Below is a summary of PJM’s proposed changes to the incremental auctions. Alternative proposals are also described where they differ from PJM’s plan or current rules. See the matrix for full descriptions.

Capacity Resource Deficiency Charge:

• Under current rules, bidders who fail to deliver on promised resources must pay a capacity resource deficiency charge equal to the higher of 1.2 times the weighted average resource clearing price or the resource clearing price plus $20.
• PJM would increase the penalty by about 25% to 38%, according to an analysis based on clearing prices from the 2013 base residual auction (BRA). The strictest proposals would increase that penalty by 50% to 67%, though one of them, by RC Cape May Holdings, LLC, would allow a reduction in the penalty for new resources that met certain development milestones short of completion (see chart in “Capacity Panel to Vote on Arbitrage Fix”).

Number of incremental auctions (currently three):

• PJM would retain the final IA, one year before the beginning of the delivery year, with the other two occurring only if needed for PJM to obtain additional capacity due to increases in its reliability requirement.
• PJM would release capacity only in the final IA, the only one in which other capacity buyers could participate.
• Another proposal, by RC Cape May Holdings, LLC, would reduce the number of IAs to two.

PJM sell offer price:

• PJM would continue the current practice — an upward sloping offer curve with starting price determined based on intersection of the variable resource requirement (VRR) curve and vertical line at current commitment level — but the price would be floored at the clearing price in BRA.
• RC Cape May would continue the current practice but with a non-zero offer floor at 10% of BRA clearing price.
• The Market Monitor would bar PJM from selling any excess capacity.

Allocation of 2.5% Short-term Resource Procurement Target:

• Current rules allocate 0.5% each to the first two IAs with 1.5% in the final IA. That would continue under PJM’s proposal, assuming all three auctions are held. If not, the allocation from any cancelled auctions would be carried over to the next auction.

Incremental Auction Settlement Calculation:

• Cleared sell offers and buy bids currently settle against the IA clearing price. PJM would continue to clear sell offers against the clearing price. Buy bids, however, would have to pay the clearing price plus the difference between the BRA and the IA clearing prices — eliminating the ability of market participants to profit by selling at a high price in the BRA and buying back at a cheaper price in the IA. “The goal of the settlement adjustment is to eliminate the ability to profit from the IA,” said Stu Bresler, PJM vice president of market operations.

Implementation Schedule:

• PJM would implement most changes for all auctions related to delivery year 2017/18, starting with this year’s BRA.
• The sell offer price and mitigation changes would become effective immediately upon FERC approval.
• The Market Monitor would implement all changes to all future auctions upon FERC approval “with appropriate transition.”