult, if not impossible, to forecast in advance.
440. Accordingly, we direct PJM to modify its propos ed revisions t o Section 3.2.3(e) of the Operating Agreement, and the parallel provision of the OATT, to permit resources to recover, through make

- whole payments, the costs incurred if a resource operates within its actual constraints and not only within its unit

- specifi c parameter limits based on its physical characteristics. In other words, a resource would only be deemed ineligible for make

- whole payments if it operates outside any actual constraints faced by the resource, not only limitations based on the resource’s physical constraints, as PJM proposes. Some parameter limitations, such as unit

- specific physical limits, are based on constraints that do not change quickly over time, and thus, can be communicated to, and reviewed by, PJM well in advance of the day

- ahea d market. Other parameters may be based on

323 Operating Agreement Schedule 1 Sec 3.2

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constraints, such as fuel procurement requirements, that may change quickly and may not be reviewable in advance of the day

- ahead or real

- time market. To accommodate this latter category of constraints, w e furth er direct PJM to submit tariff language to establish a process through which a resource that operates outside of its unit

- specific parameter limits c an seek to justify such operation to PJM as the result of actual constraints, rather than the exercise of m arket power. If the resource provides adequate justification, it should be eligible for any appropriate make

- whole payments for that operating interval. 324

441. The revisions that we direct here ensure that resources are appropriately compensated for their ope ration in the energy market; they do not excuse a resource from failing to fulfill its capacity obligation. Providing such an exemption from Non

Performance Charges would blunt the incentives for providing energy and reserves during the hours when they ar e most needed. Additionally, a resource that is unable to produce energy or provide operating reserves during Performance Assessment Hours because of parameter limitations provides less capacity value to customers than a resource that is able to perform d uring these hours. Accordingly, it is reasonable for a resource that fails to perform because of parameter limitations to receive less net capacity revenue than a performing resource. Thus, we do not agree with commenters that a resource’s non

- performanc e during Performance Assessment Hours due to accepted parameter limitations should be excused.
442. Turning to other issues raised by intervenors, we disagree with Homer City, Essential Power, and LS Power that PJM should publish standard values for parameter l imits. Parameter limit values based on actual constraints are likely to vary among resources, and, as discussed above, each resource should be allowed to reflect its actual values in its energy offer.
443. PJM has proposed to evaluate all physical parameter li mits submitted to it based on manufacturers’ specifications as well as other factors. We find this a just and reasonable method of evaluating such limits, and we require PJM to include, in its compliance filing, a specification of the timelines and other d etails as to how this provision will be implemented

.

324 As noted earlier, a resource’s capacity market offer cap is based, in part, on its avoidable costs less net revenues from providing energy and ancillary services. If, in developing its unit

- specific offer, a resource projects that it may incur costs due to its parameter limitations, PJM and the Market Monitor, in determining the resource’s capacity market offer cap, must take into account that revenues from make

- whole payments may offset these costs. To the extent that the costs are offse t, PJM and the Market Monitor should not consider them to be legitimate costs or risks for inclusion in a capacity market offer.Docket No. ER15

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444. Intervenors assert that PJM has too much discretion in evaluating physical parameter limits and suggest either eliminating all such review or specifying the appropriate limits in PJM’s tariff. We find, however, that given the diverse nature of any such limits, PJM should, instead, be required to evaluate these considerations on a case

specific basis. Market participants who may be dissatisfied with PJM’s determination may file a complaint with the Commi ssion. Other intervenors suggest that the Market Monitor, and not PJM, should review these limits. While the Market Monitor should be permitted to provide its input, ultimately a determination not to allow a parameter limit must be made by PJM. PJM’s ta riff, in this regard, clearly defines the Market Monitor’s role, providing that PJM “shall consult with the [Market Monitor], and consider any input received from the [Market Monitor], in its determination of a resource’s unit

- specific parameter limited sc hedule values.” 325

445. We disagree with PSEG’s request that clarification is required on whether a resource’s unit

- specific parameter limits reflect the present state of a resource’s capability or a potential enhanced state attained through capital upgrades. As stated by PJM, a resource’s unit

- specific parameters limits will be determined using manufacturing operating characteristics as well as historical operational information. Section 6.6(b) of the Tariff states that PJM shall determine each resource’s unit

- specific physical ly achievable operating parameters based on its operating design characteristics, recognizing that some expenditures may be required over time to maintain these characteristics. Section 6.6(b) also states that a resource may apply for an exception from th ese values. Section 6.6(h) states that an exception request will be evaluated based, in part, on the Market Monitor’s determination of whether the request raises market power concerns. We find that PJM’s proposed process in this matter is clear and reaso nably evaluates the need for incurring costs to maintain operational design parameter values over time in light of any potential market power concerns.
446. Finally, in response to the Market Monitor’s comments regarding the obligations of Demand Resources, we are satisfied that PJM’s proposal would treat Demand Resources and other c apacity r esources in a not unduly discriminatory way. The differences in treatment cited by the Market Monitor, such as whether output is metered on a five

- minute basis or whether o utput is dispatched nodally, are not undue discrimination. Rather, they are minor but reasonable accommodations that allow Demand Resources to participate in the market and provide value to customers.

325 Proposed PJM Operating Agreement, Schedule 1, section 6.6(b); see also proposed PJM OATT, Attachment K

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B. Force Majeure

447. PJM states that, under its OATT, Operat ing Agreement, and RAA, market participants are generally excused from performing their obligations in the event of force majeure. PJM notes that while, in the history of these agreements, no entity has invoked this provision as an excuse to its non

- perfo rmance in PJM’s markets, clarifications are warranted, consistent with PJM’s capacity performance objectives, as summarized above, and the efficient operation of a centralized, multilateral market.
1. PJM’s Proposal

448. PJM proposes to create a new defined term, Catastrophic Force Majeure, in the Operating Agreement to include only actions or events in which there has been a systematic failure in all or substantially all of the PJM area of either : (i) the transmission system; or (ii) the fuel delivery network. 326 PJM then proposes to narrow its existing force majeure provisions (as applicable to all market transactions, including the provisions of Attachment DD of the OATT and Schedule 1 of the Operating Agreement) to apply only in the event of a Catastrophic Force Majeure

. 327 Specifically, u nder revised section 1 8 .9, performance of any obligation arising under the Operating Agreement, owed by a member to either PJM or to another member (either directly or indirectly) shall not be excused or suspended by reason of an event of force majeure, unless such event constitutes an event of C atastrophic F orce M ajeure.
449. Revised section 18.9 also notes that an event of Catastrophic Force Majeure shall excuse a member from performing such obligations during the period such member’ s performance is prevented by any event of Catastrophic Force Majeure , provided such event was not caused by such member’s fault or negligence. PJM states that, under this standard, the event of Catastrophic Force Majeure may suspend but shall not excuse any payment obligation owed by a member. 328 By contrast, PJM states that the broader, existing force majeure protections should continue to apply in the case of non

- market, bilateral arrangements. PJM notes, for example, that parties to an interconnection service

326 See PJM Operating Agreement, section 1.6.01.

327 PJM thus proposes replacing the existing language of section 18.9 of the Operating Agreement and the parallel provision, section 1.13AA.01 (Common Service Provisions) of its OATT.

328 PJM states tha t, in addition, its revised provision provides that any excuse or exception to a performance obligation expressly provided for by specific terms of the Operating Agreement, OATT, or RAA shall apply according to their terms and will remain in effect.Docket No. ER15

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agreement should have broader force majeure protections than a Capacity Performance Resource, due to the nature of the parties’ relationship to PJM when they provide interconnection services under their agreement.
450. PJM further proposes that it be designated as the entity responsible for determining whether an event of Catastrophic Force Majeure has occurred, based on its consideration of the circumstance, and subject to Commission oversight. PJM also proposes to clarify in its OATT, at section 10. 1, that the force majeure provision set forth in that section shall appl y only to the provision of transmission service. PJM proposes similar clarifications to its OATT, for the purpose of limiting the applicable reach of the force majeure provision utilized, or , where appropriate, referring to PJM’s proposed term, Catastrophi c Force Majeure

. 329 Finally, PJM proposes to revise its existing OATT provisions addressing Financial Transmission Rights and Auction Revenue Rights, by clarifying that, in this context, references to force majeure are improper and therefore will not apply. 330 PJM proposes instead to make reference to “an unanticipated event outside the control of PJM” in discussing PJM’s allocation of these products.
2. Protests and Comments

451. Dominion protests, as a threshold matter, that PJM has failed to establish that any
rev isions to the force majeure provisions are necessary or that the existing provisions are unjust and unreasonable.
452. Intervenors protest also PJM’s proposed definition of a Catastrophic Force Majeure condition and the strict requirement on which it is based , i.e

. , an event affecting substantially all of the PJM region. Dominion argues that PJM’s focus on an event that impacts all or substantially all of the PJM region is unreasonably limited and fails to account for potentially catastrophic events that are beyond market participants’ control. Dominion argues that any revisions to the force majeure provisions should incent market participants to take appropriate steps to alleviate or prevent events that could impact PJM system reliability and must apply equa lly to all market participants and all facets of the PJM system.
453. P3, Joint Intervenors, and Essential Power assert that the new definition is unnecessarily narrow and would improperly assign risk without appropriate compensation for that risk. The PJM Uti lities Coalition similarly objects to PJM’s

329 Proposed OATT at Attachment K

- Appendix; Attachment O, Appendix 2; Attachment P, Appendix 2, Attachment GG, Appendix 3; Attachment KK; and Attachment LL

.
330 Proposed OATT at Attachment K

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proposed list of events giving rise to a Catastrophic Force Majeure , arguing that under these triggering conditions even the most serious natural disasters or other circumstances outside the control of a utility, including Hurricane Sandy or a terror attack, would not qualify. Homer City argues that requiring that a disaster affect the entire PJM region before it qualifies for relief, at PJM’s discretion, is arbitrary.
454. Essential Power argues that adopting the ne w force majeure provisions for existing Base Capacity Resources without providing for additional compensation is unjust and unreasonable. Essential Power argues that PJM is essentially rewriting the contractual relationship with those generators without a ny compensation.
455. Intervenors also dispute PJM’s assertion that its proposed definition of a Catastrophic Force Majeure is warranted, based on a similar clause used by the New York Mercantile Exchange. The PJM Utilities Coalition responds that the force majeure provision to which PJM alludes is not as narrow as PJM’s proposed language. Joint Protestors objects to the analogy, arguing that the New York Mercantile Exchange, unlike PJM’s capacity markets, is not a mandatory construct. The PJ M Utilities Coalition also objects to PJM’s proposed designation of itself as the sole arbiter of force majeure. The PJM Utilities Coalition argues that the party that suffers such an event is typically the one with the responsibility to declare and estab lish that such an event has occurred. The PJM Utilities Coalition also questions PJM’s asserted independence, in this context, given that PJM shares a legal responsibility for meeting the reliability standards within its region.
456. Rockland protests that PJM’s characterization of the force majeure provisions is vague and unclear, particularly regarding how the provisions concerning relief from specific performance interact with the obligation to pay. Rockland argues that PJM should clarify that invoc ation of force majeure protection excuses performance and payment under the Capacity Performance regime.
457. Joint Protestors argue that PJM has not explained or justified how its proposed changes to the force majeure provisions impact load serving entities’ Stage 1A Auction Revenue Right guarantees.
3. PJM’s Answer

458. PJM, in its answer, responds to Joint Protestors ’ argument that PJM’s proposal fails to demonstrate that its existing fo rce majeure provisions are unjust and unreasonable. PJM argues that it has met this burden, given that PJM’s existing force majeure provisions could be used to excuse performance under circumstances that would conflict with underlying objectives of PJM’s markets, as they relate to the provision of energy and reserves when needed the most, including in the case of emergencies.Docket No. ER15

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459. PJM also responds to Joint Protestors’ argument that PJM’s proposed limitations, as to the circumstances giving rise to a force maje ure event, are excessive, given that they will impose risks on generators that are beyond the generators’ control. PJM argues that its proposed limitations do nothing more than conform the operation of force majeure to the intended design of PJM’s markets . PJM asserts that, regardless, in a multilateral market such as PJM’s, there is no opportunity for a buyer and seller to come together to negotiate which party will take on risks that neither can control. PJM argues that, instead, market participants ar e appropriately required to assume performance obligations under all conditions, other than those expressly recognized by PJM in the case of planned outages, maintenance outages, and circumstances relating to a dispatched

- down directive.
460. PJM also responds to Rockland’s request for clarification as to whether a Catastrophic Force Majeure event would relieve performance as well as penalties. PJM confirms that such an event would relieve performance and any Non

- Performance Charge s that would have otherwise ac crued.
4. Additional Answers

461. Exelon, in its answer, responds to the argument raised by Dominion, Joint Protestors, and the PJM Utilities Coalition that PJM’s proposed force majeure revisions will expose generators to penalties for circumstances beyond their control. Exelon argues that a generation outage of any kind, whether within or beyond the generator’s control, is a risk that should be reflected in that generator’s capacity offer, such that the resulting market clearing price will reflect the selection of the most reliable resources available. Exelon adds that, in the ISO

- NE Capacity Performance Order, the Commission fully accepted this economic rationale in its approval of an even more stringent force majeure provision. 331

5. Commission Determinat ion

462. For the reasons discussed below, we accept PJM’s proposed force majeure revisions. We agree with PJM that an expansive definition of force majeure in the context of PJM’s markets is incompatible with reasonable expectations of performance by market pa rticipants and is therefore unjust and unreasonable in this context. PJM notes that it is not aware of any instance in which a market participant has invoked force majeure to excuse its performance. Nonetheless, we agree that the ability to do so in the context of PJM’s two

- settlement energy market construct is inappropriate and should be

331 See Exelon answer at 6 ( citing ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 64 (“suppliers, not consumers, are in the best position to assess and price the performance risk associated with their resources[, including] risks beyond a resource’s control[.]”)

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remedied. Without a replacement provision narrowing the reach of a force majeure event to excuse performance only in the most unforeseen and catastrophic circumstances, a market participant would be able to escape its obligations under circumstances not contemplated by the design of PJM’s markets.
463. Given our acceptance of PJM’s proposed Capacity Performance reforms, as discussed supra , the need to close a related potenti al loophole is appropriate. As the Commission explained in the ISO

- NE Capacity Performance Order , exemptions for non

performance should be limited. 332 If PJM were to implement its proposed two

- settlement capacity market design without clarifying and revisi ng the application of its force majeure provisions, exemptions for non

- performance would be inappropriately broad. We therefore find that PJM has met its burden under section 206 of the FPA to demonstrate that its existing force majeure provisions of its Tariff and Operating Agreement are unjust and unreasonable.
464. We now turn to PJM’s proposed force majeure revisions. Multiple intervenors argue that PJM’s proposed definition of the new term, Catastrophic Force Majeure , is unnecessarily narrow and improperl y assigns risk to capacity suppliers without compensation for bearing that risk. We disagree. As the Commission stated in the ISO

- NE Capacity Performance Order , the risk of capacity resource non

- performance must be borne by either capacity suppliers o r consumers, and capacity suppliers are in the best position to assess and price the performance risk associated with their resources, including performance risks beyond a resource owner’s control, such as weather

- related outages. 333 Under PJM’s proposed de finition of Catastrophic Force Majeure , a resource will be excused from its performance in the event that all , or substantially all , of the electric transmission or fuel delivery infrastructure in the PJM region is incapacitated. We find this definition consistent with the principle that risk should be borne by the party that is best able to assess and price it.
465. Intervenors assert t hat PJM’s analogy to a clause used by the New York Mercantile Exchange (NYMEX) is inapposite because, unlike RPM, the NYMEX is not a mandatory construct. However, our basis for a cce pting PJM’s force majeure revisions is unrelated to PJM’s reference to the NYMEX, so we need not address the proposed comparison.
466. We disagree with intervenors’ argument that capacity suppliers will not be compensated for bearing this risk. An integral component of the two

- settlement capacity market design is an expectation tha t capacity suppliers will include in their capacity

332 ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 62.

333 ISO

- NE Capacity Performance Order , 147 FERC ¶ 61,172 at P 64.Docket No. ER15

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offers the additional performance risk imposed on them by a more stringent performance standard. In fact, it is this expectation, and the likely higher clearing price for the Capacity Performance product that will result, that will help incent investments in maintenance, dual or firm fuel, or weatherization to improve capacity resource performance, particularly during summer and winter peak periods. If capacity resources price their performance risk into their capacity offers and obtain a capacity commitment, they will, in fact, be assured of compensation commensurate with the performance risk that they assume.
467. The PJM Utilities Coalition objects to PJM’s proposal to designate itself as the entity who wil l determine whether a Catastrophic Force Majeure event has occurred. However, given that this determination will require an assessment of region

- wide, or nearly region

- wide, infrastructure impairment, and related operational facts, we agree with PJM that PJM is the most appropriate choice as the arbiter of this provision. In addition, any party that disagrees with a PJM decision in declaring or failing to declare Catastrophic Force Majeure will be free to seek recourse with the Commission.
468. With respect to Rockland’s requested clarification that PJM’s proposed Catastrophic Force Majeure provision, if invoked, will relieve the resource of both its performance obligation as well as any associated payment obligation, we accept PJM’s clarification on this iss ue and will not direct a compliance requirement.
469. W e disagree w ith Essential Power’s argument that the Commission should reject PJM’s propos al to apply its revised force majeure provisions to resources with existing capacity obligations in the 2016

- 20 17 an d 2017

- 20 18 delivery years. We find it appropriate to have uniform and consistent force majeure provisions for capacity resources in PJM and do not believe that resources with existing obligations will be materially impacted by the revised force majeure p rovision

. 334 As PJM notes, under its tariff, a force majeure event has yet to be invoked, despite instances of major storms, floods, extreme weather and numerous instances of individual unit or customer unavailability, accidents and breakages.
470. Finally, Jo int Protestors argue that PJM has not explained or justified how its proposed changes will affect load

- serving entities’ Stage 1A Auction Revenue Right guarantees given a proposed revision to section 5.2.2(f)(ii) of the OATT. PJM proposes to remove from t hat provision the term “event of force majeure ” and insert in its place the term “unanticipated event outside the control of PJM.” We find PJM’s proposed revision as applicable to Financial Transmission Rights and Auction Revenue Rights to be

334 See, e.g., ISO New England Inc. , 145 FERC ¶ 61,095 at P 29 (2013) (explaining how the Commission balances proposed revisions to market rules and market participants’ reliance on existing market rules).Docket No. ER15

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reasonable g iven that it is generally consistent with the other force majeure revisions adopted herein. We also deem it appropriate that PJM retain some discretion in determining when to relax a binding constraint in allocating Financial Transmission Rights. To the extent a market participant believes PJM to have impermissibly applied this discretion under the revised definition of “extraordinary circumstances,” that market participant may file a complaint with the Commission.
C. Maximum Emergency Offers

471. PJM’s cu rrently

- effective energy market rules require all generation capacity resources to submit offers for their available capacity in the day

- ahead market, but allow sellers, in certain circumstances, to designate all or part of their capacity as a Maximum Emer gency Offer. 335 Resource capacity so designated is available to PJM only when PJM declares a Maximum Generation Emergency and requests that the relevant resource
run. 336

1. PJM’s Proposal

472. PJM proposes to prohibit, on a phased

- in basis, a generation resource sell er from designating its offer as a Maximum Emergency Offer during certain extreme weather alerts, or other more severe emergencies. 337 PJM states that, for Base Capacity Resources, the bar on designation as a Maximum Emergency Offer will apply during the
mo nths of June through September when PJM has issued a Hot Weather Alert 338 or has declared an Emergency Action. 339 For Capacity Performance Resources, PJM proposes

335 Operating Agreement at Schedule 1, section 1.10.1A(d). A seller may submit a Maximum Emergency Offer when its resource is subject to one or more of the following conditions: (i) enviro nmental limitations ( e.g. , run limits due to an air quality permit); (ii) fuel limitations ( e.g. , temporary interruption in fuel supply); (iii) temporary emergency conditions, or (iv) the ability to provide certain of its capacity on a temporary basis only

. Id.

336 Operating Agreement at Schedule 1, at section 1.3.12A

.
337 Proposed Operating Agreement at Schedule 1, section 1.10.1A(d).

338 Operating Agreement at Schedule 1, section 1.3.9.01 (defining a Hot Weather Alert as an alert issued by PJM to market participants and others in advance of extreme hot and/or humid weather conditions that are expected to persist ).

339 PJM Manual 13, section 2.3.2 (defining an Emergency Action as a Pre

Emergency Load Management Reduction Action and any more severe Emergency Action).Docket No. ER15

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that the bar on designation as a Maximum Emergency Offer apply year

- round at any time when PJM c alls a Hot Weather Alert, an Emergency Action, or a Cold Weather Alert. 340

2. Protests and Comments

473. The Pennsylvania Commission filed comments generally supportive of PJM’s proposal. PSEG, too, generally supports PJM’s proposal to limit the use of Maximum Emer gency offers during extreme conditions but argues that this change cannot be implemented for combined cycle units at this time because PJM’s dispatch software does not adequately model the actual capabilities of combined cycle units. PSEG states that the Market Monitor raised this issue to the PJM membership and developed a problem statement in 2012. PSEG argues that absent a resolution of this problem, it is not reasonable to impose operating requirements on combined cycle units that cannot be accurately reflected in those units’ offers. PSEG therefore requests that the Commission direct PJM to implement a combined cycle model that addresses this shortcoming.
474. Joint Protestors contend that PJM has not demonstrated that its existing provisions governing of fers during Maximum Generation Emergencies are unjust and unreasonable or that its proposed revisions are just and reasonable. They argue that by not allowing a capacity resource to designate a portion of the resource as a Maximum Emergency Offer in circu mstances that are warranted, PJM’s proposal may have the unintended consequence of reducing resources available during certain extreme conditions if the resource’s alternative action is to take a forced outage.
3. PJM’s Answer

475. PJM, in its answer, responds to Joint Protestors’ argument that PJM’s proposal, as to Maximum Emergency Offers, fails to demonstrate that PJM’s existing tariff provisions are unjust and unreasonable, as to when a given resource will be permitted to submit such an offer into PJM’s day

- ahead energy market. PJM argues that, under its existing rules, the submission of a Maximum Emergency Offer in the day

- ahead market unreasonably precludes PJM from dispatching that resource, in real

- time, absent the declaratio n of a Maximum Generation Emergency. PJM asserts, however, that it is unjust and unreasonable that PJM cannot rely on such a resource when an emergency condition has not yet been declared but is nonetheless possible. PJM adds that it is unjust,
unreasona ble, and unduly discriminatory and preferential to allow certain resources to

340 PJM proposes to define a Cold Weather Alert as an alert issued by PJM to market participants and others in advance of extreme cold weather conditions. Proposed Operating Agreement at Schedule 1, section 1.3.1B.01A.Docket No. ER15

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avail themselves of this excuse for their non

- performance, while requiring the performance of other resources.
4. Commission Determination

476. For the reasons discussed below, we find that PJM has not demonstrated that the existing Maximum Emergency Offer provisions of its OATT and Operating Agreement 341 are unjust and unreasonable. We therefore reject PJM’s proposed revisions with regard to Maximum Emergency Offers. However, we find th at PJM has shown its OATT and Operating Agreement to be insufficiently clear, and therefore unjust and unreasonable, with respect to a Generation Capacity Resource’s obligation to offer the installed capacity equivalent of the resource’s cleared unforced c apacity into the day

ahead energy market. We therefore accept PJM’s proposed revisions with regard to clarifying the day

- ahead energy market obligation for these resources.
477. PJM asserts that the existing Maximum Emergency Offer provisions allow a Generatio n Capacity Resource to effectively, by virtue of an uneconomic offer price, remove itself from the day

- ahead energy market until PJM has reached the point of declaring a Maximum Emergency. We acknowledge PJM’s concern and agree that under existing market rules, the Maximum Emergency Offer designation may be subject to misuse that allows a capacity resource to avoid honoring its capacity commitment. However, we conclude that proper application of Non

- Performance Charges, rather than revision of the Maximum Emergency Offer designation, is the appropriate method of eliminating this concern.
478. Consistent with our findings in section V.C of this order, we find that any capacity that is designated by a Generation Capacity Resource as a Maximum Emergency Offer and not dispatched by PJM because of its use of a Maximum Emergency Offer should be considered non

- performing for application of Non

- Performance Charges. We deem this modification to PJM’s Capacity Performance proposal sufficient to eliminate the existing sh ortcoming in the Maximum Emergency Offer rules, whereby a Generation Capacity Resource might attempt to avoid taking a forced outage by designating its capacity as a Maximum Emergency Offer. Under the application of Non

- Performance Charges, a resource tha t attempts such a strategy will be subject to Non

- Performance Charges for any of its capacity that is not dispatched by PJM during a Performance Assessment Hour. This charge exposure will thus act as an incentive for a resource to provide as much of its
c apacity as possible during an emergency condition, consistent with PJM’s dispatch instructions.

341 PJM OATT at Attachment K

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479. PJM’s proposal to instead preclude a Capacity Performance Resource from designating its capacity as a Maximum Emergency Offer could, as Joint Protestors conten d, have the unintended consequence of reducing the number of resources available during emergency conditions if the resource’s alternative action is to take a forced outage. There is, therefore, value in allowing a Capacity Performance Resource to offer
c apacity on an emergency

- only basis when it is subject to environmental limitations, fuel limitations, or temporary emergency conditions, or when it can provide its capacity on a temporary basis only. Based on these conclusions, we reject PJM’s proposal to preclude Capacity Performance Resources from using Maximum Emergency Offers during Emergency Action s and hot or cold weather alerts and direct PJM to remove this proposed revision when it submits its compliance filing

. 480. We next turn to PJM’s proposal rela ted to Generation Capacity Resources’ day

ahead energy market offer obligation. PJM proposes to clarify that seller offers from Generation Capacity Resources shall be based on the resource’s installed capacity equivalent of the market seller’s cleared unf orced capacity. We agree that existing section 1.10A(d) of the OATT and its parallel section 1.10A(d) of the Operating Agreement are insufficiently clear as to this requirement, and that this lack of clarity could lead to unnecessary confusion. We also a gree that a Generation Capacity Resource’s day

- ahead energy market sell offer should be based on the installed capacity equivalent of its unforced capacity that cleared a capacity auction. W e therefore accept PJM’s revisions as proposed.
481. With respect to P SEG’s assertion that PJM’s current dispatch software does not adequately model the actual capabilities of combined cycle units, we are not persuaded that our action here introduces or exacerbates the problem that PSEG describes. We do not have sufficient information at this point to know whether PJM’s dispatch software inadequately models combined cycle units. PSEG should pursue these issues with PJM and seek a resolution of any modeling issues, as may be warranted.

D. Generator Outages

482. PJM’s existing rule s address both Generator Planned Outages and Generator Maintenance Outages. A Generator Planned Outage is defined as an outage taken to conduct inspection, maintenance or repair of a generating facility. 342 A Generator Maintenance Outage, on the other hand , is defined as an outage taken to perform repairs

342 PJM Operating Agreement at Schedule 1, section 1.9.2.Docket No. ER15

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on specific components of a generating facility and is typically taken for a shorter period of time. 343

1. PJM’s Proposal

483. PJM proposes to revises its existing rules, as to Generator Maintenance Outages, by addr essing contingencies similar to those addressed as to Generator Planned Outages. Specifically, PJM proposes to add language to section 1.9.3 addressing the generator’s obligation to return to service if PJM rescinds approval, during an emergency. First, PJM proposes that a Generator Maintenance Outage not be allowed to proceed unless it is submitted to PJM for approval, in accordance with the standards and procedures set forth in PJM’s Manuals, and is approved prior to the outage start date. 344 PJM also pr oposes to clarify its authorization to withhold approval, or withdraw a prior approval, by tying that action to the need “to ensure adequacy of reserves or the reliability of the PJM Region in connection with anticipated implementation or avoidance of Emer gency procedures.” 345

484. PJM’s proposal also provides that it will be required to give notice to the seller at least 72 hours prior to requiring the generator to return to normal operation. Finally, PJM states that, if it withholds, withdraws, or rescinds a pproval for an outage, it will work with the seller to reschedule the outage at the earliest practicable time.
485. With respect to Generator Planned Outages, PJM proposes that a seller, in seeking approval for such an outage, be required to provide PJM with an estimate of the amount of time it needs to return to service. 346 PJM states that it will use this information to facilitate a voluntary solution, should emergency conditions approach, or arise, that could implicate the need to return the resource to servic e.

343 PJM Operating Agreement at Schedule 1, section 1.9.3. While section 1.9.2(b) allows PJM to withhold approval of a Generator Planned Outage, or withdraw a prior approval, as necessary, to ensure the adequacy of reserves, or the reliability of the PJM region, in connection with anticipated implementation, or avoidance, of emergency procedures, section 1.9.3, by con trast, requires PJM to approve a Generator Maintenance Outage, “unless the outage would threaten the adequacy of reserves in, or the reliability of, the PJM Region.”

344 Proposed Operating Agreement at Schedule 1, section 1.9.3(b).

345 Proposed Operating Agr eement at Schedule 1, section 1.9.3(b).

346 Proposed Operating Agreement at Schedule 1, section 1.9.2(b).Docket No. ER15

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2. Protests and Comments

486. Intervenors challenge PJM’s proposal giving it the authority to rescind approval for a Generator Maintenance Outage. Rockland argues that permitting PJM to rescind approval, subject to only a 72 hour notice requirement, would all ow PJM to unreasonably penalize resources. Homer City asserts that returning to service, under these circumstances, should be voluntary. P3 asserts that PJM has provided no justification for its selection of a 72

- hour notice period.
487. The PJM Utilities C oalition argues that PJM’s proposal will be particularly burdensome for units that have extensive safety procedures or long start

- up times. PSEG argues that a generator should not be required to reschedule a Generator Maintenance Outage in the event it is too expensive or difficult to do so. P3 adds that PJM should be required to excuse a unit’s under

- performance, in this instance, until such time as the unit is able to complete its required maintenance. Essential Power argues that PJM’s proposal is unju st and unreasonable because it could require a generator to choose between safety and incurring penalties from not complying with PJM’s instruction.
488. Intervenors also argue that, in the event PJM is authorized to rescind approval of a Generator Maintenance Outage, compensation should be required covering the additional risks and costs at issue. 347 PSEG notes that, in anticipation of a Generator Maintenance Outage, generators are required to hire contractors, rearrange staffing schedules, and incur other admin istrative expenses. NRG/Dynegy argues that compensation is warranted, given that it is possible that PJM, when required to rescind an outage, may have a choice as to which unit it selects. NRG/Dynegy note, for example, that the cost of rescission may be $ 10,000 for one unit, but $1,000,000 for another. NRG/Dynegy argue that, in this instance, PJM be given the incentive to select the unit with the lower cost, i.e. , the $10,000

- cost unit. NRG/Dynegy conclude that the efficient economic rule would be to req uire PJM to pay the owner of the generation unit the costs of the withdrawal or rescission, thus providing PJM the incentive to seek the lowest cost option of securing the additional generation that it is seeking. NRG/Dynegy add that such a rule would als o directly compensate the generation owner for the actual costs of the PJM withdrawal or rescission notice, rather than pushing these costs into the capacity market.

347 See P3 comments at 7; PSEG protest at 4 ( asserting that such a requirement would be consistent with the practice followed by the Midcontinent Indepen dent System Operation, Inc. (MISO) ); NRG/Dynegy protest at 28

- 29; Coalition of Resource Projects protest at 18; Essential Power protest at 12.Docket No. ER15

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3. PJM’s Answer

489. PJM, in its answer, responds to intervenors’ argument that compensation shou ld be required to cover any costs that may be incurred by a generator in the event that PJM is authorized to rescind or modify a Generator Maintenance Outage. PJM argues that no such payment should be required. PJM notes that, under its Capacity Performa nce proposal, as summarized in Section V.B of this order, above, approved Generator Planned Outages and Generator Maintenance Outages comprise two of only three limited excuses that would allow a seller to avoid a Non

- Performance Charge it would otherwise incur during a Performance Assessment Hour. PJM adds that, in proposing this allowance, PJM balanced the seller’s interest in scheduling and completing maintenance, with PJM’s responsibility to ensure reliability and provide adequate reserves. PJM states that, based on this measure, its proposed revisions, as to generator outages, provide a reasonable, transparent process, authorizing PJM to take needed action, when appropriate, to address an unexpectedly high level of forced outages, or other unexpected circumstances requiring withdrawal or rescission of a prior outage approval.

490. PJM argues that for its Generator Maintenance Outage construct to work, PJM has to be given the authority to reschedule, withhold approval, or rescind a prior approval, to
accou nt for changing, unforeseen conditions that may impact reliability. PJM adds that absent this authority, it may be required to remove Generator Maintenance Outages from the Operating Agreement altogether, and require any resource seeking to conduct mainte nance to take a forced outage.

491. PJM also defends its proposal as beneficial to both consumers and the affected resources. Specifically, PJM argues that consumers will benefit if PJM has input into the coordination and scheduling of a Generator Maintenance Outages in a way that reduces system impact, while resources will benefit to the extent that maintenance is carried in a way that reduces the resource’s exposure to Non

- Performance Charges. Finally, PJM argues that, as the Commission has held, MISO’s adop tion of a given rule, or practice, does not mandate that PJM conform to that rule, or practice, where its proposal is otherwise just and reasonable. 348

4. Additional Answers

492. The Market Monitor, in its answer, responds to intervenors’ argument t hat generation resources should be reimbursed for costs they may incur, in the event a Generator Maintenance Outages is rescinded or modified by PJM, under the circumstances set forth by PJM in its filing. The Market Monitor agrees with PJM that,

348 See PJM February 13, 2015 answer at 32 (citing Order No. 719, FERC Stats. & Regs. ¶ 31,281 at P 129 ).Docket No. ER15

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-

in this instance, it is the resource, not PJM, that should be responsible for the resource’s performance.

5. Commission Determination

493. For the reasons discussed below, we agree with PJM that the currently

- effective Generator Planned Outage and Generator Maintenance Outage provisions of PJM’s Operating Agreement, and the parallel provisions of PJM’s OATT, are unjust and unreasonable, to th e extent these existing rules impede PJM’s ability to ensure reliability and maintain adequate reserves at a reasonable cost. We also accept, as just and reasonable, PJM’s proposed changes, addressing PJM’s authority to rescind a Generator Maintenance Out age, under specified circumstances, and to require a resource on a Generator Planned Outage to provide an estimate of the amount of time required to return to service.
494. With respect to Generator Maintenance Outages, Schedule 1, section 1.9.3 currently prov ides that PJM shall approve requests for such an outage “unless the outage would threaten the adequacy of reserves in, or the reliability of, the PJM Region,” but grants no authority that would allow PJM to rescind such an outage, should the relevant unit be needed. 349 Such a limitation might not be problematic if emergency conditions were foreseeable. But emergency conditions are often not foreseeable. Accordingly, we find this allowance inconsistent with a two

- settlement capacity market construct that
re quires resources with a capacity commitment to deliver energy or reserves when needed.
495. PJM’s proposed changes make clear that a generator may not begin a maintenance outage without PJM’s approval, and authorizes PJM to rescind approval of a Generator Mai ntenance Outage, when required. PJM also proposes that a generator will be subject to any Non

- Performance Charges that may apply 72 hours following the issuance of PJM’s rescission notice. We find these proposed changes to be just and reasonable and here by a cce pt them.
496. As an initial matter, we note that PJM’s proposal applies a more lenient application of Non

- Performance Charges than does the analogous proposal made by ISO

- NE, which the Commission, in the ISO

- NE Capacity Performance Order , has also found to be just and reasonable. We also note that the more significant of PJM’s proposed revisions relates to Generator Maintenance Outages, not Generator Planned Outages. We agree with PJM that a generator on a planned outage should not be
e xpected to return to service within a time interval of less than 72 hours. We also find reasonable PJM’s proposal requiring a generator on a planned outage to provide PJM

349 Ope rating Agreement at Schedule 1, section 1.9.3.Docket No. ER15

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-
with an estimate of the amount of time it will require to return to service. This
r equirement presents no significant burden to the resource, but will assist PJM in operating its system during tight conditions.
497. Intervenors argue that PJM’s proposed 72

- hour notice allowance is too strict. i.e

. , that a generator on a maintenance outage sh ould be provided more

– or unlimited

– time to return to service, or should be compensated for doing so. NRG/Dynegy adds that a generator that fails to perform during a Performance Assessment Hour after the 72

- hour allowance period ends should not be coun ted as a forced outage. We reject these arguments as inconsistent with the Commission’s finding in the ISO

- NE Capacity Performance Order that a capacity market design may properly require that capacity resources deliver energy or reserves during critical times or be subject to Non

Performance Charges. A core principle of such a design is that a capacity resource is held accountable for its actual performance during these critical times and is not excused for its non

- performance, even when the factors givi ng rise to that non

- performance are beyond the resource’s control. While PJM proposes, and we accept above, an outage exemption from the Non

- Performance Charge, the exemption is strictly limited such that we are satisfied that it will not undermine the re source performance incentives that are at the core of the Capacity Performance construct

. We do not find that extending the exemption indefinitely to resources on a Generator Maintenance Outage

– by preventing PJM from recalling those resources

– is a nec essary addition to PJM’s proposal to make it just and reasonable.
498. P3 argues that PJM’s proposed 72

- hour notice allowance is unjustified. We are not persuaded that a 72

- hour notice allowance is unjust or unreasonable. In fact, such a notice period appea rs to strike an appropriate balance, i.e. , it appears to give a resource a reasonably sufficient interval prior to its required return to service, while giving PJM the leeway it requires in responding to any emergency conditions that may arise.
499. Essentia l Power argues that a notice requirement limited to a 72

- hour period could compel a generator to sacrifice safety in attempting to return to service to avoid a Non

Performance Charge. We find this argument without merit. There are myriad theoretical inst ances where a resource owner could choose financial profit over safety if it were so inclined. An owner with a resource on an outage during times of high day

- ahead and real

- time energy prices would face the same possible incentive to bypass safety precaut ions to bring the resource back online more quickly. Market rules cannot be expected to protect against all forms of potential negligent behavior, and we do not find it reasonable to hold the instant proposed revisions to that standard.
500. Intervenors also a rgue that permitting PJM to rescind approval for a maintenance outage, subject to a 72

- hour notice requirement, penalizes a resource for the exact maintenance behavior that PJM’s Capacity Performance proposal seeks to incent. We disagree. While maintenan ce is a critical component of ensuring a resource’s ability to perform when needed, a properly

- functioning capacity market must also possess theDocket No. ER15

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-
proper incentives, over the long term, allowing it to clear those resources that will provide the greatest valu e to the system at an efficient price. Viewed in this context, a resource required to take a maintenance outage for a significant period of time is providing less reliability value than a resource requiring less maintenance. We also note that the resourc e requiring less maintenance would be capable of submitting a lower capacity offer price and thus have a greater probability of clearing. However, if the resource requiring more maintenance is excused for its inability to perform during the duration of it s maintenance outages, it could be capable of submitting a lower capacity offer than its more reliable counterpart, thus distorting the market

- clearing price.
501. Finally, based on this same logic, we disagree with intervenors’ argument that a capacity resour ce whose maintenance outage approval is rescinded by PJM should be compensated. A compensation requirement of this sort would both mask the unavailability of capacity resources that require more maintenance outages during the year and provide an out

- of

- ma rket revenue stream that could skew market clearing prices. Rather than pricing the risk of charges for expected non

- performance into its capacity offer, a resource could submit an artificially low capacity offer, knowing that PJM would compensate it for maintenance outage

- related non

- performance through a separate, out

of

- market payment.
The Commission orders : (A) PJM’s proposed tariff revisions, in Docket No. ER15

- 623

- 000, are hereby accepted, in part, subject to condition, as discussed in the b ody of this order , and subject to making a compliance filing within 30 days of this order

. (B) PJM’s tariff provisions , in Docket No. EL15

- 29

- 000, are granted, in part, subject to conditions, as discussed in the body of this order , and subject to making a compliance filing within 30 days of this order

. (C) Essential Power’s request to dismiss its complaint in Docket No. EL15

- 41

- 000 is hereby granted, as discussed in the body of this order.
By the Commission. Chairman Bay is dissenting with a separat e statement attached.
( S E A L )

Nathaniel J. Davis, Sr., Deputy Secretary.Docket No. ER15

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-

Appendix A

List of Intervenors in Docket No s . ER15

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- 000 and ER15

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- 001
AEP Companies * (EKPC/AEP) (PJM Utilities Coalition) (AEP/Duke Energy) Advanced Energy Management Alliance * (AEMA) Alevo Energy, Inc. Allegheny Electric Cooperative, Inc * (Allegheny). American Gas Association American Municipal Power, Inc. (Joint Protestors) America’s Natural Gas Alliance * (Gas Alliance) American Public Power Association * (APPA/NRECA) American Wind Energy Association and Mid

- Atlantic Renewable Energy Coalition * (Wind Energy and Renewable Energy Coalition) Ares EIF Management, LLC ** (AEIF) Attorney General of Kentucky BP Wind Energy North America Inc. Brookfield Energy Marketing, LP * (Brookfield) Buckeye Power, Inc. * (PJM Utilities Coalition) CPV Power Development, Inc. * (Coalition of Resource Projects ) Calpine Corporation * (Calpine) Champion Energy Companies CleanGrid Advisors LLC * (CleanGrid) Community Ene rgy, Inc. * (Community Energy) Comverge Inc. Consolidated Edison Companies CP o wer Corporation Covanta Energy LLC ** (Covanta) DC Office of the People’s Counsel * ((Joint Consumers) DTE Energy Trading, Inc. The Dayton Power and Light Company * (PJM Utilit ies Coalition) Delaware Public Service Commission * (Delaware Commission) (Transition Coalition) (Joint Consumers) Direct Energy Companies * (Direct Energy) (Transition Coalition) Dominion Resources Services, Inc. * (Dominion) Dynegy Companies * (NRG/Dyn egy) Duke Energy Corporation * (Duke) (AEP/Duke Energy) Duquesne Light Company * (Transition Coalition) (Joint Consumer s ) EMC Development Company, Inc. * (EMC) E. ON Climate & Renewables North America LLCDocket No. ER15

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- 000, et al

. - 170

-
East Kentucky Power Cooperative, Inc. * (EKPC/AEP) (PJM Utilities Coalition) Edison Electric Institute * (EEI) Electricity Consumers Resource Council Electric Power Supply Association * (EPSA) EnergyConnect, Inc. EnerNOC, Inc. Energy Storage Association * (ESA) Environmental Defense Fund * (Public Interest Organizations) Environmental Law and Policy Center EquiPower Resources Corp. * (EquiPower) Essential Power Companies * (Essential Power) ( Coalition of Resource Projects ) Exelon Corporation FirstEnergy Service Company * (PJM Utilities Commission) GDF Suez Energy North America, Inc. H.Q. Energy Services (U.S.) Inc. * (H.Q. Energy) H

- P Energy Resources, LLC Homer City Generation, L.P. * (Homer City) IMG Midstream LLC ITC Lake Erie Connector, LLC Iberdrola Renewables, LLC Illinois Citizens Utility Boa rd * (Joint Consumers) Illinois Commerce Commission * (Illinois Commission) Illinois Industrial Energy Consumers Illinois Municipal Electric Agency Indiana Office of Utility Consumer Counselor * (Indiana Commission and Indiana Consumer Counsel) (Indicated State Regulators) Indiana Utility Regulatory Commission * (Indiana Commission and Indiana Consumer Counsel) (Indicated State Regulators) Invenergy Companies * (Invenergy) LS Power Associates, L.P. * (LS Power) Macquarie Energy LLC * (Transition Coalition) Maryland Office of People’s Counsel * (Joint Consumer s ) Maryland Public Service Commission * (Maryland Commission) Michigan Public Service Commission* (Michigan Commission) Monitoring Analytics, LLC, acting as PJM’s Independent Marke t Monitor * (Market Monitor) Morgan Stanley Capital Group Inc. and TAQA Gen X LLC ** * (Morgan Stanley) NRG Companies * (NRG/Dynegy) National Fuel Gas Distribution Corporation National Rural Electric Cooperative Association * (APPA/NRECA) Natural Gas Supply Association * (NGSA) New Jersey Board of Public Utilities * (Joint Consumers)Docket No. ER15

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- 000, et al

. - 171

-
New Jersey Division of Rate Counsel * (Joint Consumers) NextEra Energy Resources, LLC * (Coalition of Resource Projects ) (Transition Coalition) Noble Americas Energy Solutions LLC ** (Noble) North Carolina Electric Membership Corporation Ohio Consumers’ Counsel * (Joint Consumers) Old Dominion Electric Cooperative * (Transition Coalition) (Joint Protestors) Panda Power Funds ** * (Panda) (Coalition of Resource Projec ts ) Pennsylvania Office of Consumer Advocate * (Joint Consumers) Pennsylvania Public Utility Commission * (Pennsylvania Commission) PHI Companies * (PHI) PJM Industrial Customer Coalition * (Transition Coalition) (Joint Consumers) PJM Power Providers Grou p * (P3) PPL Companies (PPL) PSEG Companies * (PSEG) Public Citizen, Inc. Public Power Association of New Jersey * (Joint Consumers) Public Service Commission of Kentucky * (Indicated State Regulators) Public Utilities Commission of Ohio * (Ohio Commission) Raven Power/Sapphire Power Companies Retail Energy Supply Association * (RESA) Rockland Electric Company * (Rockland) (Transition Coalition) Sequent Energy Management, L.P. Shell Energy North America (US), LP * (Shell) Sierra Club * (Public Int erest Organizations) Solar Energy Industries Association * (Solar Association) Southern Maryland Electric Cooperative, Inc. * (Transition Coalition) (Joint Protestors) Steel Producers Sun Edison Utility Holdings, Inc. ** Sustainable FERC Project and N atural Resources Defense Council * (Public Interest Organizations) UGI Companies * (UGI) Union of Concerned Scientists * (Concerned Scientists) (Public Interest Organizations) U.S. Federal Executive Agencies * (U.S. Agencies) Virginia Municipal Electric Association No. 1 WGL Energy Services, Inc. * (Transition Coalition) West Virginia Consumer Advocate

List of Coalitions’ Individual MembersDocket No. ER15

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. - 172

-
Coalition of Resource Projects CPV Power Development, Inc. Essential Power Companies NextEra Energy Resources, LLC Panda Power Funds
Indicated State Regulators Indiana Office of Utility Consumer Counselor Indiana Utility Regulatory Commission Public Service Commission of Kentucky

Joint Consumers DC Office of the People’s Counsel Delaware Public Service Commission Duquesne Light Company Illinois Citizens Utility Board Maryland Office of People’s Counsel New Jersey Board of Public Utilities New Jersey Division of Rate Counsel Ohio Consumers’ Counsel Pennsylvania Office of Consumer Advocate PJ M Industrial Customer Coalition Public Power Association of New Jersey

Joint Protestors American Municipal Power, Inc. Old Dominion Electric Cooperative Southern Maryland Electric Cooperative, Inc.

PJM Utilities Coalition AEP Companies Buckeye Power, Inc. The Dayton Power and Light Company East Kentucky Power Cooperative, Inc. FirstEnergy Service Company
Public Interest Organizations Environmental Defense Fund Sierra Club Sustainable FERC Project and Natural Resources Defense Cou ncil Union of Concerned Scientists

Transition CoalitionDocket No. ER15

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- 000, et al

. - 173

-

Delaware Public Service Commission Direct Energy Companies Duquesne Light Company Macquarie Energy LLC NextEra Energy Resources, LLC Old Dominion Electric Cooperative PJM Industrial Customer C oalition Rockland Electric Company Southern Maryland Electric Cooperative, Inc. WGL Energy Services, Inc.

______________________ * Entities submitting protests or comments. ** Entities submitting motions to intervene out

- of

- time.Docket No. ER15

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- 000, et al

. - 174

-

Appendix B

List of Intervenors in Docket No. EL15

- 29

- 000
AEP Companies * (PJM Utilities Coalition) Alevo Energy, Inc. Allegheny Electric Cooperative, Inc. American Municipal Power, Inc. * (Joint Protestors) American Public Power Association * (APPA/NRE CA) American Wind Energy Association and Mid

- Atlantic Renewable Energy Coalition * (Wind Energy and Renewable Energy Coalition) Attorney General of Kentucky Ares EIF Management, LLC ** (AEIF) BP Wind Energy North America Inc. Brookfield Energy Marketing , LP * (Brookfield) Buckeye Power, Inc. * (PJM Utilities Coalition) CPV Power Development, Inc. * (Coalition of Gas Generators and Project Finance Resources) Calpine Corporation Champion Energy Companies DC Office of the People’s Counsel * (Joint Consumers) Delaware Public Service Commission * (Joint Consumer Representatives) Direct Energy Companies Dominion Resources Services, Inc. * (Dominion) Dynegy Companies * (NRG/Dynegy) Duke Energy Corporation Duquesne Light Company * (Joint Consumers) EMC Development Company, Inc. E. ON Climate & Renewables North America LLC East Kentucky Power Cooperative, Inc. ** (EKPC) Electricity Consumers Resource Council Electric Power Supply Association EnergyConnect, Inc. Energy Storage Association * (ESA) Environme ntal Defense Fund * (Public Interest Organizations) Environmental Law and Policy Center EquiPower Resources Corp. * (EquiPower) Essential Power Companies * (Essential Power) (Coalition of Gas Generators and Project Finance Resources)Docket No. ER15

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- 000, et al

. - 175

-
Exelon Corporation * (Exelon) FirstEnergy Service Company * (PJM Utilities Commission) GDF Suez Energy North America, Inc. Homer City Generation, L.P. * (Homer City) Iberdrola Renewables, LLC Illinois Citizens Utility Board * (Joint Consumer Representatives) Illinois Commerce Commission Illinois Industrial Energy Consumers Invenergy Companies LS Power Associates, L.P. * (LS Power) Macquarie Energy LLC Maryland Office of People’s Counsel * (Joint Consumer Representatives) Maryland Public Service Commission Morgan Stan ley Capital Group Inc. and TAQA Gen X LLC ** * (Morgan Stanley) NRG Companies * (NRG/Dynegy) National Rural Electric Cooperative Association * (APPA/NRECA) New Jersey Board of Public Utilities *(Joint Consumer Representatives) New Jersey Division of Rate Counsel * (Joint Consumer Representatives) NextEra Energy Resources, LLC * (Coalition of Resource Projects ) Noble Americas Energy Solutions LLC North Carolina Electric Membership Corporation Ohio Consumers’ Counsel * (Joint Consumers) Old Dominion Elec tric Cooperative * (Joint Protestors) Organization of PJM States, Inc. Panda Power Funds ** * (Coalition of Resource Projects ) Pennsylvania Office of Consumer Advocate * (Joint Consumer Representatives) Pennsylvania Public Utility Commission * (Pennsylvania Commission) PHI Companies * (PHI) PJM Industrial Customer Coalition * (Joint Consumers) PJM Power Providers Group * (P3) PPL Companies PSEG Companies * (PSEG) Public Power Association of New Jersey * (Joint Consumer Representatives) Raven P ower/Sapphire Power Companies Retail Energy Supply Association * (RESA) Rockland Electric Company * (Rockland) Shell Energy North America (US), LP * (Shell)Docket No. ER15

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. - 176

-
Sierra Club * (Public Interests Organizations) Solar Energy Industries Association * (Solar Associ ation) Southern Maryland Electric Cooperative, Inc. * (Joint Protestors) Sustainable FERC Project and Natural Resources Defense Council (Public Interest Organizations) UGI Companies * (UGI) Virginia Municipal Electric Association No. 1 West Virginia Consu mer Advocate

List of Coalitions’ Individual Members
Coalition of Resource Projects CPV Power Development, Inc. Essential Power Companies NextEra Energy Resources, LLC Panda Power Funds

Joint Consumers DC Office of the People’s Counsel Delaware Public Service Commission Duquesne Light Company Illinois Citizens Utility Board Maryland Office of People’s Counsel New Jersey Board of Public Utilities New Jersey Division of Rate Counsel Ohio Consumers’ Counsel Pennsylvania Office of Consumer Advoc ate PJM Industrial Customer Coalition Public Power Association of New Jersey

Joint Protestors American Municipal Power, Inc. Old Dominion Electric Cooperative Southern Maryland Electric Cooperative, Inc.

PJM Utilities Coalition AEP Companies Bucke ye Power, Inc. The Dayton Power and Light Company East Kentucky Power Cooperative, Inc. FirstEnergy Service Company
Public Interest OrganizationsDocket No. ER15

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. - 177

-

Environmental Defense Fund Sierra Club Sustainable FERC Project Natural Resources Defense Council Union of Concerned Scientists

______________________ * Entities submitting protests or comments. ** Entities submitting motions to intervene out

- of

- time.Docket No. ER15

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. - 178

-
Appendix C

List of Co nditions for Acceptance in Docket E R 15

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- 000

B. Performance Requirements

• P 92

• P 95

• P 97

• P 100

• P 101

C. Non

- Performance Charges

• P 165

• P 167

• P 171

• P 178

• P 181

• P 185

D. Fixed Resource Requirement Plans

• P 208

• P 209

• P 210

• P 212

F. Market Power Mitigation

• P 353Docket No. ER15

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. - 179

-

• P 356

G. Credit Requirements

• P 382

• P 383Docket No. ER15

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. - 180

-
Appendix D List of Compliance Requirements in Docket EL15

- 29

- 000

A. Operating Parameters

• P 437

• P 440

C. Maximum Emergency Offers

• P 479UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION
PJM Interconnection, L.L.C.

Essential Power Rock Springs, LLC Docket Nos. ER15

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- 000 EL15

- 29

- 000 ER15

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- 001

EL15

- 41

- 000
(Issued June 9, 2015)
BAY, Chairman, dissenting : Today’s order accepts PJM’s Capacity Performance Proposal (CPP), as modified by PJM’s response to FERC’s deficiency letter. Unfortunately, I cannot support that result because I do not believe the CPP will result in just and reasonable rates. First, even on its own terms, the proposal has a serious design flaw that undercuts the very aim that it seeks to achieve, which is to provide greater assurance of delivery of energy and reserves during emergencies. Second, this flaw is an expensive one : the CPP may result in billions in additional costs for consumers without achieving its intended aim. PJM’s capacity market is structurally non

- competitive, and the CPP largely eliminates mitigation as a safety net up to .85 of Net Cost of New Entry (CO NE). I recognize the difficulty of doing cost

- benefit analysis and do not believe it is needed every time a market rule is changed. But, here, given the potential multi

- billion dollar cost of the CPP and the burden consumers will be asked to bear, any analysis, no matter how rudimentary, would have been helpful before concluding this proposal is just and reasonable.
First, PJM’s current capacity market, the Reliability Pricing Model (RPM), has worked tolerably well. PJM itself does not contend that the RPM is unjust and unreasonable; rather, it says that the current rules do not create “sufficient incentives” to ensure that capacity resources provide energy and reserves when needed. To be sure, the RPM has shortcomings, but it has been in operation for almost a decade and has allowed PJM to maintain reliability. In each year since 2007, reserve margins have been met, new capacity has been added, and, most importantly, the lights have staye d on.
Moreover, it is important to emphasize what the CPP is not about: it is not about the need to incent the development of new capacity, and PJM does notDocket No. ER15

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. - 2

-

advocate for the CPP on that basis. 1 Even under the RPM, PJM has developed sufficient capacity to meet its reserve margins. Indeed, PJM’s 2014 reserve requirements study

– a study completed prior to submission of the CPP

– indicated that for the 2018

- 19 delivery year reserve margins would be met, despite significant generator retirements. 2 Even i n the absence of CPP, PJM has forecasted adequate reserve margins through at least 2019.
Nor is the CPP necessarily required to enhance generator performance. In the winter of 2014, uplift payments were $667 million (January

- February 2014) and the forc ed outage rate was 22 percent. 3 But this winter saw marked improvement, even though it was almost as cold as last winter and PJM had a higher peak load at 143,086 megawatts. 4 The outage rate dropped to 12 percent, and uplift was $105 million (January

- F ebruary 2015). 5 Better preparation and winterization, which are relatively inexpensive fixes, and the addition of gas

1 PJM Deficiency Letter Response at 2 (“PJM’s RPM capacity market design has worked effectively to spur new investment to replace the nearly 26,000 megawatts (‘MWs’) of retiring generation since 2008, and proj ecting forward to 2019 and ensure forward reliability in a period of unprecedented turnover of a large portion of the generation fleet. In the 2017/2018 BRA alone, PJM procured nearly 6,000 MWs of new generation resources. Approximately, 35,000 MWs of to tal new generation have been procured since RPM was implemented in PJM’s markets.”).

2 PJM, 2014 PJM Reserve Requirement Study , at 15 (Oct. 9, 2014), http://www.pjm.com/~/media/committees

- groups/subcommittees/raas/ 20141003/20141003

- reserve

- requirement

- study

- draft

- update.ashx

3 Office of Enforcement, 2014 State of the Market Report , at 17 (Mar. 19, 2015), https://www.ferc .gov/market

- oversight/reports

- analyses/st

- mkt

- ovr/2014

- som.pdf (OE 2014 State of the Markets Report).

4 PJM declared cold weather alerts on 26 days in the first three months of 2015 compared to 25 days in the first three months of 2014. See PJM, State of the Market Report for PJM , at 138 (May 18, 2015), http://monitoringanalytics.com/reports/PJM_State_of_the_Market/2015/2015q1

- som

- pjm.pdf

.
5 OE 2014 State of the Markets Report at 19.Docket No. ER15

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. - 3

-
infrastructure, with better gas

- electric coordination, helped make this happen. 6
Against this backdrop, PJM has proposed a new ca pacity market that suffers from a serious design flaw that undermines its very purpose to provide greater assurance of delivery of energy and reserves during emergency conditions. To do this, the CPP establishes a “two

- settlement” process and a “Non

Perfo rmance Charge,” or, to put it more colloquially, two carrots and a partial stick. With respect to the first carrot, a resource is allowed to offer up to Net CONE times the balancing ratio (currently calculated to be .85). 7 But this is not a ceiling per s e if a resource can justify higher unit specific costs; those costs in turn could drive the market clearing price even higher. Resources that over perform can receive a second carrot as well: a bonus share of penalties collected from units that fail to p erform.
To approximate the expected total Non

- Performance Charge a resource that fails to perform would pay, one needs to make an assumption about the expected number of performance assessment hours. The total yearly expected Non

Performance Charge or penalty pay ment per megawatt of capacity for a resource that never performs is calculated by multiplying .85 of Net CONE by the ratio of the number of actual performance assessment hours in the relevant capacity zone divided by 30

. The number 30 is important because it represents PJM’s expectation of performance assessment hours in a year. In 2011

- 12, PJM declared 7; in 2012

- 13, 5; and in 2013

- 14, 30. 8 The average over the three

- year period is 14. If the outlier is excluded (2013

- 14), the average is 6. An estimat e of 30 expected performance assessment hours appears to be overly generous and, depending upon the number of actual assessment hours, may result in a partial stick. For example, if PJM declared 14 actual performance assessment hours in a capacity zone, a resource that failed to perform during each of those hours would be subject to a total Non

- Performance Charge per megawatt of capacity of 14/30

6 Id . at 17.

7 PJM Deficiency Letter Response at 7.

8 PJM, Performance A ssessment Hours for 2011

- 2014 , (Mar. 23, 2015), http://pjm.com/~/media/committees

- groups/committees/elc/postings/performance

assessment

- hours

- 2011

- 2014

- xls.ashxDocket No. ER15

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. - 4

-
times .85 Net CONE, which equates to .40 of Net CONE for the delivery year. 9
Taken together, the CPP’s inc entive structure creates an opportunity for resources to profit from non

- performance, as long as the first carrot

– the auction clearing price, which can be up to .85 of Net CONE or more if the marginal generator can justify its unit specific costs

– is la rger than the partial stick, which, with 14 assumed performance assessment hours, would be .40 of Net CONE. A rational profit

- maximizing resource could simply seek a capacity award in the auction, fail to perform during each performance assessment hour, a nd likely pay a penalty less than the carrot it has received. To put it more bluntly, the resource could be paid for doing nothing during the emergency hours of the year when it is most needed and for which it has been well compensated. And there is a bu ilt

- in optionality period of three years, since the auction has a delivery year of 2018

- 19. During that three

- year period, the resource may decide whether it wishes to meet its obligation when called upon, purchase replacement capacity to buy its way out of its obligation, or fail to respond. During the delivery year itself, the resource also has optionality because it can weigh the penalty of failing to perform during each Performance Assessment Hour, as a fraction of one

- thirtieth of .85 of Net CONE. I n short, PJM has purchased little certainty for what may be a lot of money. To be sure, the second carrot provides a financial incentive for resources to deliver during emergencies. But it is also true that the resource that fails to perform may be abl e to pocket the difference between the award it received and the penalty. As a matter of economic theory, to incent performance, a resource that never performs should pay a penalty at least as large as the amount it receives in compensation. Here, perfor mance is not incented because the gain may be substantially greater than the penalty; the first carrot is larger than the partial stick. The second carrot provides even more compensation to incent performance but does nothing to remedy the initial dispari ty. The weakness inherent in the CPP’s design creates significant incentives to move auction clearing prices up to .85 of Net CONE, because only prices above that level are subject to mitigation in the form of unit specific review. The

9 PJM has another penalty, the Capacity Deficiency Charge, that is 1.2 times the capacity clea ring price or clearing price plus $20 per megawatt day, whichever is greater, but this penalty would be lower than the Non

- Performance Charge imposed for failure to respond during an emergency.Docket No. ER15

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. - 5

-
temptation to ex ercise market power in the auction will be considerable. This would be less of a problem if one could count on the salutary benefits of competition. But, as PJM and the Market Monitor recognize, this market is structurally non

- competitive. 10 And the miti gation rules that are usually the safety net in such markets have largely been removed. Thus, the CPP creates the very real risk of the unmitigated exercise of market power up to .85 of Net CONE. 11
The majority also undercuts the CPP by rejecting PJM’s pr oposal to limit operating parameters to unit

- specific physical constraints. 12 In this order, the majority requires that resources be eligible for make

- whole payments based on their “ actual constraints,” a new and ambiguous term that would, at the very leas t, include fuel delivery arrangements. It is unclear what other constraints would fall into this category, and the provision increases the opacity of make

- whole payments. While the majority’s proposal includes a reminder that a resource should consider su ch expected make

- whole payments in its projected revenues when calculating its capacity offer, it may be impossible to reconcile whether a resource has been compensated for a constraint through its capacity payment. Nor

10 See PJM, 2014 State of the Market Report for PJM , Vol.2: De tailed Analysis, at 179 (Mar. 12, 2015), http://monitoringanalytics.com/reports/PJM_State_of_the_Market/2014/2014

- som

- pjm

- volume2

- sec5.pdf

.
11 It is important to note that even though the Market Monitor offered support for PJM’s filing, his support was qualified on a number of conditions. For instance, the Market Monitor pointed out that PJM offers no analytical basis for using 30 as the expect ed number of performance assessment hours. Instead, he suggested us ing an “annual probabilistic analysis” to approximate the appropriate Non

- Performance Charge rate . In addition, the Market Monitor strongly supported PJM’s proposal to limit operating pa rameters to unit

- specific physical constraints , arguing that this would lower uplift payments during tight operational conditions and provide greater operational flexibility to PJM dispatchers.

12 PJM proposed the following new language to its Operating Agr eement Schedule 1, section 3.2.3(e): "A Generation Capacity Resource that operates outside of its physically determined parameter limitations due to external requirements such as fuel delivery arrangements, for example, will not receive Operating Reserve C redits nor be made whole for such operation when not dispatched by the Office of the Interconnection."Docket No. ER15

- 623

- 000 et al

. - 6

-
does this provision take into account the progress that has been, and continues to be, made on gas

- electric coordination, and it is inconsistent with the CPP’s goal of incenting generators to make more flexible fuel arrangements. A gas generator has little incentive to make such arran gements if it knows it can wait and have its costs covered anyway.
The CPP’s potential cost is also troubling relative to the benefit it may provide. In October 2014, PJM estimated that the net incremental cost for the CPP would be $1.4 to 4.0 billion. One way of viewing the CPP is that it fixes a several hundred million dollar uplift problem in the energy market with a multi

- billion dollar redesign of the capacity market. Let me be clear: I support reliability. It is one of the most fundamental ser vices a Regional Transmission Organization or Independent System Operator can provide. I also believe in the benefits of competition and markets. But the question here is not whether to support markets or reliability; rather, it is one of cost relative t o the potential benefit and whether the CPP is a just and reasonable way to achieve a higher degree of performance in emergencies. Here, despite the potential multi

- billion dollar burden consumers will be asked to bear, there is no analysis, however rudim entary, indicating whether the benefits are at least roughly commensurate with the costs.
The majority today accepts a flawed, complex, highly technical market construct in which there is a potential mismatch between incentives and penalties, in which m itigation has largely been eliminated in a market characterized by structural non

- competitiveness, and in which there may be billions in additional capacity market costs borne by consumers. The reality is that once a market construct is accepted and imple mented, it is very difficult to unwind. Of all the costs associated with the CPP, not the least among them is this: the opportunity cost of the time and resources that could have been used to develop a more sustainable, efficient, and cost

- effective desi gn. For all those reasons, I respectfully dissent.

______________________ Norman C. Bay C hairman