[co-author: Amber Miller]*
On June 26, 2025, FERC upheld PJM Interconnection, L.L.C.’s (“PJM”) proposal to revise its Capacity Performance Quantifiable Risk (“CPQR”) Offer Cap. Several public interest organizations and PJM’s Independent Market Monitor (“Market Monitor”) filed requests for rehearing, arguing that PJM’s tariff changes did not adequately differentiate between costs directly related to capacity commitments and those incurred for other reasons, potentially leading to unfair rates. FERC disagreed, stating that PJM’s definition of CPQR provides a clear principle for identifying relevant costs and prevents sellers from inflating offer caps with unrelated expenses. The Commission emphasized that the review process by PJM and the Market Monitor ensures adherence to this principle, maintaining fair and competitive market practices.
PJM operates a Base Residual Auction to secure capacity three years in advance of a delivery year and uses its Capacity Performance construct to encourage resources to deliver energy during emergencies. The offer cap, a maximum price for capacity sellers with market power, was previously limited to the unit-specific net Avoidable Cost Rate (“ACR”), which is the gross ACR minus net energy and ancillary service (“EAS”) revenues. On October 13, 2023, PJM initially proposed changes to its tariff that would allow sellers to have an offer cap based on their incremental cost of providing capacity and segmented unit-specific offer caps. However, this proposal was rejected by FERC in February 2024 due to insufficient explanation of how incremental costs would be distinguished from those incurred for other purposes. In response, PJM submitted a revised proposal on December 20, 2024, to address FERC’s concerns by setting a price floor based on verified CPQR levels and removing uncertainty regarding the inclusion of other incremental costs. PJM also proposed resource-specific offer caps that would provide offer caps based on the megawatt segments of an offer. FERC issued an order approving this updated proposal on February 20, 2025, holding that by incorporating the CPQR in the offer cap floor, the offer cap will accurately reflect the costs and risks associated with capacity supply obligations.
In their request for rehearing, several public interest organizations argued that PJM’s tariff changes do not sufficiently differentiate between costs directly related to capacity commitments and those incurred for other reasons, which could result in unjust and unreasonable rates. FERC disagreed, finding that PJM’s tariff definition of CPQR provides a clear principle to differentiate costs that are directly related to capacity commitments from those incurred for other reasons. FERC found that CPQR is limited to valuing risks and costs associated with capacity commitments, ensuring that only necessary costs are included in the offer cap. FERC explained that this prevents sellers from inflating offer caps with unrelated costs, thereby maintaining fair and competitive market practices. FERC also notes that the review process by PJM and the Market Monitor ensures adherence to this principle, addressing concerns about vagueness and ensuring the proposal is enforceable.
The Market Monitor also requested rehearing and argued that FERC’s acceptance of the CPQR-based offer cap allows capacity offers to exceed competitive levels by ignoring EAS revenues entirely. The Market Monitor contended that the fundamental purpose of the capacity market is to provide “missing money” when net EAS revenues are less than avoidable costs, and that treating capacity as a separate product without considering EAS revenues undermines this purpose. They argued that there is no economic basis for a capacity market offer that is higher than necessary to cover avoidable costs net of EAS revenues, suggesting that the CPQR-based offer cap could lead to offers that do not reflect competitive market behavior. FERC disagreed, noting that under the CPQR Offer Cap Proposal, capacity market sellers are subject to market power mitigation, ensuring that their capacity offers align with competitive behavior. FERC highlighted that if EAS revenues fully offset a resource’s ACR. Still, the resource has a positive CPQR, the resource would have little incentive to incur additional costs for a capacity commitment without being able to include those costs in its offer. FERC stated that this ensures that the offer cap reflects only the necessary incremental costs associated with capacity commitments.
FERC upheld its February 20 order and continued to find PJM’s proposal just and reasonable and not unduly discriminatory or preferential.
A copy of FERC’s order, issued in Docket No. ER25-785-002 can be found here.
*Summer Associate
