PJM Proposes Reliability Reset While FERC Questions Its Governance

Key Takeaways

• A recent white paper from PJM seeks to reframe the region’s resource adequacy debate around risk allocation, reliability, market design, and the shared reliability compact, but its deliberative approach comes as FERC and stakeholders press for faster action.
• Rapid demand growth, generation retirement, and development delays have shifted the region from surplus to scarcity, creating a “credibility trap” in which high-capacity prices signal the need for new generation but may not provide bankable investment certainty.
• PJM identified three potential reform paths: stabilizing markets through long-term forward commitments, differentiating reliability and curtailment obligations for certain loads, and shifting more revenue recovery to energy and ancillary services markets while retaining a capacity-market backstop.
• Market participants should expect PJM to pursue multiple reform tracks as FERC uses its upcoming technical conference to scrutinize whether PJM’s governance can produce timely results, with FERC limited in its direct control but still able to influence filed market rules and practices affecting jurisdictional rates and services.

PJM’s May 6, 2026, white paper, Powering Reliability Through Market Design, is a philosophical effort to reset the region’s resource adequacy conversation. PJM frames the paper as a response to the PJM board’s January 16, 2026, directive to conduct a holistic review of capacity market design and investment incentives, which came after the board concluded that current market volatility was placing unsustainable stress on the governmental compact that allows the market to function. The paper deliberately does not recommend a single path. Instead, PJM characterizes the fundamental market design choices as questions about risk allocation, reliability standards, market architecture, and the meaning of the shared reliability compact in an era of scarcity. That posture is thoughtful and institutionally disciplined, but it arrives at a moment when FERC and PJM stakeholders are signaling that they have little patience for extended deliberation. 

That tension is now explicit. In remarks at PJM’s annual meeting on May 12, 2026, FERC Chairman Laura Swett described PJM as facing “historically unprecedented demand” and warned that the region needs new generation “NOW.” She also stated that PJM’s current stakeholder process is “slow where it must be fast, opaque where it must be transparent, and vulnerable to vetoes and agenda control exactly when the region needs immediate action.” On the same day, FERC issued a notice convening a chairman- and commissioner-led technical conference for July 23, 2026, focused on PJM’s governance and stakeholder process and on “actionable reforms” to improve PJM’s ability to address system needs in a timely and efficient manner. 

PJM’s Core Diagnosis: Scarcity, Credibility, and Durability

PJM’s starting point is that the region has moved from an era of managing surplus to an era of managing scarcity. According to PJM, the scarcity is driven by three structural forces: rapid demand growth from data centers and electrification; accelerated retirement of dispatchable generation; and supply chain, permitting, and interconnection frictions that have lengthened the time needed to bring new supply online. PJM acknowledges that the 2027/2028 Base Residual Auction cleared approximately 134,478 MW of unforced capacity, producing an installed reserve margin of only 14.4%, a 5.6% shortfall against PJM’s 20% reliability target. PJM also emphasizes that this is not merely an auction-scheduling problem, because load is connecting faster than generation can physically be built to serve it. 

The white paper’s critical market-design insight is the “credibility trap.” PJM explains that high capacity prices are the rational market response to scarcity, but those same prices create affordability pressure for unhedged load and invite governmental intervention. Investors then discount the durability of the revenue signal because they fear price caps, backstop procurement, or other administrative intervention, which can leave capital on the sidelines even when the market is signaling a need to build. In PJM’s view, the current market may be sending the right economic signal but failing to make that signal bankable over the time horizon needed for generation investment. 

That distinction matters for stakeholders because PJM is not proposing to suppress the cost of reliability. Instead, PJM is asking whether the region can redesign market obligations and hedging structures so that reliability costs are made more durable, more financeable, and less politically destabilizing. The paper therefore reframes the capacity market debate from a narrow question about auction parameters into a broader question about who bears risk, who must hedge, who may be curtailed, and what institutional process is legitimate enough to allocate those burdens. 

Three Pathways, Not One Proposal

PJM puts three high-level pathways on the table. Path A, “Stabilized Markets,” would preserve the shared reliability compact by requiring most load to be covered through long-term forward commitments, either through mandatory load serving entities hedging or through PJM-administered long-term procurement. Under that approach, the spot capacity market could continue to reflect scarcity prices when the system is short, but most load would be insulated from those prices through forward contracts or commitments. The key tradeoff is that consumers may give up some short-term procurement optionality in exchange for greater bill stability and a more durable investment signal. 

Path B, “Differential Reliability,” would confront the possibility that the shared reliability compact that has defined the PJM market from inception cannot be maintained for all load under structural scarcity. PJM describes this path as a move toward deliberate, principled, and governable differentiation of reliability, rather than leaving scarcity allocation to emergency protocols, distribution-system architecture, or the physics of the grid. The most immediate version of this concept is reflected in PJM’s Connect and Manage work, which would place large new loads that interconnect without associated new supply at the front of the curtailment queue. This path is technically compelling but institutionally difficult. As PJM recognizes, FERC, state commissions, legislatures, governors, utilities, and customers would all have roles in deciding how differentiated reliability would actually work. 

Path C, “Energy Market Transition,” would shift more revenue recovery from the capacity market to the energy and ancillary services markets, paired with long-term forward energy contracting requirements to protect consumers from energy price volatility and support investment. PJM is careful to say that this is not an “energy-only” model, because the paper still assumes a capacity market backstop for resource adequacy. This path would require major energy and ancillary services reforms, including reserve market changes that PJM views as necessary under any of the three pathways. 

PJM does not view these pathways to be mutually exclusive. PJM notes that elements of Path A are compatible with Paths B and C, and the paper contemplates that PJM may move on multiple tracks at once: near-term hedging reforms, large-load differentiation frameworks, and energy and reserve market reforms that could support a longer-term transition. For market participants, that means PJM’s white paper should be read less as a menu and more as a strategic map of reforms that may advance in parallel and reinforce one another over time. 

The Governance Clock Is Running

PJM’s deliberative approach is grounded in a serious concern about legitimacy. PJM states that wholesale electricity markets depend not only on price curves and performance obligations, but also on the belief of generators, utilities, investors, and consumers that the rules are fair, stable, and the product of a credible process. The white paper’s “next steps” are therefore framed around completing the reserve reform package, developing Connect and Manage, beginning forward-contracting policy work, and engaging stakeholders on foundational questions through 2026. PJM also acknowledges that the time available to make these decisions deliberately is measured in years, not decades. 

FERC’s recent actions suggest that the Commission may view that timeline as too slow. Chairman Swett’s remarks described the status quo as “unacceptable” and characterized current governance concerns as “warning signs of a serious legitimacy crisis.” She also stated that FERC “will not shy away from taking action if necessary” and announced the July 23 technical conference as a work session to build a record “eyed toward actionable change.” The formal notice confirms that the conference will focus on PJM governance and stakeholder process reforms, with particular attention to reforms that would improve PJM’s ability to address system needs in a timely and efficient manner. 

That creates a difficult sequencing problem. The reforms PJM is teeing up involve questions that are not merely technical; they include whether reliability remains a common good, whether some loads should have differentiated curtailment priority, whether default service providers should be required or enabled to hedge over longer horizons, and whether energy-market scarcity pricing should carry more of the investment signal. Those questions require stakeholder buy-in and interjurisdictional coordination, but the operational and political pressures may require PJM to move before consensus fully forms. 

PJM’s and its stakeholders’ challenge is therefore to move quickly without losing the legitimacy that makes market rules investable. That is a high-wire act: A durable solution likely requires deliberation, state coordination, investor confidence, consumer protection, and stakeholder legitimacy, but the reliability and governance clock is already running. 

How Far Can FERC Go on PJM Governance?

FERC has substantial tools to influence PJM’s market design and filed tariff rules, but there are meaningful limits on FERC’s ability to directly control the internal governance of an independent system operator (ISO) or regional transmission organization (RTO). As a “creature of statute,” FERC has only the authority Congress confers on it.[1] The courts have rejected FERC’s attempt to dictate the composition and selection of an ISO board as a “practice affecting rates” under Section 206 in the past, limiting that phrase to methods or ways of doing things that directly affect rates or are closely related to rates. In practical terms, that suggests FERC’s most durable path is likely to require or encourage tariff, operating agreement, or filed-process reforms that are tied closely to jurisdictional rates, terms, conditions, market rules, or services, rather than to attempt direct command-and-control over PJM’s board or corporate machinery. 

This is a line that will matter after the July 23 technical conference. FERC may have room to require greater specificity, transparency, deadlines, decisional criteria, voting procedures, or escalation mechanisms in filed PJM processes if those mechanisms significantly affect jurisdictional rates, terms, conditions, market rules, or services and if FERC builds an adequate record. FERC’s authority is more vulnerable if it attempts to dictate board composition, stakeholder composition, or otherwise regulate internal corporate governance as an end in itself. The Commission’s technical conference is therefore important not only as a policy forum, but also as a record-building exercise that may help FERC frame any future action as a reform to jurisdictional market rules and filed practices rather than as a direct takeover of PJM governance. 

Market participants should expect parallel tracks rather than a single reform proceeding. PJM is likely to continue advancing reserve-market reforms, large-load curtailment and Connect and Manage concepts, and forward-contracting policy discussions, while FERC uses the July 23 conference to assess whether PJM’s governance and stakeholder processes can deliver timely results. The legal boundary for FERC will be important, but it should not be mistaken for a practical safe harbor for the status quo. FERC may face limits on directly controlling PJM’s corporate governance, but it retains meaningful leverage over filed market rules and practices that affect jurisdictional rates and services.

Possible Bellwether for Market Reform

PJM’s white paper candidly acknowledges that the region’s inherited market assumptions may no longer fit the physical, financial, and political realities of the grid. The three-year forward capacity signal no longer aligns cleanly with modern generation development timelines, capital costs have increased sharply, project finance now demands greater revenue certainty, and load growth from data centers is moving faster than the supply-side response. PJM is also confronting the fact that, in some ways, stakeholder legitimacy is itself part of market design, because investors need confidence not only in prices but also in the durability of the rules that produce those prices. 

Other organized markets will be watching, because PJM is not alone in facing load growth, resource turnover, supply-chain constraints, and pressure to revisit scarcity pricing and reserve-market design. Other RTOs and ISOs have already undertaken or are undertaking major reserve-market reforms to navigate changes in the generation fleet. PJM observes that hyperscale data centers may create both the problem and part of the solution, because the same class of load that is straining the system may be capable of price-responsive flexibility through workload shifting, on-site generation, and battery discharge. If PJM can translate that insight into market rules that are financeable, administrable, and politically legitimate, it may provide a model for other regions facing similar pressures. But if PJM cannot do so at speed, it risks deep structural changes and active intervention from FERC.

Endnote

[1] Cal. Indep. Sys. Op. Corp. v. FERC, 372 F.3d 395, 398 (D.C. Cir. 2004).