RALEIGH, N.C. — The capacity market and the role of demand response dominated the discussion as more than 170 state regulators, PJM staff and stakeholders gathered here for the OPSI annual meeting last week.

The role of imports and the coordination of the gas and electric markets also were the subject of remarks during nine sessions involving more than 40 panelists.

Although some of the voices were new, the debates were familiar to those who have attended stakeholder meetings. (All presentations from the conference can be found at the OPSI website.)

DR `Too Blunt’

Demand response and its role in the capacity market was a frequent theme.

As currently defined and deployed, DR is “too blunt an instrument,” said PJM CEO Terry Boston. Boston said PJM needs to be able to deploy some DR with less than two hours’ notice and do so with more geographical granularity.

“We need to focus it down to the … 69 (kV) and below feeder level” — the cause of the problems that led to load shedding in September, Boston said. “When we have shorter notice and longer dispatch, DR will have arrived.”

Gloria Godson, vice president of federal and PJM policy for Pepco Holdings Inc. and Katie Guerry, senior director of regulatory affairs for curtailment service provider EnerNoc, said they support PJM’s efforts to make DR more of an “operational” tool but said rapid changes risked alienating participants.

“It’s appropriate for the product to evolve. It’s not appropriate for demand response to be like all other resources,” said Guerry.

Godson said PHI lacked the ability to dispatch DR by the zip code or pNode. And more important than whether PHI has the technology to make changes is “when the customers are ready” for them, she said.

She opposed proposals to require DR to offer into the energy market, saying it would increase customers’ risk. “That’s not what we signed up for,” she said.

Guerry agreed: “Customers are not in the business of generating energy,” she said. “If we start requiring customers to be active participants in the energy market my concern is we are going to deter those customers from” taking part in DR.

In separate comments, Dan Griffiths, director of the Consumer Advocates of PJM States (CAPS) made a similar point. “For consumers, it’s about mitigating costs, not making profits — particularly for residential customers.”

Dallas Winslow, chairman of the Delaware Public Service Commission, said regulators gave DR proponents leeway in crafting rules. “The pendulum went too far perhaps; we don’t want it to swing back the other way too far.”

Stu Bresler, PJM vice president of market operations, said he was encouraged Guerry and Godson’s comments. “I think I hear more areas in which we’re aligned than in which we are not,” he said.

Capacity Market Incentives

Several speakers recommended changes to the capacity market, saying current rules don’t encourage new generation or support existing plants.

Chuck Whitlock, president of Midwest commercial generation for Duke Energy, said his company’s Ohio River plants are among the cheapest coal plants in the country. Still, they struggle to earn revenues because of capacity prices suppressed by DR and low energy prices resulting from cheap natural gas and intermittent resources, he said.

Nick Akins, president and CEO of American Electric Power, echoed Whitlock’s complaint. He said PJM should use a five-year rolling average to set clearing prices to reduce volatility. He also said PJM should buy capacity in seven- to 10-year increments to incentivize new generation.

“There is just no product that provides for long term capacity in the market,” he said. “What the market is telling us right now is not to invest.”

Meanwhile, Allen Freifeld, senior vice president, law and public policy for Viridity, said PJM should procure DR six or nine months before delivery rather than three years ahead. “For demand response, the three-year forward is a barrier to entry,” he said.

Capacity Imports

The role of capacity imports also was the subject of considerable debate.

Boston noted that imports into PJM have been cut twice this year by Transmission Loading Relief (TLR) declarations. Overreliance on imports, Boston said, are “a clear and present danger to reliability.”

AEP’s Akins said PJM is taking a risk in buying capacity as far away as Louisiana. “I wouldn’t depend on that much capacity from Baton Rouge to Shreveport let alone [to] Columbus, Ohio,” he said.

Susan Bruce, representing the PJM Industrial Customers Coalition, said customers benefit from imports that increase competition and lower prices. “We should not be erecting unreasonable barriers to their participation,” she said.

Auction Arbitrage

Participants generally agreed with PJM Market Monitor Joe Bowring, who said the RTO needs to address arbitrage between the Base Residual Auction and Incremental Auctions. “We need to address the lack of risks associated with what has become a financial strategy,” he said.

Steve Schleimer, vice president of governmental and regulatory affairs for Calpine, said PJM should increase the penalty for failing to deliver promised capacity, calling the current 20% penalty “way too low.” Alternatively, he said, suppliers should give up all the upside in trading between the base and incremental auctions, excluding a 10% “dead band.”

Bruce agreed that there should be no speculation between the auctions but warned against “unnecessarily blunt” solutions.

No `Magic’ from FERC Conference

In a luncheon address, FERC Commissioner Cheryl LaFleur told attendees that she heard two conflicting messages at the commission’s technical conference on capacity in September: “`We need stability, consistency, certainty or we won’t invest. However, there are a lot of things that are broken. Can you fix them please?’” (See Capacity Market Attracts Praise, Criticism at FERC) 

Citing the tensions between must-buy obligations and municipal utilities’ desire to self-supply she added, “To no one’s surprise we did not come up with a magical solution.”

Gas-Electric Coordination

The coordination of the gas and electric markets, another subject that’s on the mind of FERC, was the topic for a session Tuesday morning.

Abe Silverman, chief regulatory counsel for NRG Energy, said generators in New England are sometimes forced to choose between responding to RTO dispatch orders and pipeline tariffs.

“In the future, security constrained economic dispatch is actually going to have to take into account fuel constraints,” he said. “I don’t know how you do that. I don’t know if you can do that.”

Stan Chapman, senior vice president for marketing and customer services for Columbia Gas, said the penalties his pipeline can impose are not enough to dissuade generators from “drafting” gas from the pipeline without a supply contract.

“What scares me is when a generator tells me, `You should interrupt your gas customers to keep the electric system operating. They’ll understand.’”

Because generators are reluctant to sign firm gas contracts, Chapman recommended PJM purchase pipeline capacity and release it to generators.

That was a nonstarter to Paul Sotkiewicz, PJM’s chief market economist. “That would be PJM taking a market position on behalf of a group of market participants,” he said. “And that’s just not going to happen.”