By Rory D. Sweeney

VALLEY FORGE, Pa. — After nearly a year of discussion on potential changes to PJM’s capacity model, stakeholders have begun determining what components a new construct should have.

At another two-day meeting of the Capacity Construct/Public Policy Senior Task Force (CCPPSTF) last week, stakeholders began developing the criteria on which the nine construct proposals will be compared. It was a year ago that American Municipal Power and likeminded stakeholders pushed for a “holistic” review of the RTO’s Reliability Pricing Model. (See Co-ops, Munis Call for Reset of PJM Capacity Model.)

Model Issues

PJM’s Murty Bhavaraju presented a model that RTO staff created to compare results for each of the proposals. The model currently only includes the five repricing proposals but will eventually address the other four, PJM’s Dave Anders said.

The model uses fictitious data in its comparisons, and Adrien Ford of Old Dominion Electric Cooperative asked if PJM could substitute data from recent Base Residual Auctions to give stakeholders a better indication of the real-world implications.

Staff balked.

“I think we probably need to explore what that would look like,” Anders said. “I think to make the step between this modeling and taking a prior BRA, there’s going to have to be a lot more assumptions.”

“I am worried that the results of that will be taken as price forecasts,” PJM’s Adam Keech said.

“If there’s concern about using the past, then what can we use?” Ford asked. “We also recognize that the supply stack in the examples isn’t anything like the actual supply stack. I seek to understand if we do have an issue here and, if so, how big it is.”

Ruth Ann Price of the Delaware Division of the Public Advocate asked PJM to identify if any proposals would discourage states from allowing resources within their borders to participate in the markets.

Susan Bruce, representing the PJM Industrial Customer Coalition, asked the RTO and its Independent Market Monitor to also report on how they believe the proposals would affect bidding behavior. “It would be helpful for us to understand what those concerns would be,” she said.

PJM staff agreed to research potential solutions that address stakeholder concerns.

MOPR Issues

Attorney Mike Borgatti of Gabel Associates explained the standards FERC set out in its 1991 Edgar Electric Energy (ER91-243) and 2004 Allegheny Energy Supply rulings (ER04-730) to prevent utilities from self-dealing. The Edgar ruling required demonstration that long-term power purchase agreements that utilities sign with their marketing affiliates are reasonably priced compared to alternatives. The commission said such a demonstration could include evidence of competition between affiliated and unaffiliated suppliers or a showing of prices paid by non-affiliated buyers. FERC refined its guidance in Allegheny.

Borgatti said he brought up the rulings to propose a “conceptual framework” for considering changes to the minimum offer price rule (MOPR).

“If we were to go this route, that would need to be something we spend a lot of time on,” he said.

John Hyatt of Monitoring Analytics, PJM’s Independent Market Monitor unit, said he believed that state sponsored competitive and non-discriminatory procurements are consistent with the IMM’s MOPR-Ex capacity proposal.

Roy Shanker, an industry consultant, expressed concern about using the rulings as guidance in this situation.

“Edgar certainly stands for the proposition of assuring there was not affiliate favoritism,” Shanker said. “It’s completely unacceptable to apply it without a thorough discussion of what nondiscriminatory means.”

PJM staff agreed to review the current MOPR policies to determine if they should be revised.

Fixed Resource Requirement

PJM provided a refresher on its current fixed resource requirement (FRR) rules. FRR contrasts with RPM in that it can be used by a load-serving entity to meet a fixed capacity requirement, while RPM is variable. FRR resources don’t receive RPM clearing prices and the LSE doesn’t pay the RPM locational reliability charge.

The education came in response to a proposal from Dayton Power and Light’s John Horstmann that would allow LSEs to choose acquisition from FRR, RPM or any combination of the two to address their capacity requirements. Horstmann acknowledged that his proposal has many factors that would have to be addressed, but argued that it also resolves many issues stakeholders have identified.

“I’d say look at the things you don’t have to worry about, including two-tiered auction design compromises, creation of a reference price, and auction participant bidding concerns,” he said.

Social Science Experiment

The nine proposals fall into three categories: Some completely redesign the capacity construct; some add to the RPM a repricing mechanism to avoid subsidized offers influencing clearing prices; and the last group would expand the MOPR to effectively prohibit subsidized units from offering into auctions.

In what he called a “social science experiment for stakeholders,” Anders split meeting attendees into three groups and directed each of them to identify the positive and negative aspects of one of the categories and develop potential questions for a poll of stakeholder interests.

Stakeholders found that the MOPR was straightforward and easy to understand, but that it could be subjective and fails to accommodate state policy actions. The task force’s charter called for developing RPM rule changes “that could accommodate/address both capacity construct objectives and state actions.”

The redesign proposals would give load and resources more flexibility in decision-making but could increase market volatility if enough buyers and sellers opt out. The repricing options all attempt to address price influence from subsidies but could incentivize undesirable behavior, such as bid suppression or additional pursuit of subsidies, stakeholders said.

Next Steps

The task force’s next meeting is scheduled for Wednesday, when Anders said stakeholders should be prepared to provide input on identifying the traits of an offer that would trigger repricing.

AMP’s Steve Liebermann said he plans to have revisions to discuss for his organization’s proposal — which focuses on encouraging long-term bilateral contracts — based on feedback he’s received.

“States with retail choice might have some difficulties with the bilateral-contract concept,” he said. “We think we have a workable solution.”

Other sponsors have already offered revisions or addendums to their proposals, including LS Power and Exelon. Both focus on repricing.

Jennifer Chen of the Natural Resources Defense Council promised some revisions as well. The NRDC’s proposal focuses on including seasonal resources that can’t meet Capacity Performance’s requirement to be always available.