Acting on the eve of PJM’s base capacity auction, the Federal Energy Regulatory Commission Friday approved most of PJM’s new dispatch rules for demand response but rejected a plan to curb speculation in the auction, saying it created undue barriers to entry.

Instead, the commission ordered a technical conference to develop solutions to eliminate arbitrage opportunities between the base residual auction (BRA) and incremental auctions (IAs). It approved all but one of the major provisions of PJM’s DR proposal, rejecting the ability of the RTO to dispatch resources on a subzonal basis.

The commission said PJM’s proposed arbitrage fix — which the RTO proposed unilaterally after failing to obtain stakeholder consensus — “will simultaneously increase risk to suppliers and costs to load, without guaranteeing equally offsetting benefits to the PJM grid as a whole” (ER14-1461).

PJM proposed the arbitrage fix in March after the Markets and Reliability Committee failed for a second time to reach consensus. (See Second Time Not the Charm.)

No Consensus

Because clearing prices in IAs are usually lower than those in the BRA, participants can profit by selling capacity in the BRA and buying out their commitments in the IAs. PJM and the Market Monitor say such buyouts are suppressing capacity prices and could undermine system reliability.

PJM’s solution would have reduced the number of IAs (currently three) and set conditions eliminating the potential to arbitrage between the BRA and IAs.

Generators, including AEP, Calpine, PSEG, LS Power, Exelon, the PJM Power Providers and the Electric Power Supply Association, submitted interventions backing the PJM proposal. The Maryland Public Service Commission, Brookfield Energy Marketing LP, demand response provider Comverge, Old Dominion Electric Cooperative and American Municipal Power, Inc. were among those filing in opposition.

‘Disruptive’ Proposal

The commission said PJM’s “disruptive” proposal would increase risks for capacity sellers, creating undue barriers to entry, and increase costs to load through the acquisition of excess capacity. The commission was also unpersuaded by PJM’s “limited demonstration of the presence of speculative sell offers.”

“PJM has not demonstrated the degree to which purchases of replacement capacity are, in fact, the result of resources’ inability to meet their capacity obligations for non-speculative reasons, or resources submitting physical offers and responding to subsequent economic signals, or overly-optimistic offers `insured’ by consistent price spreads, or speculators looking to profit from consistent price spreads,” the commission wrote.

“Even existing generation resources, typically the most `physical’ of all resources, may seek to purchase replacement capacity as a result of unforeseen circumstances. More generally, both existing as well as planned capacity resources face a chance of being unable to meet their delivery year obligations due to unforeseen problems with a resource, or a resource’s development, and thus may reasonably wish to recoup certain sunk costs.”

The commission said the proposal could also increase costs for load by limiting the ability of the RTO to sell excess capacity back to the market.

The revised rule would have allowed PJM to sell into the IAs only if the clearing price equaled or exceeded the original BRA price. The commission said PJM had already taken steps to prevent capacity sellers from profiting from the purchase of cheap replacement capacity through a provision to recapture any such profits.

While it ruled PJM’s proposal not just and reasonable, the commission said it agrees “that PJM has identified a reliability issue that merits consideration.”

The commission said FERC staff will convene a technical conference to help develop a solution. The proceeding will be conducted in a new docket (EL14-48) using the procedures spelled out in Section 206 of the Federal Power Act.

DR Dispatch Proposal

PJM fared better in its proposal to increase its options for dispatching demand response. The commission voted 3-1 to approve all but one of PJM’s rule changes, with Commissioner John Norris dissenting.

The order (ER14-822) allows PJM to dispatch DR before emergencies, reduce default notice times to 30 minutes from as long as two hours and reduce minimum run times to one hour from two. However, the commission ordered PJM to allow small commercial customers to be eligible for the “mass market” exemption from the 30-minute notice.

It also approved an escalating price cap based on notice requirements:

• 30 minutes: $1,000/MWh, plus the primary reserve penalty factor, minus $1.
• 60 minutes: $1,000/MWh, plus the primary reserve penalty factor divided by two.
• 120 minutes: $1,100/MWh.

The previous rules capped DR at $1,000/MWh plus two times the applicable primary reserve penalty factor, for a total of $1,800/MWh. With rising penalty factors, the offer caps would have risen to $2,700/MWh over the next two years.

PJM’s proposed changes to measurement and verification rules were also approved, but FERC required a revision to allow DR providers to aggregate their performance for dispatches on the same operating day and within the same zone. The commission also ordered PJM to produce reports documenting its implementation of the new rules.

Sub-Zonal Dispatch Rejected

The commission rejected PJM’s call for sub-zonal dispatch inside an operating day. The commission ruled that PJM failed to show that DR providers which provide day-ahead sub-zonal dispatch can comply with sub-zonal dispatch on the operating day within 30 minutes without suffering “prohibitive costs.”

The commission said complying with the rule could be “difficult and costly” for curtailment service providers with customers in multiple locations and for individual customers with a footprint larger than a sub-zone.

“The necessary technology for demand resources to comply with this provision of PJM’s proposal is not widely available today,” the commission said. “If it becomes more widely available in the future, that change could enable PJM to show that this aspect of the proposal is just and reasonable.”

Norris Dissents

Commissioner Norris issued a dissent arguing that the 30-minute notice requirement imposed “a significant barrier” on DR participation in the capacity market that would undermine reliability and increase costs for consumers.

“I am particularly troubled because PJM’s proposal represents the third major tariff filing recently approved by this Commission that collectively will have the impact of reducing demand response participation in PJM capacity markets,” Norris wrote, referring to earlier rule changes that capped capacity offers for limited and extended summer DR (ER14-504) and required DR providers to give more assurances in their offers (ER13-2108).

“Demand response has repeatedly demonstrated its value in helping PJM meet system needs, but because some resources will be unable to meet the new performance requirement, such demand response will now be valued at zero and driven out of the market,” Norris continued. “As was made clear from this past winter’s polar vortex weather events, PJM needs all the resources it can get to help ensure reliability, particularly during times of system stress. I fail to understand why the Commission through today’s order would sanction efforts to unnecessarily reduce the pool of potential resources at PJM’s disposal.”