Stakeholders will hold a formal vote on measures to eliminate speculation in the capacity market this week after narrowing the proposals from seven to five in a lengthy meeting Friday.

Because clearing prices in incremental auctions (IAs) are usually lower than those in the base residual auction (BRA), participants can profit by selling capacity in the BRA and buying out their commitments in the IAs. PJM and the Market Monitor say such buyouts are suppressing capacity prices and could undermine system reliability.

PJM’s proposed solution (#2 in the matrix) would reduce the number of incremental auctions (currently three) and set conditions eliminating the potential to arbitrage between the BRA and IA.

RC Cape May Holdings LLC (#3), Old Dominion Electric Cooperative (#4), the Market Monitor (#9) and Exelon (#10) adopt some of PJM’s changes but differ in other details. (See “Incremental Auction Proposals Compared”)

All of the proposals would increase the penalties for failing to deliver promised resources. (See chart, right)

An informal poll conducted last week among 41 respondents representing 206 members and affiliates found overwhelming support for reducing speculative offers in the base auction but a split over the urgency of the issue: 59% of votes called for implementing changes in time for this May’s base auction as PJM has insisted; 34% said stakeholders should take more time to vet the issue. About 7% said there was no need for changes.

PJM’s proposal was the most popular proposal, followed by ODEC and the Market Monitor.

At Friday’s meeting of the Capacity Senior Task Force, Calpine (#7) and Duke (#8) withdrew their proposals, with Duke throwing its support behind the PJM plan. Citigroup Energy (#6) had withdrawn its proposal earlier.

Force Majeure

Much of the meeting was spent discussing the Market Monitor’s demand that the new rules bar bidders from buying out of their obligations except under force majeure.

Market Monitor Joe Bowring said the condition wouldn’t be limited strictly to “acts of God.”  The reason for buying replacement capacity “has to be out of your control and it can’t be [a] financial” motive, he said.

None of the proposal sponsors were willing to add that condition to their packages Friday although some said they might agree after vetting it with their companies. Stu Bresler, PJM vice president of market operations, said he feared the restriction would be difficult to administer.

Unintended Consequences

Dan Griffiths, executive director of the Consumer Advocates of PJM States, said the RTO risks “overcorrecting” and should wait to evaluate other recent initiatives impacting demand response and the capacity market before making additional changes. (See Members Deadlock on DR in Capacity Auctions; PJM May Seek FERC OK Despite Stakeholder Opposition.)

“Our concern is the pancaking of a variety of issues,” Griffiths said “We’ve repeatedly asked PJM about the impact of these changes and have been repeatedly told: `We don’t know.’”

Carl Johnson, representing the PJM Public Power Coalition, said the changes could result in “a huge number of megawatts whose price is administratively determined” rather than set by the market.

Walter Hall, of the Maryland Public Service Commission, said the PSC is concerned that PJM may not be able to sell excess capacity in incremental auctions if it refuses to sell below the base auction clearing price, as it has proposed.

Milestones

The task force also discussed the inclusion of development milestones, which Exelon and RC Cape May Holdings LLC proposed using to reduce credit requirements. RC Cape May would also use the accomplishment of milestones to reduce penalties for failing to deliver promised resources.

Hall and a second stakeholder said they supported the concept of development milestones but feared it would make it more difficult to reach consensus. “It just feels like it doubles the complexity of the replacement capacity issue,” the stakeholder said.

The vote on the proposals will run between tomorrow and Friday, with results released next Monday, in time for a first read at the Markets and Reliability Committee Jan. 30. The MRC will vote on Feb. 27, with a Members Committee vote the same day or at a special meeting afterward in time for a mid-March filing with the Federal Energy Regulatory Commission.

Bresler said the Board of Managers may file the PJM proposal with FERC even if it does not receive a two-thirds vote in support.