- FERC rejected AEP’s request to sell 750 MW of excess capacity into PJM’s auction.
- The surplus stemmed from AEP’s own forecasting errors and investment decisions, not a demonstrated reliability need.
- The ruling reinforces that competitive electricity markets and capacity markets protect customers by ensuring utilities can’t shift the costs of speculative investments onto ratepayers.
On February 10, the Federal Energy Regulatory Commission (FERC) rejected American Electric Power’s (AEP) waiver request to allow its utilities – Appalachian Power, Indiana Michigan Power, Kentucky Power, and Wheeling Power – to sell up to 750 MW in PJM Interconnection’s upcoming incremental capacity auction.
At first glance, this may seem like a technical market dispute. However, AEP’s request to sell capacity to PJM was really an attempt to bail themselves out of poor business decisions made across several service territories.
With load forecast showing significant demand growth from data centers, AEP procured significant generation capacity. Unfortunately, the data centers never materialized. Rather than absorb the cost of its bets, AEP attempted to have customers across PJM bail them out under the guise of helping grid reliability.
Monitoring Analytics – PJM’s market monitor – argued in its November 26 filing that “the waiver would allow generators with fully guaranteed cost recovery paid for by their customers to undercut the capacity market in which investors take the risks. The primary result of the proposed waiver would be that the AEP FRR entities would be able to take advantage of the high PJM capacity market prices.”
Why did FERC reject the request?
FERC determined that AEP failed to show PJM needed its capacity to maintain grid reliability, stating, “AEP’s remaining problem is simply that AEP finds itself with excess capacity … because of its own business decisions that led to the procurement of more capacity than it needed.”
By FERC rejecting the waiver, the Commission made the important clarification that capacity markets exist to ensure reliability, not to give utilities an opportunity to game the market for misjudged business decisions.
AEP operates as a Fixed Resource Requirement (FRR) entity within PJM. Unlike competitive generators that fully participate in PJM’s capacity market, FRR utilities procure capacity directly on behalf of their ratepayers – while passing on investment risks, whatever the outcome of their decisions.
If FERC had allowed AEP to offload its excess capacity into PJM’s auction, utilities would be able to overbuild based on speculative load forecasts, recover their costs from captive ratepayers, and later double dip into the market when investments don’t pan out. FERC was right to call out the utility for this maneuver.
Markets Prove Effective in Rightsizing Investment and Protecting Customers
Capacity auctions are intentionally designed to prevent overbuilding that resembles AEP’s. When capacity auction prices are high – over multiple auctions – that is a sustained market signal that supply needs to be rebalanced with demand and investment in new generation is needed.
However, regulated utilities are dramatically expanding investment plans to match their own speculative demand forecasts. For example, Duke Energy announced a $103 billion plan, the largest spending plan of any regulated U.S. utility. Executives have emphasized the need to “add every available megawatt to the grid” to meet anticipated demand. If those forecasts are wrong, Duke’s captive customers will be saddled with that risk.
By design, competitive wholesale power markets impose discipline to protect customers and help keep prices stable over the long term. They also ensure that Independent Power Producers shoulder the burden of any bad business decisions, not customers. FERC’s decision in the AEP case reinforces a simple but critical principle: speculative business decisions should not automatically become reliability emergencies. If a utility overestimates load growth and procures more capacity than necessary, that does not constitute a regulatory intervention that bails them out through the market.
