Federal Energy Regulatory Commission staff signaled Wednesday that the commission may require PJM to change rules requiring demand response providers to provide “sell offer plans” in order to participate in capacity auctions.

At a nearly four-hour technical conference, members of FERC’s Office of Energy Market Regulation (OEMR), Office of General Counsel (OGC) and Office of Energy Policy and Innovation (OEPI) questioned a three-member panel including PJM Executive Vice President of Markets Andy Ott. The subject was the demand response “plan enhancements” approved by stakeholders in June and submitted to FERC in August (ER13-2108). (See PJM Demand Response Providers Decry Scrutiny, “Freight Train” of Changes)

Ott said the offer plans — and a requirement that they be certified by a corporate officer — were needed to prevent DR providers from gaming the capacity market by selling in the Base Residual Auction and buying out their obligations at much lower prices in Incremental Auctions.

Ott was backed by Kenneth Carretta, managing director of power market development for PSEG Energy Resources and Trade, LLC, who represented generators on the panel. Carretta said the officer certifications were similar to those required of generators offering capacity.

But the third member of the panel, Frank Lacey, vice president of regulatory and market strategy at demand response aggregator Comverge Inc., said PJM’s changes are unnecessary and will stunt the development of DR.

Commission Order

The technical conference was ordered by the commission Oct. 1 when it suspended PJM’s proposed changes to its Tariff and Reliability Assurance Agreement for five months pending further investigation. The commission said more investigation was needed to determine whether PJM’s filing cleared the “just and reasonable” threshold.

The commission’s two Republican members, Philip Moeller and Tony Clark concurred in the order but said their “initial assessment is that PJM’s filing represents a balanced approach for resolving its reliability concerns.”

About 50 PJM stakeholders and attorneys listened during Wednesday’s conference, including Market Monitor Joe Bowring and PJM General Counsel Vince Duane. Commissioner Moeller and policy advisor Jason Stanek also attended part of the conference.

Auction-Performance Link

FERC Staffers questioned why PJM could not address its concerns under current rules and pressed for evidence of a linkage between auction behavior and reliability threats.

Ott said some DR aggregators provide PJM only “cursory” one-paragraph assurances of their intent to procure resources to meet their obligations.  They “tend to be the ones that replace a lot” of capacity in the incremental auctions.

“There is no evidence that there’s been a capacity shortfall because of incremental auction purchases,” Lacey said. “…There is no evidence that DR won’t perform.”

Demand response “has consistently delivered,” Ott acknowledged. “It has been there when called.”

Chris Young, of OEPI, questioned whether PJM was being reasonable in the information it seeks to require from DR providers. “You don’t expect generators to purchase steel before” winning a capacity contract, he noted.

Michael Goldenberg, of OGC, asked how PJM could distinguish between good and bad seller plans, wondering why the RTO hadn’t filed “fact-based parameters instead of this kind of reciprocal analysis.”

Certifying Intangibles

Lacey complained that the proposed requirements were speculative and lacked clear definitions.

PJM’s officer certifications for transmission and generation are based on tangibles, such as the percentage of right of way acquired, Lacey said. “That’s an easy certification to make. Either it’s true or it’s not true.”

In contrast, DR providers are being asked to certify plans to acquire customers three years in advance when most customers only sign one-year contracts with their Curtailment Service Providers. “Customers don’t look four years in advance,” he said.

“There’s nothing that says if the rules change we can get out. Or if the economy changes.” Absent such a definition, Lacey said, DR providers risk getting referred to FERC for enforcement action, “and that is a very scary thing,” he said.

“We’re asking for due diligence,” Ott responded. “We’re not asking them to predict the future.”

PJM is intending only to remove the “incentive and opportunity for certain DR providers to speculate,” Ott added. “Then they’re not delivering anything. They’re just taking money out of the market.”

Carretta added: “There’s a lot of rules generators don’t like — that don’t agree with our business models.”

RPM Shortcomings

Ott said the Reliability Pricing Model (RPM) is an “administrative construct” and not a true market. “The IAs simply are not going to be this wonderful liquid market to… discipline behavior,” he said.

Lacey responded: “Does RPM work? If it does let it go” and prices will recover. “If it doesn’t work then we have a much bigger problem.”

Lacey said Comverge both buys and sells capacity in the Incremental Auctions, acknowledging his company had profited by buying out of some obligations in the IAs. “We have obligations to shareholders too,” he said, adding: “We’re not going to buy out of our entire position — that’s our business.”

`Overprocurement’

Several audience members also made comments during the conference.

Ed Tatum, of Old Dominion Electric Cooperative, said one reason for the disparity in prices between the Base and Incremental auctions is that PJM has procured too much capacity in the BRA — imposing excessive costs on load. The IAs offer load an opportunity to at least “get 20 cents back on the dollar,” he said, addressing the FERC staffers. “I ask you not to take that away.”

Market Monitor Joseph Bowring, however, said “PJM’s not going far enough” in its actions to end arbitrage opportunities.

Post-Conference Comments

Post conference comments in the case are due Nov. 27, with reply comments due a week later on Dec. 4.

The commission must weighing PJM’s filing against Congress’ direction in the 2005 Energy Policy Act that “unnecessary barriers to demand response participation in energy, capacity and ancillary service markets shall be eliminated.”