By Rory D. Sweeney

ARLINGTON, Va. — The panels at the Organization of PJM States Inc.’s annual meeting last week took on a wide variety of topics, but two themes rose to the top: cheap natural gas from local shale deposits has undoubtedly upended the electricity industry; and no matter how pure a market is, nothing will prevent the taint of politics.

“Politics sort of have everything to do right now in the energy market space,” said Susan Bruce, who represents the PJM Industrial Customers Coalition. “Low natural gas prices may have an adverse effect on certain PJM market participants, but as a general matter, the shale gas revolution should be viewed as a real positive for our region. Businesses make decisions to site here because of that. If we mute that in some fashion to give competitive advantage to others, I think we, looking at the issues as a whole, have done ourselves a disservice from an economic perspective.”

State regulators agreed. In the meeting’s opening panel, regulators of several PJM states tracked the current debate over providing subsidies to nuclear units — most notably through Illinois’ zero-emissions credit program — back to the low gas prices suppressing auction results so that “generation owners are not making enough money in the marketplace,” said Asim Haque, chair of the Public Utilities Commission of Ohio.

“If the power markets are just going to now be about state and federal politics, I think we’ve got a problem,” Haque said. “I worry where our collective heads are at. I worry that we’re all going to continue to be entrenched in our state policy and political objectives. … I do have fears of a full-on accommodation of all state subsidies.”

Catch-22

Pennsylvania Public Utility Commission Chair Gladys Brown noted her commission traditionally protests efforts to introduce unit-specific subsidies. The Pennsylvania legislature has developed a large pro-nuclear caucus and held two hearings on developing financial support for the state’s nine nuclear units, she said, but “we as a commission still have not been called over to provide any type of testimony.”

“It’s a catch-22 because we want access to that cheap natural gas, but they also know we’re a diverse state and we have so many other things that we could offer in terms of generation,” she said.

Illinois Commerce Commissioner John Rosales said he was “proud” of his state’s ability to coalesce around the issue and decide to support nuclear generators. “It was the right decision,” he said. “I realize there’s always going to be some political attributes that come into play.”

Kentucky Public Service Commissioner Talina Mathews noted that her state “loves to say how different it is” as one of the few in PJM that is fully regulated, has no renewable energy portfolio, energy efficiency standards or carbon emission goals, and remains a staunch advocate for coal use.

Still, she joined other regulators in defending states’ abilities to make decisions for their residents.

Differing Priorities

When asked what changes to the capacity market they endorse, only New Jersey Board of Public Utilities President Richard Mroz would say he favors a redesign that supports nuclear, saying “there are other attributes that are not being valued that should be valued.”

Haque was far less committal.

“I do not know who to trust anymore,” he said. “On the state side, you’ve just got different priorities developing. You’ve got different priorities developing in different states,” he said. “This is the sort of implicit cooperation that’s supposed to exist between the states when we’re all in this marketplace together, and Ohio unequivocally — when we made our [power purchase agreement] decisions [to subsidize some in-state generation units] — was a violator of that implicit cooperation.”

He said that Ohio is taking a different position now.

“The decision that I made when I was sworn in as the chair in 2016 was that the PUCO was out of the generation business,” he said. “Our advocacy now going forward will very much be tailored around trying to be constructive with that cooperation the best we can until we get to a breaking point where I think I’ve got to protect Ohioans. … We will start to become very active if I think that my residents and my businesses are going to be asked to stand on the Titanic.”

Pricing Politics

In a lunchtime address, PJM CEO Andy Ott explained that gas-fired units used to be on the margins of receiving enough revenue to cover their costs. However, they were small and flexible enough to turn on and off quickly as prices dictated. Cheap gas has allowed those units to offer into the market so low that they can always run and don’t have to respond to price signals. That has pushed large, inflexible units to the margin, where they can’t respond to price changes quickly, or at all. So that attribute of flexibility, which was previously inherent to the system, now needs to be valued in the market, he said.

“Hopefully, we’re not trying to solve a political problem,” he said.

Market participants filled a second panel on the issue later in the day, and their perspectives reflected their positions in the market.

Kathleen Barron, Exelon’s senior vice president for government and regulatory affairs, said markets are adjusting to state preferences. Her comments seemed to echo those made by James Wilson of Wilson Energy Economics, who consults for several state commissions and has argued at PJM stakeholder meetings that markets can absorb state actions given enough time and information. Tonja Wicks, who oversees FERC and RTO affairs for Duquesne Light, said her company has concluded the existing capacity design is the right one for now.

It wasn’t a surprise that Barron supported her own company’s proposed revisions, but she acknowledged, “I think we have a ways to go to make sure that what we actually adopt is fair to customers.”

Part of that may be because “we’re talking about different kinds of subsidies” that forestall exit from the market rather than incentivize entry as other state policies have done, said Marji Philips, Direct Energy’s director of RTO and federal services. They’re also targeted at a few very large units rather than many smaller ones.

“It’s about politics, and it’s really hard to price politics,” Philips said.

“What it really gets down to is investor confidence,” said Steve Schleimer, Calpine’s senior vice president for government and regulatory affairs.

There are trusted ways to secure a return on investments in competitive and regulated environments, but “where it’s part-competitive and part-regulated … that’s not stable.”

Split Over Cost Containment

In a separate session, stakeholders split on whether to factor cost-containment guarantees into proposals for transmission development.

PJM’s Craig Glazer said the RTO could consider caps on construction costs but isn’t prepared to determine whether other guarantees are suitable. He said PJM should “stay in our lane,” and Gloria Godson, vice president of federal and PJM policy for Exelon’s Pepco Holdings Inc., agreed.

However, Sharon Segner, vice president of power development for LS Power, disagreed.

“We have a lot of reservations about that policy. If PJM is going to take [the opposite perspective of] every other RTO on cost containment, that’s a discussion that should go on with FERC,” she said.

She and West Virginia Consumer Advocate Director Jackie Roberts said they were willing to pay extra to develop a “robust” independently administered evaluation process. Roberts suggested a plan in which proposals would be requested during a certain time frame and submitted using the same form so they could create “an apples-to-apples” comparison. The current system allows developers to submit proposals in any form they wish.

“If my money’s being spent, I want to know that the most creative solution is being proposed and that everybody is on a level playing field to fix that solution. This is what all businesses do, and the fact that it has not come to transmission planning is because PJM has been trying very hard to fix its time constraints,” Roberts said. “You just don’t have time for that, but others do. … I’m convinced that consumers will be better served by a real bid process that puts the risk of the business on the people making the bids, who are the people who know what the risks are and should bear them. That’s something that I’m willing to get my checkbook out for.”