By Rich Heidorn Jr.

WASHINGTON — Some came to praise PJM’s Reliability Pricing Model. Others said they’d like to bury it.

Six years after RPM’s inception, the Federal Energy Regulatory Commission convened a technical conference last week to ask the question: How’s the capacity market working for you?

The commission said it was time for a broad look at the strengths and weaknesses of PJM’s model and those launched later in ISO New England and NYISO and how the markets should evolve in the future. Commissioner Tony Clark likened the session to a “checkup.”

The day-long session, which featured 26 panelists and attracted an overflow crowd of hundreds, was the prelude for a potential FERC rulemaking. (The speakers’ written testimony is available in FERC’s eLibrary under Docket # AD13-7.)

PJM Represents `Best Practices’

The consensus among the speakers was that PJM’s market deserved the highest marks. “PJM does represent the vast majority of best practices here,” said securities analyst Julien Dumoulin-Smith of UBS Investment Research. Lee Davis, who heads NRG Energy’s operations in the three eastern regions, said his company is investing “hundreds of millions” to upgrade 600 MW of generation in PJM because of its confidence in the RTO. In contrast, he said, the company is retiring capacity in New England because of the instability in the region’s market rules. “We look at risk just as highly as we look at revenues,” he said.

Changes Needed

That’s not to say PJM’s model couldn’t use improvement, even its supporters acknowledged.

Andy Ott, PJM executive vice president for markets, cited concerns about the volume of imports that cleared in this year’s auction (see PJM Seeks to Curb Capacity Auction Speculation). He also cited price volatility in western PJM due to MISO’s “inadequate construct.”

Compromises Weaken Model

Consultant Roy Shanker said “FERC got it right” in setting capacity market rules but that compromises have eroded the construct. He cited PJM’s short-term resource procurement — which removes 2.5% of the reliability requirement from the demand curve — as “blatant price discrimination.”

There also was debate about the optimal forward and commitment periods, the role of demand response, the wisdom of creating “tranches” to reflect differences in resource capabilities and how capacity can accommodate the growing role of variable resources and new technologies such as storage. (See sidebar, Old Issues, New Technologies in Capacity Debate)

States, Public Power Bash MOPR

The central debate, however, was a crossfire between those who contend capacity prices are too high and those who say they are too low.

State and public power representatives said the markets interfere with state policies and have failed to attract competitively-priced new generation.

“A capacity market that does not recognize new capacity developed pursuant to the requirements of state statutes and regulations … cannot endure,” said Jeffrey Bentz, of the New England States Committee on Electricity.

Reality on the Ground

James Jablonski, representing the Public Power Association of New Jersey, said PJM’s capacity market rules don’t recognize “the reality on the ground.”

Despite capacity prices of $245 per MW Day in PSEG North, Jablonski said, no generation is being built because of the difficulty siting in the densely-populated state. “There’s no point in having … customers paying for something that doesn’t have a way of getting built.”

Ed Tatum, vice president of RTO and regulatory affairs for Old Dominion Electric Cooperative, said PJM’s rules to curb buyer-side market power are unnecessary. “I would like us to stop looking behind every tree for the boogeyman of monopsony power,” he said. “You have to think about intent [to exercise market power]. You have to think about incentives. You have to think about ability.”

He noted that PJM’s minimum price floor for generation sponsored by public power — the net Cost of New Entry (CONE) — has almost doubled since it was instituted.

Jablonski urged a return to the self-supply provisions in the 2006 RPM settlement. “We don’t bother you, you don’t bother us…We know we can build for less than [net CONE] so it makes no sense to buy from the capacity market.”

Generation Owners Cry Foul

Representatives of generation owners, however, said capacity prices are too low, due in part to state-subsidized generation projects in Maryland and New Jersey. Shahid Malik, president of PSEG Energy Resources and Trade, said his company decided against building a merchant generator because of concerns it would be undercut by a subsidized competitor.

William Massey, now counsel to COMPETE, a coalition of generators and others, said Maryland’s “contract for differences” with Competitive Power Ventures’ 725 MW St. Charles generating plant “skews the capacity market in a way that this commission should not allow.”

“That’s just not true,” Robert Erwin, general counsel of the Maryland Public Service Commission, shot back. He said Maryland’s initiative “irons out” volatility. “No one knows whether at the end of 20 years Maryland ratepayers will pay CPV or if CPV will have paid Maryland ratepayers.”

Commissioner LaFleur asked if the impact of state programs such as Maryland isn’t the same in reducing prices, even if it is not the state’s intent.

Erwin conceded its new generation could depress prices. “But it’s no different than a state that says we’re going to have emission limits on power plants,” which would have the opposite effect, he said.

Capacity Market Not Voluntary

Susan Kelly, general counsel of the American Public Power Association, parried with Commission Chairman Jon Wellinghoff, who said APPA’s members were not required to join RTOs and thus participate in capacity markets. “It’s not a legal requirement,” Wellinghoff said.

Kelly responded: “If you have to take transmission service from the organization it’s kind of silly not to be a member… no system can be an island.”

FERC’s Next Step

Some panelists said they hoped the conference would be a prelude to a future rulemaking.

Consultant Susan Tierney called for a policy statement — “a visioning thing” — on the role of capacity markets in the future.

Richard Miller, director of the energy markets policy at Consolidated Edison Co. called on the commission to impose “some minimum level of standardization.”

Others said the role of the capacity market should shrink to its initial concept — a “residual” role that supplements bilateral contracts and self-supply.

“The mother of all rulemakings – Standard Capacity Market Design – scares me,” said Kelly.

“I guarantee that’s not what it would be called,” responded LaFleur, prompting laughter from the audience.

LaFleur added: “There is not a `thing’ to be named. We have to distill what we learned.”