Document ID: FERC-2007-1932-0002
Agency: ferc
Document Type: Notice
Title: Order on Complaint and Setting Case for Hearing and Settlement Judge Proceedings
Posted Date: 2008-01-11T05:00Z

[Federal Register: January 11, 2008 (Volume 73, Number 8)]
[Notices]               
[Page 2018-2023]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja08-37]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. EL08-8-000]

 
Mirant Energy Trading, LLC, Mirant Chalk Point, LLC, Mirant Mid-
Atlantic, LLC, and Mirant Potomac River, LLC v. PJM Interconnection, 
LLC; Order on Complaint and Setting Case for Hearing and Settlement 
Judge Proceedings;

 January 4, 2008.

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. 
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

    1. On November 8, 2007, Mirant Energy Trading, LLC, Mirant Chalk 
Point, LLC, Mirant Mid-Atlantic, LLC, and Mirant Potomac River, LLC 
(jointly, Mirant) filed a complaint against PJM Interconnection, LLC 
(PJM). The complaint alleges that the default rate for the Third 
Incremental Auction as part of PJM's Reliability Pricing Model (RPM) is 
unjust and unreasonable and requests that the Commission institute a 
new default rate for the auction to be held January 7, 2008.
    2. The Commission grants, in part, and dismisses, in part, the 
complaint. The Commission finds that Mirant has made a sufficient 
showing that the prices resulting from the RPM program's Third 
Incremental Auction may be unjust and unreasonable and may need to be 
replaced. However, as Mirant's own answer indicates, even if the 
existing pricing structure is found unjust and unreasonable, there is a 
significant dispute as to the appropriate just and reasonable 
replacement. The Commission therefore sets the RPM market rules 
relating to the Third Incremental Auction for hearing, but holds the 
hearing in abeyance pending settlement judge proceedings. Because this 
proceeding will extend beyond the auction to be held on January 7, 
2008, the Commission cannot make a finding on this matter before that 
auction is held, and refunds would not be appropriate, the Commission 
dismisses Mirant's complaint with respect to that auction.

I. Background

A. RPM

1. Auction Mechanism to Set the Price of Capacity
    3. As discussed extensively in prior Commission orders,\1\ the 
Commission found that PJM's capacity market as it existed prior to RPM 
was unjust and unreasonable. On August 31, 2005, PJM and several of its 
customers filed a proposed settlement establishing the RPM market 
mechanism. The settlement proposed a capacity market under which 
capacity sellers would offer, and PJM would purchase, capacity on a 
multi-year forward basis through an auction mechanism, and that prices 
for capacity would be derived through these forward auctions.
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    \1\ See PJM Interconnection, LLC, 119 FERC ] 61,318 (2007) (June 
25 Order); PJM Interconnection, LLC, 117 FERC ] 61,331 (2006) 
(December 22 Order) and PJM Interconnection, LLC, 115 FERC ] 61,079 
at P 9-17 (2006) (April 20 Order).
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    4. Under RPM, PJM conducts multiple auctions in advance of each 
Delivery Year to procure capacity for that year. PJM first conducts a 
Base Residual Auction (BRA) three years in advance of the Delivery 
Year. Capacity sellers offer capacity into the BRA, and the offers 
create a demand curve that determines the price of capacity (absent 
mitigation, which will be discussed infra). Thus, the offers submitted 
into the market determine a single clearing price for all capacity 
(i.e., the highest-priced offer accepted by PJM sets the price for all 
the capacity that PJM purchases).\2\
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    \2\ Additionally, the RPM mechanism provided that different 
locations within PJM might have different prices, if necessary to 
reflect the amount of capacity that must be acquired within each 
separate location.
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    5. After the BRA for each Delivery Year, PJM conducts three 
incremental auctions for that year, to enable market participants to 
obtain additional capacity that may be needed for that Delivery Year, 
either to replace previously-committed resources that have become 
unavailable, or to accommodate an increase in the forecasted load.\3\ 
The Third Incremental Auction (conducted four months prior to the start 
of the Delivery Year) allows

[[Page 2019]]

capacity sellers to make available additional MWs of capacity for sale 
(either generation that did not clear an earlier auction, or generation 
that has newly become available due to an increase in PJM's rating of a 
unit's capacity), and also allows capacity buyers to obtain replacement 
capacity resources before the Delivery Year, if made necessary by the 
derating of a unit (i.e., the determination that that unit is no longer 
able to produce some or all of its previously determined capacity) or a 
decrease in PJM's rating of a unit's capacity. The cost of capacity 
purchased through the BRA and the Second Incremental Auction are 
allocated among load-serving entities (LSEs) within PJM. The costs of 
the First and Third Incremental Auctions are assessed to the capacity 
buyers purchasing replacement resources in those auctions.\4\
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    \3\ Mirant states (Complaint at 6-7, footnotes omitted):
    The First Incremental Auction is conducted * * * 23 months prior 
to the start date of the Delivery Year, and allows Capacity Market 
Sellers that committed resources in the BRA for such Delivery Year 
to submit Buy Bids for replacement capacity. * * * The Second 
Incremental Auction is conducted only if necessary for PJM to secure 
additional capacity resource commitments to satisfy an increase in 
the projected peak load for the PJM Region. If held, the Second 
Incremental Auction is conducted in April, 13 months prior to the 
Delivery Year.
    \4\ Complaint at 7, footnotes omitted.
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    6. To ensure that capacity resources provide the capacity to which 
they have committed, PJM imposes a Capacity Resource Deficiency Charge 
on any capacity seller that is unable to deliver its full amount of 
committed capacity for some or all of that Delivery Year. For each day 
that the seller is deficient, the deficiency charge is equal to the 
Daily Deficiency Rate (the greater of: (a) two times the Capacity 
Resource Clearing Price, or (b) the Net Cost of New Entry) multiplied 
by the megawatt quantity of deficiency below the level of capacity 
committed in the sell offer.
2. Mitigation Measures
    7. The RPM mechanism also includes mitigation measures to protect 
customers from the exercise of market power by generators in the RPM 
auctions. So as to prevent the withdrawal of capacity from the market 
in order to increase prices, generation capacity resources are required 
to submit all available capacity in the BRA for a Delivery Year. If a 
generation resource does not clear in the BRA, that capacity must be 
offered into the subsequent incremental auctions for that year.
    8. Further, if the PJM area (or a local delivery area within PJM) 
fails the Market Structure Test conducted by the PJM market monitor 
(i.e., if the monitor determines that one or more sellers may be able 
to exercise market power), then all sellers in the area are subject to 
Market Seller Offer Caps for the applicable auction for that Delivery 
Year.
    9. The Offer Cap is based on either (a) the Avoided Cost Rate 
(ACR), which approximates the total cost of operating a particular 
generating unit, or (b) the Opportunity Cost for the resource. The 
Opportunity Cost is defined as ``the documented price available to an 
existing generation resource in a market external to PJM.'' \5\
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    \5\ PJM Open Access Transmission Tariff, Attachment DD, section 
6.7(d)(ii).
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B. Mitigation in PJM's First BRA and Third Incremental Auction

    10. PJM and its stakeholders are currently in a period of 
transitioning to full implementation of RPM. For Delivery Years during 
this transitional period, PJM will conduct BRAs, and some (but not all) 
of the incremental auctions. The Third Incremental Auction will be the 
last opportunity for parties to adjust their capacity positions through 
an auction before the applicable Delivery Year begins. The Third 
Incremental Auction for the 2008-2009 Delivery Year is scheduled to be 
held in January 2008.
    11. To date, PJM has conducted three BRAs. On August 16, 2007, the 
PJM Market Monitor issued a report that analyzed the first BRA, 
conducted for the 2007-2008 Delivery Year.\6\ The report stated that 
``[a]ll participants in the RPM auction failed the market structure 
tests with the result that offer caps were applied to all sellers.'' 
\7\ PJM has not yet conducted an Incremental Auction. However, the 
Third Incremental Auction for the 2008-2009 Delivery Year is scheduled 
to begin on January 7, 2008.
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    \6\ PJM Market Monitoring Unit, Analysis of the 2007-2008 RPM 
Auction (Aug. 16, 2007) (PJM Report), available at: http://www.pjm.com/markets/market-monitor/reports.html
.

    \7\ According to the Report, 1,090 Capacity Resources submitted 
Sell Offers in the BRA. Of those 1,090 Capacity Resources, the MMU 
calculated unit-specific offer caps for 125 units, 392 offers used 
the default offer caps values posted by the MMU, and 510 offers were 
price takers. Three offers were based on the seller's documented 
Opportunity Cost. See PJM Report at 1, 4, 5.
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C. Mirant's Complaint

    12. On November 8, 2007, Mirant filed the instant complaint against 
PJM under section 206 of the Federal Power Act (FPA).\8\ Mirant alleges 
that the prices yielded in the Third Incremental Auction are ``almost 
certainly going to be unjust and unreasonable,'' \9\ and requests the 
Commission to direct PJM to modify the definition of Opportunity Cost 
in section 6.7(d)(ii) of the RPM market rules so that, for the Third 
Incremental Auction only, Opportunity Cost is defined as the higher of 
the Daily Deficiency Rate or the documented price for exports.\10\
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    \8\ 16 U.S.C. 824e (2000).
    \9\ Complaint at 13-14.
    \10\ Id. at 14.
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    13. Mirant states that the combination of the must-offer 
requirement for Capacity Resources and what it considers to be the 
almost certain ACR-based capping of Sell Offers in the Third 
Incremental Auction will result in market-clearing prices far below 
competitive market values and far below levels necessary to compensate 
Capacity Market Sellers for the risks they are compelled to incur.
    14. Mirant states that three factors pertaining to the Third 
Incremental Auction are likely to produce clearing prices at or near 
ACRs, which Mirant considers to be below prices that would be produced 
in a competitively workable market. First, Capacity Market Sellers that 
have newly available capacity are required to offer that capacity into 
the Third Incremental Auction, and may not hold any capacity as a 
physical hedge. Second, prices in the Third Incremental Auction will be 
based on the Sell Offers of Capacity Market Sellers who have additional 
capacity to sell and the Buy Bids of buyers who need to procure 
replacement capacity. Third, because there is no comparable Opportunity 
Cost that reflects the actual opportunity cost associated with 
supplying the incremental MWs offered in the Third Incremental Auction, 
Market Seller Offer Caps will be based on ACRs.
    15. Mirant asserts that ``there is no real doubt'' that ACR rates 
will be applied as Offer Caps in the next several Delivery years, and 
that all existing Generation Capacity Resources will be subject to such 
offer cap mitigation.\11\ Mirant states that buyers in the Third 
Incremental Auction will know, based on the published results of the 
BRA for a given Delivery Year, and the fact that PJM does not intend to 
calculate new ACRs for the Third Incremental Auction, what approximate 
ACR prices are for those sellers that have positive ACRs. Mirant states 
that with this knowledge, Capacity Market Buyers can, and likely will, 
submit Buy Bids with a price equal to or slightly below ACRs, knowing 
that their bids will clear because Capacity Market Sellers are capped 
at that level.
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    \11\ Id. at 16-17.
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    16. Mirant states that the price that should result in a workably 
competitive market is one where the market price equals the opportunity 
cost of the marginal supplier. Mirant asserts that the economic value 
of retaining the capacity as uncommitted (which Capacity Suppliers are 
not permitted to do) is the incremental risk associated with deficiency 
charges that can be assessed in a given Delivery Year for

[[Page 2020]]

incremental capacity offered in the Third Incremental Auction. As a 
result, Mirant states that Sellers will be forced to sell their 
physical hedge against penalties assessed (at a Daily Deficiency Rate) 
for a small fraction (the ACR rate) of what their incremental capacity 
is worth to them.\12\
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    \12\ Id. at 19.
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    17. Mirant states that the current definition of Opportunity Cost 
in the RPM market rules does not provide a solution to the problem of 
artificially depressed prices in the Third Incremental Auction, because 
Market Sellers have limited ability to obtain an Opportunity Cost-based 
Offer Cap due to their limited access to markets external to PJM. 
Mirant further states that nothing in the Opportunity Cost provision 
permits Capacity Market Sellers to hedge against the increased risk of 
paying deficiency charges potentially incurred for incremental capacity 
committed in the Third Incremental Auction.
    18. Accordingly, Mirant requests that the Commission direct PJM to 
modify the definition of Opportunity Cost to read:

    ii. Opportunity Cost:
    (a) Opportunity Cost shall be the documented price available to an 
existing generation resource in a market external to PJM. * * *
    (b) In the Third Incremental Auction, Opportunity Cost shall be 
calculated, at the election of the existing generation resource, 
either: (i) based on the methodology set forth in (a) above, or (ii) 
based on the Daily Deficiency Rate for the relevant Delivery Year as 
calculated by the Office of Interconnection at the time Sell Offers are 
required to be submitted for the Third Incremental Auction. In the 
event that the existing generation resource owner chooses option (b), 
the Market Seller Offer Cap applicable to Sell Offers relying on such 
generation resource shall be the Daily Deficiency Rate for the relevant 
Delivery Year.

    19. Mirant states that its requested change to the definition of 
Opportunity Cost would not raise market power concerns. Mirant states 
that in the Third Incremental Auction, unlike the BRA and other 
incremental auctions: (1) The price is established by sell offers, not 
the Variable Resource Requirement curve used in the BRA, (2) 
participation is limited to Capacity Market Sellers, so Capacity Market 
Buyers, not Load Serving Entities, pay for MWs cleared, (3) the amount 
of MWs being offered as additional supply by other market participants 
is not easily known, (4) there is no direct link between a supplier's 
share of installed capacity and its share of offered capacity, and (5) 
a supplier has no material information about the amount of MWs that may 
be offered by other market participants. Given these distinguishing 
characteristics of the Third Incremental Auction, Mirant concludes 
that, because sellers will compete to have their offers cleared, they 
can be expected to bid at prices below the Offer Cap level of the Daily 
Deficiency Rate, especially since they will be factoring in their own 
assessment of the risk of penalty charges in determining what the 
capacity is ``worth'' to them as a physical hedge.\13\
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    \13\ Id. at 24.
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    20. Mirant states that this topic was first raised with the PJM RPM 
Working Group (RPMWG) on August 10, 2006. Despite several months of 
discussions and presentations on this issue, the RPMWG still has not 
reached consensus with respect to whether and how mitigation for the 
Third Incremental Auction should be modified.
    21. Mirant requested Fast Track processing, asking the Commission 
to act on its Complaint before January 7, 2008.

D. Answers and Comments

    22. Notice of Mirant's complaint was published in the Federal 
Register, with answers, motions to intervene and comments due on or 
before November 29, 2007.\14\ PJM filed an answer, Allegheny Energy 
Services Company (Allegheny), EME Companies et al. (EME), PPL and 
Constellation Parties (PPL/Constellation), the Borough of Chambersburg, 
PA (Chambersburg), the Old Dominion Electric Cooperative and PJM 
Industrial Customer Coalition (ODEC/PJMICC), the Southern Maryland 
Electric Cooperative (SMEC), PEPCO Holdings (PEPCO), the Tenaska Fund 
Entities (Tenaska) and Tenaska Power Services (Tenaska Power) filed 
timely comments and protests, and Reliant Energy, Inc., Dayton Power 
and Light Company, Exelon Corporation, FPL Energy Generators, the 
Office of the People's Counsel of the District of Columbia, American 
Electric Power Service Corporation, Dynegy Power Marketing, Inc., North 
Carolina Electric Membership Corporation, Duke Companies, NRG 
Companies, the Public Service Commission of Maryland, the Pennsylvania 
Office of Consumer Advocate, Dominion Resources Services, Inc., the 
Maryland Office of People's Counsel, and PSEG Companies filed timely 
motions to intervene. The New Jersey Board of Public Utilities filed a 
motion to intervene out of time on December 6, 2007. Indicated Buyers 
filed an answer to the preceding filings on December 4, 2007,\15\ and 
Mirant filed an answer on December 10, 2007.
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    \14\ 72 FR 65,320 (2007).
    \15\ Indicated Buyers consist of ODEC, PJMICC, SMEC, Portland 
Cement Association, Mittal Steel, North Carolina Electric Membership 
Corporation, the Office of the People's Counsel of the District of 
Columbia, Pennsylvania Office of the Consumer Advocate, the Public 
Power Association of New Jersey, and Chambersburg.
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    23. PJM, in its answer, agrees with Mirant's view that because 
sellers will be required to offer all available capacity into the Third 
Incremental Auction, and could be compensated at levels well below the 
value of that capacity to the seller as replacement capacity for its 
own possible later-occurring deficiencies, the current mitigation 
provisions are unjust and unreasonable. PJM explains that prospective 
buyers may either bid up to the level of the deficiency charges they 
avoid by securing replacement capacity, or they may anticipate that 
sell offers will be capped and therefore, may have an incentive to 
submit buy bids consistent with the anticipated range of price-capped 
sell offers. These anticipated price-capped sell offers will be far 
below the Daily Deficiency Rate sellers will incur if they become 
unable to deliver previously committed capacity after the Third 
Incremental Auction. PJM notes that the Third Incremental Auction will 
not change prices to load, and only involves a small amount of 
capacity.
    24. PJM clarifies that the mere presence of an incremental auction 
clearing price lower than the BRA clearing price is not indicative of a 
market flaw. Rather, it is the possibility that such an outcome could 
result due to the combination of the must-offer requirement, cost-based 
mitigation, and buyer knowledge of offer cap levels. PJM states that 
Mirant's proposed solution properly preserves both the must-offer rule 
and price caps, but seeks to include within those caps an added 
component to reflect the seller's lost opportunity to use its available 
capacity to avoid or mitigate capacity deficiencies it may experience.
    25. PJM suggests that it may not be possible to determine the 
precise appropriate price cap for sell offers, and that the Commission 
could consider setting the price cap somewhere between the BRA clearing 
price and the maximum deficiency charge that a seller might risk paying 
(the relief requested by Mirant). PJM asks the Commission to address 
this problem before PJM conducts the Third Incremental Auction on 
January 7, 2008.

[[Page 2021]]

    26. EME Companies et al. supported Mirant's complaint, stating that 
the proposed solution appears to be reasonable, as the modification to 
the Opportunity Cost definition would permit capacity market sellers 
with additional capacity deemed available in the Third Incremental 
Auction to submit sell offers that better reflect the actual 
opportunity cost of selling into that auction and becoming subject to 
PJM penalties that are tied to the Daily Deficiency Rate. Tenaska Power 
also supported Mirant's complaint, explaining that, absent the change 
sought by Mirant, sellers will be required to sell supply capacity at 
rates well below their actual opportunity costs, which raises the 
possibility of confiscatory ratemaking.
    27. Other parties oppose Mirant's complaint. Allegheny points out 
that if the Commission now changes the rules regarding mitigation, 
those changes should apply to all auctions rather than just the Third 
Incremental Auction, and should not be applied now, in the middle of an 
auction cycle, for which parties made commitments and chose to 
participate based on their understanding of the rules currently in 
place. Allegheny argues that Mirant is asking the Commission to make a 
finding that the existing market mitigation rules for the Third 
Incremental Auction, which it found to be just and reasonable by 
approving the Settlement Agreement \16\ are all of a sudden unjust and 
unreasonable, before being put into effect.
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    \16\ PJM Interconnection, L.L.C., 117 FERC ] 61,331 (2006), 
order on reh'g, 119 FERC ] 61,318 (2007).
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    28. PPL states that Mirant has not demonstrated that it will be 
injured, arguing that Mirant could hedge its own exposure by buying 
capacity (presumably through bilateral agreements). PPL states that the 
proposed remedy benefits sellers with excess capacity and burdens 
buyers and could also encourage gaming in RPM as capacity providers 
might try to sell as little capacity as possible in the BRA and hold 
capacity back to sell in the Third Incremental Auction. PPL argues that 
under Mirant's proposed remedy, if buyers expect they will be subject 
to the Deficiency Rate (either by buying replacement capacity, or as a 
result of being deficient), they may be discouraged from making an 
advance purchase in the Third Incremental Auction, which could have 
potential reliability consequences. PPL points out that another flaw in 
Mirant's proposal is that if prices are expected to be higher in the 
Third Incremental Auction, sellers will have an incentive to maintain 
as much capacity as possible to sell in the Third Incremental Auction, 
thereby discouraging the forward commitment aspect of RPM. ODEC/PJMICC 
similarly argue that Mirant's complaint is premature, and that its 
predicted outcome of the Third Incremental Auction is not a certainty. 
ODEC/PJMICC also point out that Mirant was a party to the RPM 
Settlement and that Mirant agreed to very clear provisions, including 
mitigation and the must offer requirement.
    29. PEPCO states that Mirant understood the risk it now seeks to 
remedy, at least as of August 14, 2007. PEPCO points out that capacity 
market sellers may elect to sell its available capacity bilaterally and 
avoid the Third Incremental Auction altogether. PEPCO further protests 
Mirant's proposed remedy because, it states, capacity sellers in the 
BRA have the same Opportunity Cost and exposure to Daily Deficiency 
Rates as those in the Third Incremental Auction, yet the remedy only 
addressed the Third Incremental Auction.
    30. The Borough of Chambersburg protests Mirant's proposal on the 
basis that it has the potential to incent capacity sellers to engage in 
economic and physical withholding. It further argues that the 
fundamental basis of the Mirant complaint, that the ACR will distort 
competitive rates that would prevail in the absence of mitigation, 
misses the point that because of pervasive market power, offers must be 
mitigated in order to prevent anti-competitive prices.
    31. Several parties suggest that this problem should be resolved 
through a PJM stakeholder process rather than a complaint proceeding.

II. Discussion

A. Procedural Matters

    32. Pursuant to Rule 214 of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.214 (2007), the timely, unopposed motions to 
intervene of the entities that filed them make them parties in this 
proceeding. Under Rule 214(d) of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.214(d) (2007), the Commission may grant late-
filed motions to intervene, and it does so here.
    33. Rule 213(a)(2) of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.213(a)(2) (2003), prohibits an answer to an 
answer or protest unless otherwise ordered by the decisional authority. 
We will accept the answers filed by Indicated Buyers and Mirant because 
they have provided information that assisted us in our decision-making 
process.

B. Analysis

    34. Based on the information provided, the Commission finds that 
the existing tariff may result in prices that are unjust and 
unreasonable, and establishes hearing and settlement judge procedures 
to resolve this matter.
    35. The Market Seller Offer Cap set at the level of ACR may not 
appropriately reflect the selling generators' risks in the Third 
Incremental Auction. This auction, which takes place four months before 
the Delivery Year begins, is the last market opportunity for generators 
to sell or procure capacity for that year.\17\ Under the RPM rules, 
generators are not able to withhold any of their capacity for their own 
use, but must offer that capacity into the market. Since the Third 
Incremental Auction is the final opportunity to procure replacement 
capacity by auction, a generator that is forced to sell all of its 
capacity in that auction and which subsequently becomes unable to 
deliver that capacity, has no opportunity to purchase replacement 
capacity in a subsequent incremental auction. Thus, if the generator 
cannot arrange a private purchase of capacity, it will be required to 
pay the deficiency charge. The possibility of being assessed the 
deficiency charge is a risk that generators face when bidding into the 
RPM Auctions, but the cost associated with that risk is not reflected 
in the ACR. Thus, under the current rules, generators are required to 
offer capacity into the Third Incremental Auction at prices that may 
not compensate them for their full potential risk.\18\
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    \17\ After the Third Incremental Auction, generators may still 
sell or procure capacity through bilateral contracts, assuming that 
they can find a counterparty that close to the time of delivery.
    \18\ This situation is most likely to be critical in the Third 
Incremental Auction. A generator that discovers prior to the Third 
Incremental Auction that it is unable to deliver may avoid the 
deficiency charge by acquiring replacement capacity in one of the 
incremental auctions and paying the market clearing price in that 
auction. Thus, the same argument for revising the ACR mitigation 
rate as the mitigated bid price does not apply to the earlier 
auctions.
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    36. We do not, however, agree with Mirant that the solution to this 
problem is to modify the definition of Opportunity Cost to include the 
deficiency charge. To do so would, in essence, immediately raise the 
floor for all mitigated prices up to the level of the deficiency 
charge, the highest price that could result from the auction. Setting 
the Market Seller Offer Cap at the deficiency charge appears to 
establish too high a mitigated offer cap because

[[Page 2022]]

the risk of each generator being unable to meet its capacity obligation 
clearly is less than 100 percent. Setting a Market Seller Offer Cap at 
the deficiency charge, therefore, might permit the exercise of market 
power by generators.\19\ No party has presented evidence in this 
proceeding to document the risk that a generator committed to provide 
capacity will be unable to meet its capacity obligation. The PJM Market 
Monitor also has recognized that the existing Market Seller Offer Cap 
may be too low and has proposed that, if the Commission determines that 
the offer cap should be modified for this Third Incremental Auction 
pending a stakeholder process, the clearing price from the BRA could be 
used as the price of capacity transactions in this auction, although 
only in the event that the price would otherwise be low or zero.\20\
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    \19\ For instance, if there were a complete monopoly in a local 
delivery area (with only one generator participating in the auction) 
and that generator had excess capacity, allowing the generator to 
bid the deficiency charge would set the price at the deficiency 
charge even though the generator did not face a reasonable risk of 
being unable to deliver.
    \20\ PJM MMU Response to Mirant Complaint re RPM auction, 
attachment to Indicated Buyers answer, at 9.
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    37. Because there is reason to believe that the existing rate is 
not just and reasonable and because we have no evidence to establish a 
just and reasonable replacement rate, we will set this matter for 
settlement judge and trial-type hearing. At hearing, we will direct the 
parties to examine the likelihood that resources (or particular classes 
of resources) will be unable to provide their committed capacity when 
demanded, and thus, the likelihood that the owner of that resource will 
be required to pay a deficiency charge. The parties may also consider 
alternative mechanisms that would mitigate the potential risks 
suppliers face in the Third Incremental Auction without modifying the 
offer cap, including but not limited to examining other possible 
hedging mechanisms.
    38. We will dismiss the complaint with respect to the auction to be 
conducted on January 7, 2008. Given the timing of this filing, the 
issues raised, and Mirant's own recognition that its initially proposed 
replacement rate may not be just and reasonable, we cannot resolve this 
proceeding prior to January 7, 2008. Moreover, because this is a 
market-determined result, refunds based on a subsequently determined 
Market Seller Offer Cap could not be accurately calculated.\21\ 
However, we instruct the Administrative Law Judge (ALJ) and the parties 
to set a hearing schedule that will leave sufficient time for an 
initial decision and Commission review prior to the next Third 
Incremental Auction.
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    \21\ Moreover, both equity and the desire to protect market 
certainty counsel against applying the result in this case to the 
January 7 auction, since, as several protesters pointed out, all 
parties entered this first cycle of RPM auctions with the 
expectation that the market rules agreed to in the RPM settlement 
would remain in place.
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    39. PJM has already been pursuing settlement of its issue through 
its RPM Working Group.\22\ To aid the parties in their settlement 
efforts, we will hold the hearing in abeyance and direct that a 
settlement judge be appointed, pursuant to Rule 603 of the Commission's 
Rules of Practice and Procedure.\23\ If the parties desire, they may, 
by mutual agreement, request a specific judge as the settlement judge 
in the proceeding; otherwise, the Chief Judge will select a judge for 
this purpose.\24\ The settlement judge shall report to the Chief Judge 
and the Commission within 30 days of the date of the appointment of the 
settlement judge, concerning the status of settlement discussions. 
Based on this report, the Chief Judge shall provide the parties with 
additional time to continue their settlement discussions or provide for 
commencement of a hearing by assigning the case to a presiding judge.
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    \22\ PJM notes that it has discussed this matter at the RPM 
Working Group on August 14, 2007, October 10, 2007, and October 25, 
2007, and that ``[c]onsideration of possible changes to the offer 
caps in the incremental auctions * * * has been assigned a `high' 
priority by the working group.'' PJM answer at 6-7.
    \23\ 18 CFR 385.603 (2007).
    \24\ If the parties decide to request a specific judge, they 
must make their joint request to the Chief Judge by telephone at 
202-502-8500 within five days of this order. The Commission's Web 
site contains a list of Commission judges and a summary of their 
background and experience (http://www.ferc.gov_click on Office of 

Administrative Law Judges).
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    40. Pursuant to section 206(b) of the FPA, the Commission must 
establish a refund effective date that is no earlier than the date of 
the filing of such complaint nor later than 5 months after the filing 
of such complaint. Because, as discussed above, the results of the 
hearing cannot be applied to the January 7, 2008 auction, the 
Commission will establish a refund effective date of 5 months from the 
date of the complaint. The Commission is also required by section 206 
to indicate when it expects to issue a final order. The Commission 
expects to issue a final order in this section 206 investigation within 
180 days of the date this order issues.
    The Commission orders:
    (A) Mirant's complaint is hereby granted, in part, and dismissed in 
part, as discussed above.
    (B) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
section 402(a) of the Department of Energy Organization Act and the 
Federal Power Act, particularly Section 206 thereof, and pursuant to 
the Commission's Rules of Practice and Procedure and the regulations 
under the Federal Power Act (18 CFR Chapter 1), a public hearing shall 
be held in Docket No. EL08-8-000 to examine the justness and 
reasonableness of the calculation of the mitigated bid rate for the 
Third Incremental Auction as discussed in the body of this order.
    (C) The hearing established in Ordering Paragraph (B) is hereby 
held in abeyance pending the outcome of the settlement proceedings 
described in the body of this order.
    (D) Pursuant to Rule 603 of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.603 (2005), the Chief Administrative Law Judge is 
hereby directed to appoint a settlement judge in this proceeding within 
fifteen (15) days of the date of this order. Such settlement judge 
shall have all powers and duties enumerated in Rule 603 and shall 
convene a settlement conference as soon as practicable after the Chief 
Judge designates the settlement judge. If the parties decide to request 
a specific judge, they must make their request to the Chief Judge 
within five (5) days of the date of this order.
    (E) Within 30 days of the appointment of the settlement judge, the 
settlement judge shall file a report with the Chief Judge and the 
Commission on the status of the settlement discussions. Based on this 
report, the Chief Judge shall provide the parties with additional time 
to continue their settlement discussions, if appropriate, or assign 
this case to a presiding judge for a trial-type evidentiary hearing, if 
appropriate. If settlement discussions continue, the settlement judge 
shall file a report at least every 30 days thereafter, informing the 
Chief Judge and the Commission of the parties' progress toward 
settlement.
    (F) If settlement judge procedures fail and a trial-type 
evidentiary hearing is to be held, a presiding judge, to be designated 
by the Chief Judge, shall, within fifteen (15) days of the date of the 
presiding judge's designation, convene a prehearing conference in these 
proceedings in a hearing room of the Commission, 888 First Street, NE., 
Washington, DC 20426. Such a conference shall be held for the purpose 
of establishing a procedural schedule. The presiding judge is 
authorized to establish procedural dates and to rule on all motions 
(except motions to dismiss) as provided in the

[[Page 2023]]

Commission's Rules of Practice and Procedure.
    (G) The Secretary is directed to publish a copy of this order in 
the Federal Register.
    (H) The refund effective date in Docket No. EL08-8-000 established 
pursuant to section 206(b) of the Federal Power Act is 5 months from 
the date of the filing of the complaint.

    By the Commission.
Kimberly D. Bose,
Secretary.
 [FR Doc. E8-301 Filed 1-10-08; 8:45 am]

BILLING CODE 6717-01-P