UNITED STATES OF AMERICA
`BEFORE THE
`FEDERAL ENERGY REGULATORY COMMISSION
`
`Maryland Public Service Commission, )
`Complainant
`)
`v.
`)
`PJM Interconnection, L.L.C.,
`)
`Respondent
`)
`
`Docket No. EL08-34-000
`
`ANSWER OF PJM INTERCONNECTION, L.L.C.
`
`Pursuant to Rule 213 of the Commission’s Rules of Practice and Procedure,1 and
`
`the Notice For Extension Of Time issued on January 29, 2008, PJM Interconnection,
`
`L.L.C. (“PJM”) submits this answer to the complaint filed by the Maryland Public
`
`Service Commission (“MdPSC”) in this docket (“Complaint”).
`
`I.
`
`INTRODUCTION AND SUMMARY.
`
`In its complaint, the MdPSC seeks the elimination of the exemption from offer
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`capping afforded (1) certain newly constructed generating units in PJM (“construction
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`exemption”) and (2) generating resources used to relieve the reactive limits on the West,
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`Central, and East interfaces in the Mid-Atlantic Area Council (“MAAC”) Control Zone
`
`and the Allegheny Power System (“APS”) South interface (“interface exemption”).
`
`For the reasons discussed in this answer:
`
`•
`
`although the Complaint does not offer persuasive evidence of market
`power, PJM would not oppose Commission consideration whether, as a
`policy matter, the Commission should revisit the balance of interests that
`led to adoption of the construction exemption;
`
`1
`
`
`
`18 C.F.R. § 385.213 (2007).
`
`

`

`•
`
`•
`
`•
`
`•
`
`to the extent the Commission, in its policy review, determines to retain
`the construction exemption, it should clarify for market participants and
`other stakeholders the current rule that a generator will lose its exemption
`if it exercises “significant” market power;
`
`as required by both the approved tariff and Commission policy against
`re-running markets, any change to the construction exemption should be
`on a prospective basis following any Commission order directing such
`change;
`
`the Commission need not delve at this time into an investigation of
`whether any individual unit exercised market power, both because the
`Complaint does not make a prima facie case that such has occurred, and
`because the construction exemption is better addressed on a generic
`policy basis; and
`
`the Commission should dismiss the allegations regarding the interface
`exemption in order to allow an already initiated stakeholder process to
`continue to examine issues related to the application of the three-pivotal
`supplier test to exempt interfaces.
`
`A.
`
`Construction-Exempt Units.
`
`Four-and-a-half years have passed since PJM first proposed to eliminate the
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`construction exemption for all post-1996 units, and over three years have passed since the
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`Commission decided to retain the construction exemption only for certain units
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`constructed within several narrow locked-in periods. In that time, PJM has implemented
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`scarcity pricing, special mitigation rules for frequently mitigated units needed for
`
`reliability, and a comprehensive reform of the PJM capacity market. Under the
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`circumstances, it is fair for the Commission to assess whether that exemption should
`
`continue for the remaining lives of the plants at issue. Therefore, PJM would not oppose
`
`the Commission addressing whether the balance of equities considered in 2005 remains
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`the correct policy call in today’s market.
`
`2
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`

`

`The Commission addressed this question as a policy matter when it adopted the
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`broad post-1996 unit exemption,2 when it initially rejected PJM’s 2003 proposal to
`
`terminate the exemption,3 and when it decided to eliminate the exemption but grandfather
`
`certain units.4 Therefore, the Commission should exercise its discretion to address this
`
`question, if at all, as a policy matter. To the extent the Commission engages in that
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`policy review, and determines to retain the current construction exemption, it should take
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`the opportunity to clarify the rule that PJM should file to eliminate the exemption for any
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`exempt generator that exercises “significant” market power. The Commission could
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`provide greater certainty to market participants, state regulators, and other stakeholders,
`
`by explaining (for prospective application) what showing is contemplated by this
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`standard and how, it all, the standard differs from the traditional definition of market
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`power, i.e., whether a seller has been able profitably to maintain prices above competitive
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`levels for a significant period of time.5
`
`The Complaint apparently invites the Commission to address this matter based on
`
`whether exempt generators have exercised market power. But, as shown below, the
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`Complaint does not make a prima facie case that any individual market seller has
`
`exercised market power and, in any event, this question is better addressed, if at all, on a
`
`2
`
`3
`
`4
`
`5
`
`
`
`Atl. City Elec. Co., 86 FERC ¶ 61,248, at 61,904, 61,906 (1999).
`
`PJM Interconnection, L.L.C., 107 FERC ¶ 61,112, at P 54 (2004).
`
`PJM Interconnection, L.L.C., 110 FERC ¶ 61,053, at P 53 (2005) (“January 25
`Order”).
`
`1992 Horizontal Merger Guidelines § 0.1 Purpose and Underlying Policy
`Assumptions of the Guidelines, available at
`http://www.ftc.gov/bc/docs/horizmer.htm.
`
`3
`
`

`

`generic policy basis The Complaint proffers the PJM Market Monitor’s mark-up
`
`analysis, in which he concludes that exempt units “mark up” their energy market offers
`
`above his estimate of their marginal costs and thus “can and do exercise market power.”
`
`However, as PJM previously detailed, there is far less to the Market Monitor’s analysis
`
`than meets the eye.6 For example, the Market Monitor’s analysis makes a simplifying,
`
`but invalid, assumption that the exempt unit setting the market clearing prices would
`
`remain the marginal unit, and therefore still set the market clearing price, once the
`
`exempt unit’s “marked up” offer were reduced to cost. Because this assumption does not
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`hold in many instances, it leads to an overstatement – estimated by PJM to be more than
`
`three-fold – of the impact of the alleged “mark ups” on energy prices. A significant
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`amount of the alleged markup impact, more than $32 million, relates to units owned by
`
`municipal load-serving entities that buy more power than they sell at the allegedly
`
`affected locational marginal prices (“LMP”). No rational buyer would increase its power
`
`costs in this way, suggesting that these market participants, and likely the other exempt
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`unit owners as well, are not in fact offering above marginal costs, and that the Market
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`Monitor has simply misestimated the exempt units’ costs (which are not reported to the
`
`Market Monitor).
`
`These flaws compound an even more fundamental problem with the MdPSC’s
`
`approach, i.e., the failure to show, or even allege, that any particular generator has in fact
`
`successfully raised market-clearing prices above a competitive level for a significant
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`period of time. The Market Monitor report on which the MdPSC relies discusses only
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`average mark-ups of sell offers above the Market Monitor’s administrative estimate of
`
`
`Complaint, Attachment E.
`
`6
`
`4
`
`

`

`unit marginal costs, without showing any actual increases in clearing prices (considering
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`other competitive sell offers), and without evaluating whether any particular increases
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`were significant in either magnitude or duration.
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`Moreover, the only remedy provided in the tariff, even if “significant market
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`power” is found, is prospective elimination of the exemption for the involved unit.7 The
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`Commission’s policy disinclination to order re-running of markets8 reinforces that the
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`only relief likely to be ordered in this proceeding is prospective relief. The Commission
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`could far more efficiently address the prospective applicability of the construction
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`exemption as a policy matter, without first holding a long, expensive, and likely
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`inconclusive hearing on the question.
`
`B.
`
`Exempt Interfaces.
`
`The Commission should dismiss the Complaint with regard to the exempt
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`interfaces. The Complaint fails to allege any evidence of the exercise of market power on
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`the exempt interfaces. Congestion on these regional interfaces can be controlled by a
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`large number of generators and they are among the most liquid in PJM. In the eight
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`years that the PJM market has been operating, neither the PJM Market Monitor nor PJM
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`has identified any exercise of market power by any generating unit on them.
`
`Importantly, PJM has already initiated a stakeholder process to examine the
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`application of the three-pivotal supplier test to the exempt interfaces, along with
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`examining rules for appropriate scarcity pricing. As indicated in the affidavit attached to
`
`this answer, the PJM Market Monitor supports deferring these issues to this stakeholder
`
`
`Operating Agreement, Schedule 1 § 6.5.
`
`7
`
`8
`
`See n. 37, 38 infra.
`
`5
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`

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`process. Less than a year ago, in the proceeding where the current exempt interfaces
`
`were most recently established, the Commission similarly dismissed requests to re-
`
`examine market power mitigation so as to “not preempt the PJM processes through the
`
`establishment of a section 206 proceeding.”9 The Commission should take the same
`
`action here.
`
`C.
`
`Other Issues.
`
`The complaint unfortunately resurrects Market Monitor, state and consumer
`
`advocate claims raised in 2007 that PJM hindered the PJM Market Monitor from
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`conveying his views on exempt interfaces and exempt generators, this time as a purported
`
`ground for retroactive relief. The Commission already rejected these claims in a
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`proceeding the MdPSC, among others, initiated. The claims are barred from relitigation.
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`In any event, PJM took none of the alleged actions and fully complied with its Tariff by
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`posting all PJM Market Monitor recommendations concerning exempt interfaces. PJM
`
`also fully complied with the PJM Tariff10 by advising the PJM Market Monitor to refer to
`
`the Commission his concerns regarding an exempt generator that might have exercised
`
`market power. Simply put, the MdPSC’s claims already have been rejected by the
`
`Commission and are false. The Commission should not countenance their relitigation.
`
`9
`
`10
`
`
`
`PJM Interconnection, L.L.C., 120 FERC ¶ 61,092, at P 10 (2007).
`
`PJM Open Access Transmission Tariff (“PJM Tariff” or “Tariff”).
`
`6
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`

`

`COMMISSION
`OPPOSE
`NOT
`PJM WOULD
`II. WHILE
`RECONSIDERATION OF ITS POLICY ON THE CONSTRUCTION
`EXEMPTION, THE MDPSC HAS NOT PRESENTED SUFFICIENT
`EVIDENCE TO WARRANT ADDRESSING THIS
`ISSUE BY
`ATTEMPTING TO DETERMINE WHETHER ANY EXEMPT UNITS IN
`THE PJM REGION HAVE EXERCISED SIGNIFICANT MARKET
`POWER.
`
`A.
`
`Background Of Construction Exemption.
`
`An exemption from offer capping for newly constructed generating units has been
`
`a part of PJM market rules since 1999, when the Commission first approved market-
`
`based pricing for the sale of energy in the PJM market. The Commission found at that
`
`time that encouraging the entry of new generation would, in fact, help eliminate
`
`opportunities for the exercise of local market power. Offer caps, however, could deter
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`that entry.11 Therefore, the Commission exempted from offer capping all generating
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`units constructed after July 1996.12
`
`In part responding to concerns expressed by PJM, the Commission subsequently
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`removed the blanket exemption for all units constructed after 1996.13 However, it found
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`that “some units may have been built in reliance on the exemption,” raising “equitable
`
`concerns.” Id. Therefore, the Commission refined the exemption and grandfathered “units
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`in zones other than the original PJM zones for which construction commenced beginning on
`
`the date a transmission owner made a filing with the Commission committing to join
`
`11
`
`12
`
`13
`
`
`
`Atl. City Elec. Co., 86 FERC ¶ 61,248, at 61,904.
`
`This date corresponded to a similar blanket grant of market-based rate authority,
`then contained in the Commission’s regulations to generating units throughout the
`country that were constructed after July 1996. See 18 C.F.R. § 35.27(a) (2007).
`
`January 25 Order at P 53.
`
`7
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`

`

`PJM.”14
`
`At the same time, the Commission found that, while it needed to take account of the
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`reliance interest of the generators, it also needed to balance that interest against the need to
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`provide for mitigation in the event that an exempt generator exercised market power.15
`
`Therefore, the Commission held that the grandfathered units still should be subject to
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`mitigation in the event that PJM or its Market Monitor concluded that the units exercised
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`“significant market power.”16 The Commission did not define what would constitute
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`“significant market power” warranting the lifting of an exemption.
`
`Implementing these orders, Section 6.5 of Schedule 1 of the Operating Agreement17
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`exempts the grandfathered units specified by the Commission, but provides that “[i]n the
`
`event that [PJM] or the PJM Market Monitor concludes that a generation resource exempted
`
`14
`
`by this section 6.5 exercises significant market power, then [PJM] may impose mitigation on
`
`
`PJM Interconnection, L.L.C., 112 FERC ¶ 61,031, at P 65 (2005) (“EL03-236
`Rehearing Order”) order on reh’g, 114 FERC ¶ 61,302 (2006). Consequently, the
`following units continue to hold a construction exemption: (i) units in the original
`PJM footprint for which construction commenced between April 1, 1999 and
`September 30, 2003; (ii) units in the Duquesne Light Company Zone for which
`construction commenced after August 27, 2001 and before September 30, 2003;
`(iii) units in the Rockland Zone for which construction commenced after October
`17, 2001 and before September 30, 2003; (iv) units in the AP Zone for which
`construction commenced after March 15, 2001 and before September 30, 2003;
`and (v) units in the Dayton Power & Light Zone, the Commonwealth Edison
`Company Zone, the American Electric Power Zone, and the Virginia Electric and
`Power Company Zone for which construction commenced after May 28, 2002 and
`before September 30, 2003. Operating Agreement, Schedule 1, § 6.5.
`
`15
`
`16
`
`17
`
`See PJM Interconnection, L.L.C., 114 FERC ¶ 61,302, at P 4 (explaining January
`25 Order).
`
`January 25 Order at P 60 (emphasis added).
`
`The rules are contained in both Schedule 1 of the Operating Agreement and the
`Appendix to Attachment K of the PJM Tariff, which are identical.
`
`8
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`

`

`such generation resource, provided that, prior to imposing mitigation, [PJM] or the PJM
`
`Market Monitor makes a filing under section 205 or 206 of the Federal Power Act
`
`documenting the exercise of market power by the generating resource and the Commission
`
`has accepted such filing.”18
`
`Thus, the Commission established a balancing test for determining whether
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`construction-exempt units should be subject to offer capping. While the reliance interest of
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`remaining exempt units19 “needs to be taken into account,”20 it can be overcome if an
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`exempt unit exercises “significant market power.”21
`
`Since these rules have been effect, there has been only one case in which the PJM
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`Market Monitor has provided an opinion to PJM that a particular construction-exempt
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`generator allegedly exercised market power. As explained below, in this single case, the
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`matter was properly referred to the Commission, which evidently determined that there was
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`insufficient basis for action in the matter.
`
`B.
`
`PJM Would Not Oppose A Commission Re-assessment Of The
`Construction Exemption.
`
`As indicated above, several years have passed since the Commission elected
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`generally to terminate the offer-capping exemption for post-1996 units, but preserve a
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`construction exemption for certain units that might have been built partially in reliance on
`
`18
`
`19
`
`20
`
`21
`
`
`
`Operating Agreement, Schedule 1 § 6.5.
`
`As a result of the Commission’s orders, the number of exempt units in PJM was
`reduced from 215 to 56. Complaint, Attachment B – Answers To MdPSC
`Questions, at 23.
`
`January 25 Order at P 60.
`
`Id.
`
`9
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`

`

`that exemption. In that time, there have been significant changes to the PJM markets,
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`including implementation of scarcity pricing rules,22 limitations on mitigation of frequently
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`mitigated units needed for reliability,23 and comprehensive reform of the PJM capacity
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`market.24
`
`There currently are 56 units that qualify for the construction exemption. Whether or
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`not the Commission were ever to find that any of these units had exercised market power (as
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`discussed below, the complaint does not demonstrate such market power), the Commission
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`still could determine that the equitable reliance interests that prompted the construction
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`exemption have become attenuated simply by the passage of time, or have been mitigated or
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`become moot as a result of other market changes.
`
`To be clear, PJM is not convinced that eliminating the construction exemption is
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`warranted. However, PJM would not object to the Commission re-visiting its prior policy
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`determination in response to this complaint to further consider the question.25 As noted
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`above, if the Commission undertakes that policy review, and determines to retain the current
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`construction exemption, it could provide greater certainty to PJM, state regulators, and
`
`market participants by clarifying the “significant market power” standard.
`
`22
`
`23
`
`24
`
`25
`
`
`
`See PJM Interconnection, L.L.C., 114 FERC ¶ 61,076 (2006).
`
`Id.
`
`See PJM Interconnection, L.L.C., 117 FERC ¶ 61,331 (2006), order on reh’g, 119
`FERC ¶ 61,318, reh’g denied, 121 FERC ¶ 61,173 (2007), pets. for review
`pending sub nom. Pub. Serv. Elect. & Gas Co. v. FERC, Nos. 07-1336, et al.
`(D.C. Cir., filed Aug. 23, 2007).
`
`to focused “paper-hearing”
`That policy assessment may be well-suited
`procedures, in which parties could be invited to express their views on whether
`market changes or other factors should cause the Commission to change the
`balance it struck when it adopted the construction exemption in its current form.
`
`10
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`

`

`C.
`
`The Complaint Does Not Show That Exempt Units Have Exercised
`Significant Market Power.
`
`The standard for lifting the construction exemption from a unit is its exercise of
`
`“significant market power.”26 In its complaint, the MdPSC relies upon the PJM Market
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`Monitor’s mark up analysis, which the MdPSC contends demonstrates exercises of
`
`market power. Based on the Market Monitor’s evaluation that exempt units “mark up”
`
`their energy market offers above his estimate of their marginal costs, the PJM Market
`
`Monitor told the MdSPC that exempt units “can and do exercise market power, at times,
`
`that would not be permitted if the units were not exempt.”27 MdPSC alleges that
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`“[a]ccording to the MMU, all exempt units’ ‘exercise of market power’ added $87.5
`
`million to Maryland’s 2006 real-time energy related charges.”28 Based on the PJM
`
`Market Monitor’s analysis, the MdPSC asks the Commission to eliminate the
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`construction exemption for all generating units.
`
`While well-intentioned, this approach cannot gain the MdPSC the relief it seeks.
`
`The MdPSC posits that an exercise of market power is demonstrated and quantified by an
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`exempt unit’s submission of an offer price above the Market Monitor’s administrative
`
`estimate of the unit’s marginal costs, whenever the exempt unit is the marginal unit. As
`
`such, the MdPSC equates the competitive price for the market with the Market Monitor’s
`
`cost estimate of the exempt unit’s costs. But this ignores the competitive offers of all
`
`26
`
`27
`
`28
`
`
`
`Operating Agreement, Schedule 1 § 6.5.
`
`Complaint at 19.
`
`Complaint at 15.
`
`11
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`

`

`other market participants. And it places too much reliance on the cost-estimating abilities
`
`of a single individual, i.e., the Market Monitor.
`
`As PJM explained to the MdPSC before it filed its complaint,29 the PJM Market
`
`Monitor made the simplifying, but invalid, assumption that the construction-exempt unit
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`still would be the marginal unit—setting the market clearing price—even though its
`
`“marked up” offer is reduced to an offer capped price. As PJM explained to the MdPSC:
`
`The [PJM] Market Monitor’s analysis is overly conservative because it
`fails to consider that when the supply curve is altered, the marginal
`generator can, and likely will change. Because this dynamic is ignored,
`the [PJM] Market Monitor’s analysis quantifies the impact of markup on
`LMP in a manner very likely to overstate significantly the impact of the
`markup on LMP.30
`
`In other words, the market’s competitive price likely will not be set by the estimated
`
`marginal costs of the exempt unit, but by the unit that submitted the next-lower price
`
`below the exempt unit’s “marked-up” price. If that unit is not exempt, and either did not
`
`require mitigation or was properly mitigated, then it is a better indication of the
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`competitive price for the market, even though that price may be well above the
`
`administrative estimate of the exempt unit’s marginal costs. Based on PJM’s evaluation
`
`of a sample of the actual offer prices of other units that would set price if exempt units
`
`were offer capped, PJM believes that, considering this factor alone, the alleged increase
`
`29
`
`30
`
`
`
`Letter from Andrew L. Ott to Steven B. Larsen, December 10, 2007, MdPSC
`Complaint, Attachment E.
`
`Complaint Attachment E at 3.
`
`12
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`

`

`above competitive prices is less than 30 percent of the increase depicted by the PJM
`
`Market Monitor and relied upon by the MdPSC.31
`
`The MdPSC’s approach also places too much reliance on the Market Monitor’s
`
`administrative cost estimates, and there is evidence that those estimates may be faulty.
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`Based on PJM’s review, at least four of the exempt units that the Market Monitor claims
`
`are “marking up” prices are owned by municipal entities with load-serving obligations.
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`These municipal load-serving entities are both buyers and sellers of energy, and purchase
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`far more energy than they sell. Because their generation and load are located at the same
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`LMP nodes, it is very unlikely they would have any incentive to exercise market power to
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`raise prices, which would translate into their paying substantially more for their overall
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`energy needs. More likely, the PJM Market Monitor has inaccurately estimated these
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`units’ operating costs (as exempt units, they do not report their costs to PJM), thus
`
`resulting in an overstatement of the unit’s “mark up” and resulting impact on prices.
`
`Indeed, PJM’s review indicates that these units’ offers are consistent across all days; they
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`do not “mark up” their offers during constrained days.32 This is not indicative of an
`
`31
`
`32
`
`
`
`Moreover, even this reduced quantification far overstates the impact of prices on
`load-serving entities in Maryland. The Market Monitor’s State of the Market
`Report indicates that only six percent of load is unhedged against the impact of
`increased real-time energy prices and therefore purchases from the spot market.
`2006 State of the Market Report at 88. Yet, the MdPSC’s allegation that
`Maryland customers suffered $87.5 million of increased costs in 2006 assumes
`that every megawatt of load paid the increased prices. Based on the six percent of
`megawatt-hours actually purchased in the spot market, even if there were no other
`flaws in the Market Monitor’s analysis, the impact on load would be closer to $5
`million in 2006.
`
`Moreover, under PJM market rules, generators may submit only one market-based
`offer curve for any single day. Operating Agreement, Schedule 1, Section
`(Cont’d . . . )
`
`13
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`

`

`exercise of market power. PJM believes that it is more reasonable to assume that the
`
`PJM Market Monitor did not have sufficient operating cost information available for
`
`these units in his analysis than it is to presume that these load serving entities are
`
`choosing to “mark up” their offers in order to exercise market power.33
`
`The MdPSC’s approach also fails to account for the possibility that the calculated
`
`mark-ups may be warranted by scarcity conditions, even though the Market Monitor
`
`himself recognized in his report to the MdPSC that scarcity conditions produce valid
`
`markups. He stated: “The fact that unit markups affect prices in a zone does not mean
`
`that . . . owners of units . . . have exercised market power.” Complaint, Attachment B at
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`42. As he explained, “markup on high load days is likely to be the result of appropriate
`
`scarcity pricing rather than market power.” Id. at 43. Neither the Market Monitor nor the
`
`MdPSC evaluates whether any of the alleged “mark ups” were a result of scarcity
`
`pricing.34
`
`The MdPSC ignores these flaws, all of which tend to contradict the claim that
`
`there has been an increase in prices above competitive levels. But more fundamentally,
`
`by simply relying, without more, on the Market Monitor’s report, the MdPSC fails to
`
`
`
`
`
`( . . . cont’d)
`1.10.1A(d)(ii). This rule makes it more difficult for units to attempt to exercise
`market power, because they cannot raise or lower their prices throughout the day.
`
`33
`
`34
`
`As just one example, the PJM Market Monitor may not have complete
`information about the fuel contracts of exempt units, critical to determining a
`unit’s marginal costs. Exempt units do not report that information to PJM.
`
`PJM also understands that the Market Monitor’s analysis includes “mark ups”
`even if the units are not being operated out of merit order to relieve constraints,
`which further inflates the alleged impacts. Even if the MdPSC’s complaint were
`granted, these ordinary mark-ups would be permitted.
`
`14
`
`

`

`make a prima facie showing that any unit has exercised market power. Nowhere does
`
`the MdPSC show that any exempt unit has managed to increase prices by a significant
`
`amount above competitive levels for a significant period of time. As shown above, the
`
`increase, if any, is far less than the Market Monitor portrays, since he insufficiently
`
`accounted for other competitive offers, failed to account for scarcity pricing, and
`
`evidently under-estimated exempt units’ marginal costs. Whether any remaining price
`
`increase, if any, was significant and sustained for a significant period of time is not
`
`addressed. Without an analysis that is far more accurate, rigorous, and detailed, there is
`
`no basis for believing that any particular exempt generator is exercising market power.
`
`The complaint’s generalized claims about average mark-ups certainly provide no basis
`
`for wholesale elimination of the exemption for all currently exempt units.
`
`Notably, although the market rules provide for lifting exemptions only when
`
`significant market power is exercised, with only one exception, the PJM Market Monitor
`
`has informed PJM of only general concerns regarding exempt units exercising market
`
`power. With only one exception, the Market Monitor has not identified to PJM any
`
`specific concerns regarding individual units that he believed were exercising significant
`
`market power that would warrant action under Section 6.5 to remove an exemption.35
`
`The one exception is a single unit that the PJM operations staff initially brought to the
`
`PJM Market Monitor’s attention. With regard to this unit, the PJM Market Monitor
`
`opined that the generating unit had exercised market power and received excess payments
`
`of $20 million. After investigating, PJM determined that, rather than a public filing
`
`seeking to terminate the unit’s exemption, the proper course of action was for the PJM
`
`
`Complaint, Attachment E at 2.
`
`35
`
`15
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`

`

`Market Monitor to report the situation to the Commission, which it did. However, the
`
`Commission evidently found the referred matter did not warrant any enforcement action
`
`by the Commission, since it took no action. In light of the Commission’s inaction, PJM
`
`reasonably considered that the Commission believed that significant market power had
`
`not been exercised and that there was no basis to terminate the unit’s exemption.36
`
`In short, the MdPSC complaint does not support its allegations of market power.
`
`PJM does not question the earnestness or seriousness of the MdPSC’s concerns about the
`
`potential that market power is being exercised. If any generators are exercising
`
`significant market power, exempt or not, the Commission clearly should address it.
`
`However, the absence of reports by the Market Monitor of the exercise of market power
`
`by individual exempt units undercuts the claim by the MdPSC that there is “clear
`
`evidence of market power.”37
`
`In view of the lack of evidence of actual exercises of
`
`market power and the problematic limitations in the proffered analysis, as described
`
`above, the Complaint’s allegations of market power do not provide a basis for
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`elimination of the construction exemption. Nonetheless, as stated above, PJM would not
`
`oppose the Commission considering, as a policy matter, whether the construction
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`exemption remains just and reasonable.
`
`36
`
`
`
`The PJM Market Monitor is obligated to report to the Commission if he has
`identified a significant market problem. See PJM Tariff, Attachment M § IV.A.
`Yet, aside from the one instance described above, neither the MdPSC nor the PJM
`Market Monitor has presented any evidence that individual exempt units have
`exercised market power.
`
`37
`
`Complaint at 16.
`
`16
`
`

`

`D.
`
`Any Change To The Construction Exemption Should Be On A
`Prospective-only Basis.
`
`If the Commission does determine to change the construction exemption in this
`
`proceeding, such changes should be only prospective. Section 6.5 specifically
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`contemplates prospective mitigation: PJM may mitigate individual exempt units only
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`after submitting a filing “documenting the exercise of market power by the generating
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`resource” and after “the Commission has accepted such filing.” In no event should the
`
`Commission require PJM retroactively to re-run energy markets and recalculate market
`
`clearing prices. The Commission generally “disfavor[s] re-determining market outcomes
`
`after the fact.”38 Here, retroactively re-running energy markets with previously exempt
`
`units offer capped would affect not only exempt units that allegedly exercised market
`
`power, but also all other market participants that relied on the daily prices established in
`
`the energy market. Finally, retroactive application as sought by the complainant would
`
`offend equities by holding past market participant conduct to a standard of “significant
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`market power” that has not yet been defined by the Commission. Therefore, any lifting
`
`of the construction exemptions in this proceeding should be prospective only, following
`
`any Commission decision.39
`
`38
`
`39
`
`
`
`N.Y. Indep. Sys. Operator, Inc. 113 FERC ¶ 61,340, at P 17 (2005). See id. (citing
`Wisvest-Connecticut, LLC v. ISO New England, Inc. 104 FERC ¶ 61,262, at
`61,849 (2003) (“[R]etroactivity is not authorized when a new rule is substituted
`for an old rule that was reasonably clear so that the settled expectations of those
`who had relied on the old rule are protected.”).
`
`See Borough of Chambersburg, PA v. PJM Interconnection, L.L.C., 119 FERC
`¶ 61,166 at P 46 (2007) (stating there was no basis retroactively to re-allocate
`auction revenue rights thereby “upsetting customer expectations” where “it would
`not be practical to re-run the [FTR] auction . . . to implement a change in the
`allocations for all of the participants in the ARR process, not just the
`[Complainants].”); see also Consol. Edison Co. of N.Y. v. FERC, 347 F.3d 964,
`(Cont’d . . . )
`
`17
`
`

`

`III.
`
`THE COMMISSION SHOULD DISMISS THE MDPSC COMPLAINT
`REGARDING
`EXEMPT
`INTERFACES AND ALLOW
`PJM
`STAKEHOLDERS TO ADDRESS THE MATTER
`IN THE
`STAKEHOLDER PROCESS.
`
`A.
`
`The MdPSC Presents No Evidence Of The Exercise Of Market Power
`On The Exempt Interfaces.
`
`The MdPSC presents no evidence in its complaint of the exercise of market power
`
`on the exempt interfaces. Indeed, the PJM market now has operated for over eight years
`
`with the East, West and Central interfaces exempt from offer capping.40 During this
`
`eight-year period, neither the PJM Market Monitor nor PJM has identified any exercise of
`
`market power by any generating unit related to the control of these large, regional
`
`transmission interfaces.41 Congestion on these regional interfaces can be controlled by a
`
`large number of generators, are among the most liquid in PJM, and support significant
`
`over-the-counter bilateral forward transacting as well as, in some cases, futures exchange
`
`
`
`( . . . cont’d)
`969 (D.C. Cir. 2003) (Commission has “no authority to grant retroactive relief for
`the two months prior to the filing [to change the market rule] despite the dramatic
`price spike.”); see also Bangor Hydro-Elec. Co. v