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What is wrong with the mandatory capacity markets? long-term fixed-price contracts for new power plants and,at Capacity prices in mandatory capacity markets have increased about the same time,the Maryland Public Service Commission the cost of electricity and account for a significant share of the issued an order to procure long-term contracts for new capacity. total electricity costs paid by consumers and businesses.In the- Fearful of the lower prices that would result from the entry of ory,capacity payments cover a power plant's fixed capital costs new generation constructed under these state efforts,owners of and other costs not recovered through electricity sales in energy existing power plants sought to block this competition.PJM re- and other markets.But these markets have not demonstrated sponded with a similar proposal,and in 2011,FERC approved that they incent investment in either the generation necessary changes to the PJM's"minimum offer price rule" (MOPR).This to achieve a reliable and diverse supply of power or generation more stringent rule requires PJM to replace low-or zero-price where it is most needed.Moreover,they do not exhibit any of offers from new natural gas plants with higher price offers,mak- the features of competitive markets,and are instead adminis- ing it more difficult for these new plants to"clear"the capacity trative constructs requiring elaborate rules and processes.The auctions. RTOs have continually tweaked the rules in an attempt to ISO-NE,in accordance with an order from FERC,modified address increasing reliability concerns in light of:pending coal its rules to create a similar MOPR to PJM in December 2012, and nuclear retirements;an increased reliance on natural gas; despite the absence of support from stakeholders in the region, poor performance of generators during the 2014 winter;and and received approval from FERC in February 2013.The new environmental regulations. Often these rule changes have ISO-NE minimum offer price applies to all resources,including not improved the markets,but instead simply increased the rev- renewable energy(other than a small exemption).In both PJM enue paid to owners of existing generation resources,who have and ISO-NE,FERC actually reversed carefully negotiated pro- a strong interest in a regime that limits competition from new visions agreed to when the markets were created that guaranteed entrants and props up capacity prices,as described below. that self-supply resources could clear the auctions.The PJM To illustrate the high costs of these markets,in the PJM and ISO-NE orders were appealed to the U.S. Court of Appeals capacity market,known as the Reliability Pricing Model(RPM), for the Third Circuit.Unfortunately,the court ruled that the approximately$95 billion has been paid or pledged to capac- self-supply appeal was mooted by FERC's approval of a com- ity suppliers through the middle of 2020.This works out to promise for a self-supply exemption(described later),and also approximately$1,600 per man,woman,and child living in rejected the states'appeals of the MOPR rule.In separate cases, PJM's 13-state area.In 2015,the RPM added$120 per year federal district courts in Maryland and New Jersey invalidated to the average electric bill of a homeowner, $930 for a retail the Maryland order and New Jersey law,respectively,because, establishment,and$19,000 for an industrial facility. But only a the courts stated,FERC has jurisdiction over wholesale power small portion of the$95 billion spent or committed is financing rates and states cannot take actions that impact wholesale power new generation capacity.More than 90 percent of the capac- markets.These decisions were appealed and upheld by the U.S. ity procured is existing power plants and only two percent is Courts of Appeals for the Third and Fourth Circuits. Both new and"reactivated"generation resources.While PJM touts New Jersey and Maryland state commissions and two indepen- demand response as a successful outcome of RPM,this resource, dent power producers filed petitions for certiorari to the U.S. combined with energy efficiency,accounts for only five percent Supreme Court asking it to review the Circuit Court decisions, of the capacity. which were granted for the Maryland and independent power producer cases,and consolidated into a single case.In a narrow- What are the most problematic changes to the ly written decision on April 19,2016,the U.S.Supreme Court capacity markets? affirmed the Fourth Circuit and invalidated the Maryland long- Among the more problematic changes to capacity market rules term contract because the contract would guarantee the owner have been"buyer side mitigation"or"minimum offer price of the new power plant a wholesale interstate rate,and therefore rules."The impetus for these changes began about five years ago "disregards an interstate wholesale rate required by FERC,"and when several states located within RTOs became frustrated with is preempted by the Federal Power Act.The Court also let stand the lack of new power generation being developed despite bil- the Third Circuit's decision with regard to the preemption of lions of dollars spent on capacity payments.These states sought the New Jersey contracts. to take control of their energy resource future and protect their A second set of problematic changes to the capacity markets, residents from high electricity prices.New Jersey,Maryland, referred to as"capacity performance"in PJM or"performance and Connecticut all took steps to establish competitive bidding incentives"in ISO-NE,will also significantly increase capacity processes for the procurement of capacity for long-term bilateral costs and further constrain supply.In New England,generators contracts.In January 2011,New Jersey Governor Chris Christie that are not operating or not providing reserves during scarcity signed legislation to create a competitive bidding process for conditions are subject to stringent penalties,encouraging re- s6 PublicPower.org 238