PJM’s attempt to address speculation in the capacity market collapsed Thursday as members failed for the second time in three months to reach consensus on rule changes.

The Markets and Reliability Committee was unable to muster a two-thirds sector-weighted vote for either PJM’s proposal or an alternate proposal from Old Dominion Electric Cooperative (ODEC) to eliminate opportunities to arbitrage between the Base Residual Auction and the Incremental Auctions. In all, there were four votes, including two that incorporated a late amendment addressing a potential loophole.

With the MRC deadlocked, the Board of Managers decided late Thursday to make a unilateral filing with the Federal Energy Regulatory Commission seeking approval of the PJM proposal.

Voting Blocs

The MRC votes showed a sharp division among stakeholders, with supply (generation and transmission owners) favoring the PJM proposal and load (electric distributors and end-use customers) backing ODEC’s. The same group dynamics played out in earlier votes at the MRC, in which proposals to increase compensation for black start generators failed. (See related story, Members Reject Pay Hike for Black Start Units)

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.

The MRC had deferred a vote on the issue Nov. 21 after members of the Capacity Senior Task Force were unable to coalesce around any of 11 proposals. (See Arbitrage Fix Returned to Committee.)

The CSTF met five times after that to discuss alternatives, with PJM’s proposal winning 69% support. PJM’s solution would reduce the number of incremental auctions (currently three) and set conditions eliminating the potential to arbitrage between the BRA and IA. The ODEC proposal would also increase the penalties for failing to deliver promised resources, but by less than the PJM package. (See Stakeholders Back PJM on Arbitrage Fix.)

As often happens, however, the seeming support at the lower committee evaporated in the broader sector-weighted voting at the MRC.

Four Votes

PJM’s proposal won only 40% support in the initial vote, with strong support from the generation (67%) and transmission owner (85%) sectors, and opposition from electric distributors (6%), end-use customers (0%) and other suppliers (43%).

In contrast virtually all of the distributors and end users voted for the ODEC proposal, while it was shunned by generation (17%) and transmission (8%). It got 54% overall — well short of the two-thirds needed to recommend it to the Federal Energy Regulatory Commission.

Price Convergence

Several members said the price differential between the BRA and IAs is due in part to PJM’s persistent overforecasts of load. “What’s being done about the forecasts?” asked Dan Griffiths, representing the Consumer Advocates of PJM States (CAPS).

PJM Executive Vice President of Operations Mike Kormos said the load forecast problem is a result of economic performance that has lagged behind the growth rates incorporated into PJM’s load calculations. “The algorithm — if you get the economy right — is quite accurate. The problem is the economy has lagged for five years.”

Susan Bruce, representing the PJM Industrial Customers Coalition, said PJM’s proposal would have “artificially” closed the price gap “at the expense of load.”

Loophole

After the first two votes, discussion then turned to an amendment proposed by PJM to close a loophole regarding capacity acquired through bilateral trades. The amendment would have imposed a “settlement charge” on any party replacing capacity equal to the difference between the BRA and IA clearing prices.

J.P. Morgan’s Bob O’Connell then proposed a vote on PJM’s proposal with a narrowed version of the PJM/IMM amendment that would allow companies with multiple generating assets to replace capacity within their portfolios without paying the charge.

FirstEnergy and Pepco Holdings argued that the amendment was unduly harsh without the exemption. Pepco’s Gloria Godson called it “micromanagement” and “overkill.”

Mystery Number

Mike Borgatti, of Gabel Associates, said the amendment would make it risky to make bilateral trades because the penalty would be a “mystery number” not determined until the IA. Consultant Tom Rutigliano said it would also create unintended consequences for energy efficiency.

Market Monitor Joseph Bowring countered that the PJM proposal “would be meaningless” without the amendment because participants could avoid penalties by buying replacement capacity through bilateral trades rather than incremental auctions.

Even with the exemption, the proposal garnered only 35% support.

In one last attempt, members voted on the PJM proposal and the original amendment, without the exemption introduced by J.P. Morgan.

Ken Jennings, of Duke, said he opposed the exemption. “Because your [forced outage rate] got worse, you shouldn’t be able to profit from that,” he said.

That motion fared worse still, with only 31%.

Next Steps

ODEC’s Ed Tatum said that PJM should attempt to draft language identifying conduct that would justify submitting a participant to FERC enforcement. “Go after the people that we really think are doing the wrong thing,” he said.

“With the changes we’ve seen, I don’t think we need to make any [additional] changes,” Tatum said, referring to limits on the volumes of imports and demand response that will clear in future capacity auctions.

Bowring said Tatum’s proposal was unworkable. “I strongly prefer clear rules rather than after-the-fact enforcement actions,” he said. “Referrals to FERC take a very, very long time. If you have 20 or 30 participants engaging in this kind of behavior it’s not very efficient.”

PJM Executive Vice President for Markets Andy Ott agreed, saying PJM wanted to reinforce the physical nature of capacity commitments. “We don’t want to have to judge intent,” Ott said. “We certainly will be looking at ways to strengthen the physical language.”

The PJM Board voted Thursday to submit the RTO’s proposal, including the amendment to close the bilateral trade loophole, for FERC approval. A filing may come as soon as this week.