Court Rules PJM Capacity Market Prices Adequately Protected from Seller Market Power, but Others Contend Not Protected from Buyer Market Power

PJM capacity prices were just and reasonable in 2007 and 2008, the first years for which PJM's FERC-approved Reliability Pricing Model (RPM) auction set capacity prices.  So ruled a unanimous panel of the US Court of Appeals for the DC Circuit in a February 8 decision.  According to the court, PJM and FERC had taken adequate steps to prevent electricity generators from exercising market power to elevate prices above competitive levels.  The court gave short shrift to the complaints of Maryland and New Jersey regulators, municipal utilities, and industrial consumers who alleged that RPM allowed capacity sellers to exercise market power in the 2007 and 2008 RPM auctions.

Built into RPM, the court explained, are three attributes that, in tandem, adequately prevented exercises of seller market power.  First, the rules governing eligibility to bid capacity into the base auction (for delivery three years later) and incremental auctions effectively require that all capacity not otherwise committed be offered into the auction and not withheld.  Second, capacity offers from suppliers determined to possess market power are supplanted in the auction by proxy offers that PJM sets at competitive levels.  Third, and most important to the court, by setting prices three years in advance of any delivery obligation, the RPM auction allows and encourages new entry of competitive suppliers.

Evidence put forward by the challengers of the 2007 and 2008 prices that RPM caused capacity prices in some locations was not proof of supra-competitive prices or the exercise of seller market power. To the contrary, the court explained, prices went up in some areas within PJM because RPM, unlike older capacity pricing regimes, accounts for transmission constraints that increase the cost of delivering electricity into those areas but not others.

Coincident with the court's ruling upholding the ability of RPM to protect against exercises of supply-side market power, a group of power generators calling themselves the PJM Power Providers ("P3") took aim at RPM's ability to police the ability of buyers to exercise demand-side market power.  In a February 1 complaint with FERC, P3 alleges that New Jersey and Maryland have put in place regulatory schemes that subsidize new entrants to offer capacity (and energy in the case of Maryland) at below competitive prices, which discriminates against existing capacity suppliers and, P3 argues, will prevent new entry in the long run.  FERC is expected to rule on this complaint possibly as early as this summer.