Stakeholders backed PJM’s proposal to eliminate speculation in capacity auctions, selecting it over four alternatives in a vote announced yesterday.

The PJM proposal will be the main motion considered by the Markets and Reliability Committee for a vote next month. It will be discussed in a first read at Thursday’s MRC meeting.

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 would reduce the number of incremental auctions (currently three) and set conditions eliminating the potential to arbitrage between the BRA and IA. The alternative proposals adopted some of PJM’s changes but differ in other details. All of the proposals would increase the penalties for failing to deliver promised resources.

The vote asked members of the Capacity Senior Task Force whether they could support the changes in each proposal. Forty-three voters, representing 206 members and affiliates, cast votes, with 141 (69%) backing the PJM proposal (#2 in the matrix).

Proposals by Old Dominion Electric Cooperative (#4) and the Market Monitor (#9) won support of 37% as did proposal 2a which married the PJM proposal with a “force majeure” requirement.

Exelon’s proposal (#10) won 22% support. (RC Cape May Holdings LLC withdrew its proposal before voting commenced last week.)

Qualifying Events

The Market Monitor had proposed that capacity offers be defined as representing “an enforceable commitment to physically deliver — excused only by either ‘qualifying events’ or ‘force majeure’ provisions.”

The Monitor defined a qualifying event as “a physical or regulatory event outside of a seller’s control and that was not reasonably foreseeable.” This would include deratings due to operational restrictions and certain construction delays. Excluded would be buyouts for economic reasons and cancellations or construction delays for “financial, commercial or permitting reasons.”

PJM, ODEC and Exelon declined to include the qualifying event provision in their proposals.

PJM staff said they believed the language was unnecessary in light of the other changes in their package and that it “would be too subjective to effectively administer and would introduce ambiguity and uncertainty for market participants, something we believe is important to avoid.”

Package 2a allowed replacement only under “force majeure” events, as defined in the Tariff.

MRC Vote

If the PJM plan fails to win two-thirds support in a sector-weighted vote of the MRC, the committee could consider the other proposals, which are summarized in the CSTF’s summary report.

The PJM proposal is summarized below:

Capacity Resource Deficiency Charge

• Bidders who fail to deliver on promised resources currently must pay a capacity resource deficiency charge equal to the higher of 1.2 times the weighted average resource clearing price (RCP) or the RCP plus $20.
• PJM would make the penalty to the higher of 1.5 times the RCP or the RCP plus $50, an increase over the status quo, but not a return to “2.0x” levels that used to be in effect.
• PJM’s proposal would increase the penalty by about 25% to 38%, according to an RTO Insider calculation based on clearing prices from the 2013 base residual auction (BRA). The strictest proposals would increase that penalty by 50% to 67%.

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.

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.

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.

Prerequisites for BRA Participation

• PJM would require all resources to sign a Non-Diversion Agreement, which prohibits the replacement of capacity committed in RPM for the purposes of selling to another market. Resources imported from outside PJM would be required to provide a Letter of Non-Recallability, signed between the resource owner and the host balancing authority.
• An executed Facilities Study Agreement would be needed by planned generation greater than 20 MW.

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.