By Suzanne Herel

WILMINGTON, Del. — An initiative that would allow generators to avoid underperformance penalties in the redesigned PJM capacity market was met by pushback from members who said it was premature and could undermine the new reliability product.

The problem statement presented by Bob O’Connell on behalf of PPGI Fund A/B Development would allow generators to minimize penalties by netting them against over-performing generators.

O’Connell introduced the initiative in October, saying the Capacity Performance rules allow companies with multiple generators to offset poor performance with over-performing units but does not allow after-the-fact offsets, such as bilateral trades, that could help smaller generators. (See Generators Seek to Reopen PJM Capacity Performance Rules.)

“I’m not sure why it makes sense to the market to retroactively switch around performance,” Market Monitor Joe Bowring said during a discussion at the Markets and Reliability Committee meeting. “Capacity Performance is about performing at the time you’re supposed to perform.”

Bankruptcy Threat

“We have a performance obligation to meet those,” responded O’Connell, who agreed to delay a vote on the initiative to try and address stakeholder concerns. “But to the extent that a unit has a legitimate problem that forces it to be out of service during one of these periods of time, the exposure that unit faces with possibly having to buy back its position in real time and pay a penalty … exposes it to financial stress.

“It doesn’t make sense to push that financial stress to the point that they can’t meet their obligations financially. … Sitting back until half a dozen units go into bankruptcy is something that’s not effective from a reliability standpoint or an investment standpoint.”

O’Connell said customers ultimately would benefit because the proposal would allow generators to reduce the risk premiums they will otherwise include in their offers.

“The only way to handle underperformance now is to write a check,” he said. “Give the insurance company a way to physically offlay that risk.”

Tangible Problem?

Rene Demuynck of the New Jersey Board of Public Utilities asked for proof of a problem or of consumer benefit.

“We’re at a loss as to what the failure of Capacity Performance is right now except to avoid the obligation that you want to avoid and cleared the market on,” he said. “What is the tangible problem?

“Consumers are being asked to pay upfront with the understanding that units would offer their capacity and, when most needed, deliver the capacity,” he said. “I would suggest that the risk of negative penalties would be substantially diminished, and therefore the incentive to perform would be substantially diminished. There’s no perceived reason we can see to even consider this, and before [FERC] addresses other issues that are pending.”

Susan Bruce, of the Industrial Customer Coalition, said the problem statement was one-sided.

“When we talk about Capacity Performance, we talk about risks and rewards,” she said. “I see this as looking at the risk side.”

While there may be legitimate issues there, she said, “This is so narrowly drawn that it doesn’t look at the other side of the equation, the customer side of the equation. … There’s nothing in this to recognize the other side of the ledger.”

O’Connell protested that since he introduced the idea for the problem statement at the September MRC meeting, he hadn’t received any calls or questions about how it might be changed to include the customer side. “How long do I have to wait?” he asked.

“At that last meeting there was a chorus of concern,” Bruce responded. “To be honest, I was sort of hoping it would go away.”

Brian Garnett of Duke Energy supported the problem statement, saying it would be a way for smaller generators to hedge financial risk in the way that larger generators can.

Alan Ellison of Veolia added that his company’s Grays Ferry Cogeneration plant in Philadelphia could go bankrupt if it stumbles in the new market.

Premature

Jim Jablonski of the Public Power Association of New Jersey said the problem statement was premature.

“Is it time to be tweaking it already?” he said of Capacity Performance. “Or should we wait for a sensitivity analysis?”

“PJM does have some concerns regarding the substance of the problem statement,” said Stu Bresler, PJM senior vice president for markets, noting that a fundamental piece of the new product’s design is unit-specific evaluation of performance.

“I don’t have an opinion how long we should wait,” he said. “But I certainly agree that experience would be helpful.”

The committee plans to vote on the problem statement at its December meeting.