A contentious discussion regarding updates to the PJM Tariff’s black start capital recovery factor (CRF) table led stakeholders to issue strong challenges to the RTO and the Independent Market Monitor at the Operating Committee meeting Thursday.

Paul Sotkiewicz of E-Cubed Policy Associates blasted the stakeholder process regarding the development of the CRF, saying it “was handled extremely poorly by PJM.” Sotkiewicz said that although the problem statement and issue charge endorsed by the OC in May were supposed to look at CRF on a “prospective basis” with future black start units, the PJM and Monitor solution packages would apply the CRF to black start units already in service.

Sotkiewicz said generation owners with black start units are now finding themselves “absolutely surprised and flabbergasted” that units that have been in service for years and went through the bidding process may “potentially have to take a haircut” on previously promised benefits.

He said an “uncomfortable point for PJM” may be coming if stakeholders decide to endorse the CRF table for black start because it could set off a wave of revisions of the CRF in other places in the Tariff. If revisions are going to be done for black start, he said, it could also lead to revisions for the Reliability Pricing Model (RPM) auctions as well.

“Is that a fight that PJM is willing to take on at FERC and with generation owners?” Sotkiewicz asked. “I’m not sure that’s the best use of our time right now, given all the other problems with RPM going forward.”

Craig Glazer, PJM vice president of federal government policy, said that when the issue of updating the CRF came up for discussion, the RTO intentionally included it in the black start options matrix as needing stakeholder input. Glazer said the stakeholder input, along with dialogue with the Monitor, was taken to help formulate the proposals put forward for the CRF table update and to have it apply to existing black start resources.

Sotkiewicz said entertaining determinations that the updated CRF table would apply to existing black start resources was procedurally out of order and was not part of the issue charge endorsed by stakeholders.

“The fact that PJM is negotiating behind closed doors with the Market Monitor on this and trying to fast-track this is doubly troubling,” Sotkiewicz said.

Black Start Progression

Work on an initiative that could tighten fuel requirements for black start resources was put on hiatus in March to allow the RTO to do additional analysis on its potential benefits. (See PJM Backs off Black Start Fuel Rule.)

In the interim, PJM decided to focus on the CRF and three other areas in the Tariff that the RTO said were in need of updates: testing requirements for black start resources not compensated through Schedule 6A; black start unit substitution rules; and black start termination rules. (See PJM Eyeing New Black Start Changes.)

The issue charge won endorsement at the May OC meeting, and stakeholders have been working for several months on the issues. (See “Black Start Issue Charge Endorsed,” PJM Operating Committee Briefs: May 14, 2020.)

The CRF update has turned out to be the most controversial issue for stakeholders. The problem statement said that the current CRF is based on assumptions that do not reflect recent tax law and interest rate changes. PJM said it wanted to create a way to automatically update the CRF table to remain consistent with future tax law changes.

The problem statement also noted that current black start units receiving the capital cost recovery rate in Schedule 6A of the Tariff and units already awarded in recent black start requests for proposals will continue with the commitment period and CRF rates as documented in the Tariff.

3 Proposals

Becky Davis of PJM provided a first read of the PJM solution package at the OC meeting.

Davis said PJM is proposing future updates to CRF to be calculated at the time of the black start unit’s in-service date. The CRF would be calculated using depreciation as applicable under the tax code changes in the Tax Cuts and Jobs Act of 2017.

Other calculation points include:

• the current federal tax rate (updated annually);
• the average state tax rate (updated annually);
• the debt interest rate (updated annually);
• a return on equity of 12%;
• 50% equity;
• 50% debt; and
• a five-, 10-, 15- and 20-year capital recovery period based on unit age at the time of the unit entering black start service.

Monitor Joe Bowring provided a first read of the IMM solution package, which mirrors much of the PJM package.

Bowring said the CRF table was created in 2007 as part of the RPM capacity market design. He said the CRF table “provided for the accelerated return of incremental investment in capacity resources based on concerns about the fact that some old units would be making substantial investments related to pollution control.” The same CRF table was also used in the black start rules.

Bowring said the CRF table includes assumptions that are no longer correct and that the CRF values are significantly higher than they should be under the lower corporate tax rate, leading to overcompensation for units.

The Monitor is proposing two CRF tables: one reducing the tax rate to reflect that units existing prior to the 2017 tax law saw their tax rate decrease without changes to the depreciation rules; and a second for black start units that came into service after the new law went into effect and benefited from new depreciation provisions and a lower corporate tax rate. In addition, the Monitor proposes that black start resources recover their costs over either a 10- or 20-year period and have a continuing commitment to provide black start service.

The original CRF table sets black start terms ranging from five years for units 16 years or older to 20 years for units five years and younger.

Bowring said overcompensation amounts vary with the project investment and the CRF recovery period. He said a post-2017 black start unit with an investment of $21 million to which the tax law applied would receive $840,000 per year in excess compensation, or $16.8 million over a 20-year recovery period.

A post-2017 black start unit with an investment of $21 million to which the lower tax rate applies would be overpaid by $2.6 million per year, or $13.4 million over a five-year recovery period.

Bowring said total overcompensation, if the CRF rules are not modified, for both pre- and post-2017 units over the life of their compensation periods would be $108.7 million.

Black Start Owners Response

Michael Borgatti of Gabel Associates presented the potential impacts of the proposed black start rate changes on behalf of an anonymous coalition of black start resource owners.

Borgatti said the generation owners believe the proposed changes to the black start capital recovery rate should only apply prospectively. He said limiting the changes to prospective application would avoid “unnecessary litigation over retroactive ratemaking concerns.”

Borgatti said he was authorized by the stakeholders he represents to notify PJM that if the RTO’s or Monitor’s proposed changes to the CRF table had been applied at the time of their black start units coming online, they would not have submitted bids. He also said that if the changes are endorsed, several of the generation owners will “strongly consider terminating their black start agreements at the earliest possible interval.”

“You’re looking at entities now that are committed to providing this service who would not have made that commitment under the proposal out here,” Borgatti said.

Bowring said the Monitor understands the objections being made by stakeholders, but he said he doesn’t believe it’s the responsibility of PJM to make the final decision on the CRF updates. He said that ultimately the final decision should be made by FERC.

“It’s not our decision to make, but at the same time, we can’t ignore it,” Bowring said. “Regardless of what the stakeholders decide, I believe we have the responsibility as the Market Monitor to take it to the commission and let them decide. If they decide against us, that’s fine.”