FERC Shows it is Serious About Reforming the Grid. PJM is Not.

America needs more power, and plenty of it. As Domenico Ferraro, PhD, Associate Professor at Arizona State University, noted in a recent report for the Goldwater Institute, “The policy question is not whether to accommodate the AI [artificial intelligence] boom, but how to get the next increment of power generation, transmission, and local grid capacity operational on a timeline consistent with demand growth and at a manageable cost.” Recent Federal Energy Regulatory Commission (FERC) actions will pave the way for plentiful electricity and grid reform, but only if grid operators such as PJM are willing to cooperate. With the right policies, America can continue to power its innovation ecosystem.

After years of dubious policies, FERC is making large strides toward power abundance. On June 18, FERC announced it was launching “aggressive targeted action to speed large load [i.e., power intensive] integration.” In other words, FERC wants to make sure that large energy users can continue creating jobs, bolstering tax revenue, and powering the innovation economy with minimal impact to ratepayers. FERC is telling the six regional grid operators under its jurisdiction to “ensure that adequate generation will be available to serve existing and new large loads” and either justify or reform its current rates.

The problem is that outdated rules are holding back power supply. In particular, many mid-Atlantic PJM states—including Maryland, Pennsylvania, and New Jersey—have rules on the books that forbid utilities from building or owning power plants. While these rules were put into place by state governments, PJM’s rules and institutional design act as a “soft mandate” that sustains and reinforces forced divestiture in restructured states.

While PJM does not explicitly forbid utilities from owning generation, its framework is designed under the assumption that generation should be an independent, at-risk asset—not integrated with power transmission. For a utility in a PJM state considering a return to generation ownership (assuming they are even allowed to do so), the grid operator’s rules create massive friction, financial risks, and regulatory hurdles.

Ordinarily, utilities that build plants can incorporate capital costs and investments into long-term rates, ensuring stability for ratepayers. However, PJM’s rules force bidding into a volatile and short-term wholesale market, undermining a stable and integrated approach. This bizarre system is entirely at odds with how markets ordinarily function. For example, if Walmart wants to build a massive, state-of-the-art distribution center that costs $500 million, it is free to calculate that cost, amortize it over 20 years, and bake a fraction of a penny into the price of every box of cereal and tube of toothpaste it sells to ensure it steadily pays off the building. If a regional regulator were to step in and stipulate that Walmart is forbidden from pricing its goods based on what it cost to build that distribution center, the result would be far less investment and business certainty. Yet, this is the system that PJM foists onto power markets, and it is little wonder that PJM faces a massive energy shortfall and gargantuan price increases passed along to consumers. 

PJM’s current rules guarantee power supply shortages and are fundamentally at odds with FERC’s efforts to meet America’s growing electricity needs. State governments and grid operators such as PJM must work together to allow all companies—including utilities—to supply power to consumers. The U.S. cannot continue to lead the way in digital innovation with outdated grid policies.