By Suzanne Herel

A coalition of generators led by American Electric Power and FirstEnergy last week responded to PJM’s analysis of resource investment in competitive markets, saying it presents a skewed view of the risks and benefits of such constructs compared with the traditional regulated model.

Joining AEP and FirstEnergy in a May 19 letter to the Board of Managers were Dayton Power and Light, Duke Energy Ohio and Kentucky, Buckeye Power and East Kentucky Power Cooperative.

The PJM study concluded that the RTO’s markets more efficiently attract cost-effective new generation and minimize risk to consumers. (See PJM Study Defends Markets, Warns State Policies can Harm Competition.)

The study was commissioned by the board after AEP and FirstEnergy asked Ohio regulators, and Exelon asked Illinois legislators, for financial aid to support money-losing generators.

The generators said PJM’s paper fails to point out that competitive markets have achieved their benefits because of legacy generation and transmission assets that were built under the regulated utility model, noting that PJM had a reserve margin of more than 20% when it began the capacity market in 2007.

“The paper presents a case in which nuclear and coal baseload resources that do not clear the capacity market for a given delivery year should not have been built. It is naive to think that a future driven by marginal resources through short-term capacity markets can adequately serve customers,” the letter said.

“The [Reliability Pricing Model] construct has never provided long-term price support for investments in long-life assets,” it said. “As a result, a significant amount of generation [in western PJM] has, or is seeking, some type of retail rate support.” (See Absent Legislation, Exelon to Close Clinton, Quad Cities Nukes.)

The signatories represent 44,000 MW of capacity in the RTO and serve more than 11 million consumers with about 69,000 MW of load. They note that 30% of the capacity in PJM comes from suppliers who operate under a traditional regulatory model.

“We strongly urge the PJM board to recognize that there is a place within PJM for generation supported by the market and by traditional cost-of-service regulation,” the letter said.

The companies said there were several major weaknesses in the PJM report:

• Risks to the consumer. PJM’s contention that customers face less risk in a deregulated model is “a short-term view,” the letter said, and is greatly influenced by recent decreases in the price of gas. “In contrast, the regulated paradigm inherently takes a long-term view of investments necessary to maintain proper fuel diversity, plant type diversity, transmission needs and reliability, which results in reduced market volatility and consumer benefits.”
• Value proposition of an integrated utility model. Regulated utilities have a legal long-term commitment to serve customers, the letter said, whereas merchant generation can close up shop if they don’t receive the desired return. “PJM does not account for any necessary transmission investment associated with premature retirement of baseload generation,” it said. “Integrated resource plans holistically consider these costs as well as societal and policy objectives. … Customers pay for the cost of new transmission, which often can exceed the costs of keeping a unit online.”
• Innovation. “PJM’s market rules and its stakeholder process result in a sluggish response to change,” the letter said, citing what it called “the inability of the markets to accommodate variables such as changing fuel mixes and resource adequacy as a result of environmental policies.”
• New investment. The writers contend that market signals have not attracted new technology, and that renewable generation largely relies on bilateral arrangements or government subsidies. They say the capacity market’s one-year clearing price, three years in advance, results in increased price volatility and higher consumer costs.
• Fuel diversity. “PJM’s position that legislators and policymakers should solve the issue of diversity contradicts PJM’s overall premise that any market outcome is superior to regulation,” the letter said.

In closing, the writers note that PJM said its paper was “intended as the beginning of a dialogue on resource investment.”

“We are ready to engage in a fact-based discussion of the risks and benefits associated with different market and regulatory paradigms,” they said, urging PJM to “focus on a market design that accounts for transmission costs, ensures both robust competition and adequate compensation for diverse capacity resources and respects the roles and responsibilities of the states in providing a comprehensive approach to least-cost reliability for consumers.”