By Suzanne Herel

PJM CEO Andy Ott released a letter July 8 defending the RTO’s paper on competitive markets, saying that while it believes its markets are effective in both regulated and competitive retail structures, it did not conclude that any market outcome was superior to cost-of-service regulation.

“Instead, our analysis supports the hypothesis that markets lead to more cost-effective and economically efficient outcomes in managing new entry and exit of resources,” Ott wrote. “But this is purely an economic observation and is not to suggest that markets lead to the ‘best’ or ‘most superior’ outcomes for all parties in all circumstances.” (See PJM Study Defends Markets, Warns State Policies Can Harm Competition.)

Ott also indicated PJM would consider adding multiyear commitments to the capacity market’s current one-year contracts, which are procured three years in advance.

AEP, FirstEnergy Challenge

A coalition of generators led by American Electric Power and FirstEnergy challenged PJM’s analysis in a letter May 19, saying it presented a skewed view of the benefits of competitive constructs compared with the traditional regulated model. (See Generators Rebut PJM Study on Investment in Competitive Markets.)

AEP and FirstEnergy were joined by Dayton Power and Light, Duke Energy Ohio and Kentucky, Buckeye Power and East Kentucky Power Cooperative.

PJM’s Board of Managers commissioned the study after AEP and FirstEnergy asked Ohio regulators, and Exelon asked Illinois legislators, for help in supporting money-losing generators. (See PUCO Staff Recommends $131M Annual Rider for FirstEnergy.)

On July 7, Exelon officially notified PJM of its plan to close its Quad Cities nuclear plant on June 1, 2018, citing a lack of action by Illinois legislators. It also intends to shutter its Clinton station next year.

In his letter, Ott said, “As a threshold matter, we agree that cost-of-service regulation has managed the entry and exit of generation resources in a highly reliable manner over many decades. Indeed, as we noted in Part 2 of the PJM paper, regulated environments offer a forum to balance social, political and environmental interests alongside electricity costs to the consumer. … PJM also believes, however, that markets result in a more cost-effective and economically efficient approach to procuring adequate generating resources.”

Coal Retirements not Unique

Ott acknowledged concerns over generation retirements in PJM, but he said, “The retirement of coal generation and its replacement with combined cycle natural gas power plants is happening across this country; it is not unique to PJM.”

He also combatted generators’ assertion that PJM’s competitive markets owe their success to legacy assets and that it has relied on its pre-existing reserve margin for a decade.

“PJM forward projections indicated installed reserve margins were declining and would fall below 16% in 2008. In order to address these concerns, PJM proposed and implemented the [Reliability Pricing Model] forward capacity construct under which the declining reserve margin trend reversed,” he wrote. “Despite unprecedented forces changing the generation fuel mix in this country, PJM’s forward capacity market has maintained robust installed reserve margins. For the 2019/2020 planning year, PJM is carrying an approximate 22% reserve margin.”

Fuel Diversity

The regulated model, he said, lends itself to sacrificing some of that objective in favor of others, including promoting fuel diversity.

“While the recent investment trends have actually made PJM’s aggregate fuel mix more diverse over the past decade, PJM understands the concern that we need to analyze and quantify any potential operational or reliability challenges that may occur if the PJM region trends toward a very large percentage of gas-fired generation in the future,” Ott wrote. “PJM commits to perform such an analysis and will share results with stakeholders by first quarter of 2017.”

Multiyear Commitments

He added that PJM agrees in concept that the capacity market would be strengthened by the addition of some multiyear commitments.

“On this point, we agree that through bilateral agreements or market design changes, the market would be served by better options to lock-in price [and] manage risk and volatility for at least a portion of the supply portfolio,” he said.

In contrast with the negative reception it received from utilities in Ohio and Kentucky, PJM’s paper was lauded by the PJM Power Providers Group (P3) and a coalition of 16 independent power producers, including Calpine, Dynegy, NRG Energy and Talen Energy in letters last month.

“When markets are allowed to work, and are not undermined by out-of-market interventions or uneconomic new entry, consumers across the region will continue to see highly reliable service at the most efficient price,” wrote the IPPs.

Both P3 and the IPPs noted the new natural gas capacity added or proposed in the past five years.

“The IPP sector continues to lead this new investment, and the competitive PJM market structure has been the enabling platform on which these investment decisions have been made,” the IPPs said. “What PJM’s markets have not done — and should not do — is provide protection for certain suppliers who want to be shielded from market risk.”