The PJM Board of Managers may seek FERC approval for a plan to change the way demand response clears in capacity auctions despite stakeholders’ rejection of the plan.

That scenario emerged Thursday after a last-ditch compromise to address the RTO’s reliability concerns failed to win members’ endorsement. The proposal by Old Dominion Electric Cooperative won 58% support in a sector-weighted vote by the Members Committee, short of the two-thirds threshold to signal consensus.

After the meeting, Executive Vice President for Markets Andy Ott told RTO Insider that he will recommend the Board seek Federal Energy Regulatory Commission approval of a PJM staff proposal backed by generators. The Board met Friday and is expected to file its plan tomorrow, officials said yesterday.

PJM would be gambling that FERC will find its arguments more persuasive than most members did. The staff proposal, which garnered only 37% support from the Markets and Reliability Committee Nov. 14, did only slightly better at the Members Committee, winning support of nearly 45%.

Other DR, Capacity Initiatives

PJM had more success on a separate proposal that could increase capacity prices as the Members Committee gave final approval to PJM’s methodology for limiting imports.

At the Markets and Reliability Committee meeting earlier Thursday, members also approved a proposal giving PJM more flexibility in the way it dispatches demand response.

Members agreed to postpone an MRC vote on a fourth initiative to prevent arbitrage between the Base and Incremental capacity auctions. PJM officials said they wanted to return the issue to the Capacity Senior Task Force to seek revisions that could win broader stakeholder support. (See Arbitrage Fix Returned to Committee)

Need for Changes in DR

PJM says the volume of limited DR clearing in the capacity market must be reduced because current rules result in a vertical demand curve that leads to boom-bust cycles in which the system “oscillates” between being long on capacity, with low prices, and being short on capacity with high prices.

Officials hope to implement the changes in February, when the RTO will set the parameters for its next Base Residual Auction. Representatives of load and DR providers, who said the PJM plan will increase costs and stunt DR, are certain to file interventions opposing the changes.

Under current rules, 4.8% of PJM’s reliability requirement can be filled with limited demand response, with higher levels possible if excess capacity clears against the sloped Variable Resource Requirement (VRR) demand curve. PJM wants to reduce the 4.8% by all of the 2.5% Short-term Resource Procurement Target (STRPT) for a net of 2.3%.

Compromise

ODEC described its proposal as a compromise between the PJM proposal and one submitted jointly by Southern Maryland Electric Cooperative and state public advocates which would reduce the 4.8% by only a portion of the 2.5% holdback.

The SMECO/Advocates proposal had been the most popular with members, falling just short of a two-thirds plurality at the MRC Nov. 14. Its support eroded Thursday, when it won only 54% support from the Members Committee.

Susan Bruce, representing the PJM Industrial Customer Coalition, said her group voted to support the ODEC proposal in an effort to craft a compromise. “This is certainly not our litigation position … at FERC,” she said.

Raghu Sudhakara, of Rockland Electric Co., said the ODEC proposal was less costly than PJM’s and “very close” to the PJM plan on reliability.

But ODEC’s plan was opposed by PJM as well as most generators and transmission owners. Stu Bresler, vice president of market operations, said the ODEC proposal might not hurt reliability in the short term but would in the long term by undercutting prices in the capacity auctions.

Jason Barker, of Exelon, said the plan could increase Installed Reserve Margins, ultimately costing customers more. “This is a bad proposal,” Barker said. “As a transmission owner and a generator operator we’re not satisfied with being `very close’ on reliability.”

Market Monitor Joe Bowring also panned the ODEC proposal, saying PJM’s plan was already a compromise from what he believes the RTO should do: eliminating limited DR altogether. Bowring said limited DR is suppressing the capacity market by $3 billion to $4 billion annually.

ODEC’s Ed Tatum said PJM was using “circular logic” in arguing that increased capacity costs under the RTO’s proposal will be counterbalanced by reduced energy prices. The purpose of the capacity market, he noted, is to solve the “missing money” problem — the fact that generators don’t earn enough in energy market revenues to cover their costs.

Late Change to Capacity Limit

The lid on external generation resources would limit imports in next year’s base capacity auction to 6,200 MW, a 17% drop from the volume that cleared in May’s auction. (See Members OK Capacity Import Limit; Prices May Rise.)

The Members Committee approved it with 85% support after a last-minute revision to eliminate a provision related to the requirements for external generators seeking an exemption from the cap.

As amended, the exemption will apply to external generators with firm transmission that commit to providing capacity in future auctions and have pseudo-ties allowing PJM to control their dispatch.

Deleted was a requirement that the generator be dedicated to an identified load in PJM. PJM officials said that the provision was discriminatory because it is not required of internal capacity resources. Bresler said it was also unnecessary because of the “must-offer” requirement.

Several members expressed unhappiness that the issue — which could have led FERC to reject the proposal — hadn’t been flagged earlier by PJM. Bresler said PJM officials learned of the issue several days earlier.

“I’m surprised and disappointed to have this change at the last minute,” said Reem Fahey, of Edison Mission. “I believe it makes the proposal a lot weaker.”

Dynegy’s Jason Cox, however, said PJM had to make the change. “This is one point we will happily protest if it ends up in a FERC filing,” he said.

Slower Transition Rejected

PJM’s initiative to increase the diversity of DR resources won 67.4% support of the MRC in a sector-weighted vote, just enough to clear the two-thirds threshold.

Because it passed the two-thirds hurdle, the committee did not vote on a proposed amendment by David “Scarp” Scarpignato, of Direct Energy, to slow the transition to quicker dispatch requirements.

Current rules require PJM operators to provide two hours’ notice before dispatching DR. Under the new rules, resources will be dispatchable in 30 minutes beginning delivery year 2015/16 unless they can demonstrate physical reasons for a longer dispatch. Curtailment Service Providers will be able to choose among 30-, 60- and 120-minute dispatch for DY 2014/15.

Scarp asked for a slower transition that would impose a 60-minute default in DR 2015/16 and delay the 30-minute requirement until DR 2016/17.

Marji Philips, also of Direct Energy, said a slower transition would avoid having to make changes in the middle of current contracts with customers. “Our contracts allow us to `reg out’ [change terms because of regulatory requirements] but that’s not how we like to work with customers,” she said.

PJM officials opposed the change, saying their proposal already represented a compromise from their preference to implement the 30-minute requirement next year. “We continue to over-call DR and allocate those costs to the members,” Bresler said.

Ott said PJM is concerned about having the flexibility by summer 2015 to address coming generation retirements.

Pepco, Maryland PSC Mollified 

Representatives of Pepco Holdings Inc. and the Maryland Public Service Commission, who had earlier expressed concern about the impact of the changes on their “mass market” DR programs for residential and small commercial customers, said they were satisfied that the rules will provide them needed flexibility.

“PJM was very responsive,” said the PSC’s Walter Hall. “We do think we’ve come to a meeting of the minds.”