On July 25, 2019, the Federal Energy Regulatory Commission (FERC) issued an order (July 2019 Order) directing PJM Interconnection, L.L.C. (PJM) to delay its capacity auction previously scheduled for August 2019. Instead it required PJM to wait for FERC to establish a replacement rate for the PJM tariff that was ruled unjust and unreasonable in a June 2018 order (June 2018 Order) (see Legal Update, FERC Order on Subsidized Generation Could Remake PJM Capacity Market).

The June 2018 Order granted a complaint filed in March 2016 by market participants against the Minimum Offer Price Rule (MOPR). The complaint asserted that PJM's MOPR was unjust and unreasonable because it allowed for the artificial suppression of prices in PJM's capacity market by below-cost offers from existing resources subsidized by out-of-market payments from state programs. The complaint included a proposed remedy, which, along with two alternative MOPR revisions proposed by PJM in April 2018, was rejected by FERC.

The June 2018 Order also instituted a 90-day paper hearing proceeding under Section 206 of the Federal Power Act (FPA) to determine the just and reasonable replacement rate for the PJM tariff, to address the subsidization issues. FERC action on the paper hearing remains pending more than a year later.

In April 2019, PJM filed a motion seeking clarification of FERC's June 2018 Order. In its motion, PJM also stated that it intended to run its capacity auction for the 2022-2023 delivery year in August 2019, as scheduled, under the existing PJM tariff. PJM sought confirmation that, if FERC had not established a replacement rate by the date of the capacity auction, any replacement rate later established would be applied prospectively and FERC would not require PJM to rerun the capacity auction. PJM also requested that FERC state in its ruling on the motion if they did not want PJM to run the scheduled capacity auction.

The July 2019 Order denied PJM's motion. FERC denied PJM's request to clarify that any replacement rate ultimately adopted would operate prospectively and that FERC would not require PJM to rerun the capacity auction. FERC directed PJM not to conduct the scheduled capacity auction until FERC establishes a replacement rate. It concluded that the magnitude of the tariff process and the interest of market participants in making resource investment and retirement decisions based on price signals warranted delaying the PJM capacity auction.

FERC commissioners Cheryl LaFleur and Richard Glick, both of whom voted against FERC's initial decision in the June 2018 Order, issued separate concurring opinions. Both reiterated their criticisms at the time the June 2018 Order was issued, indicating they believed FERC erred in concluding that PJM's tariff was unjust and unreasonable. LaFleur said that it was unrealistic in thinking that a 90-day paper hearing would be sufficient to determine a just and reasonable replacement rate. Rather, FERC's decision had "upended the PJM capacity market with no clear path to repairing it." Both concluded, however, that the absence of clear guidance from FERC left no alternative but to concur in FERC's decision delaying PJM's capacity auction.