Ott: ‘You’re Not Talking to a Brick Wall’

PJM officials said Wednesday they are amending their proposed capacity overhaul in response to dozens of mostly critical stakeholder comments.

“Already, based on the comments, we are making adaptations to our proposal. It’s extremely helpful to get your feedback,” Executive Vice President for Markets Andy Ott said at the beginning of the three-and-a-half-hour question-and-answer session on the proposal.

“We said all along it was a proposal,” Ott said later in the session. “I can’t say it enough. You’re not talking to a wall here. This isn’t a traditional stakeholder process but it is still a stakeholder process.”

On Monday, PJM released more than 300 pages of comments from more than 50 stakeholders. While the comments reflected the traditional load vs. supply divide, there was near universal unease with how quickly PJM is attempting to introduce a new Capacity Performance product and rewrite compensation and penalty policies. (See Something for Everyone to Dislike in Capacity Performance Proposal.)

Although Wednesday’s discussion was the last scheduled stakeholder meeting before PJM issues its final proposal Oct. 7, officials said they would consider one or two additional meetings.

The Board of Managers will make the ultimate decision on what PJM files with the Federal Energy Regulatory Commission following an Enhanced Liaison Committee meeting with members Nov. 4 in Philadelphia. Although the meeting will be limited to PJM members, representatives of state regulatory commissions will also have a chance to address the board before or after the meeting, officials said.

Ott said officials are targeting a FERC filing by Dec. 1 in order to have the changes in place for the May 2015 Base Residual Auction.

Ott said the board will likely make additional changes in the plan before filing with FERC. “I think there’s a very small chance that [the Oct. 7] proposal will be filed” at FERC, Ott said.

Below are some of the issues that generated discussion Wednesday.

Force Majeure

Mike Borgatti of Gabel Associates said PJM’s proposal for “the outright elimination of force majeure is untenable.”

Borgatti said the rules would allow a coal-fired plant to escape penalties if it were unable to operate because a sinkhole swallowed a nearby substation but not if the hole made the road to the plant impassible for coal deliveries. Another stakeholder observed force majeure would not apply for a gas-fired generator that lost its pipeline to the sinkhole.

Independent Market Monitor Joe Bowring, who opposes PJM’s proposal to add an additional class of capacity, said he supports the tightened force majeure rules. “The market doesn’t care why you’re out [of service]. If you’re not producing energy, you’re not producing energy. That’s all the market cares about. It’s impossible [for the Monitor and PJM] to manage a long list of excuses.”

Ed Tatum of Old Dominion Electric Cooperative said Bowring’s analysis was an inaccurate description of the Reliability Pricing Model. “This is a resource adequacy concept. It’s not a market. … Taking an academic view of what is not a market is not going to get us” improved performance.

Officer Certification

Generators are also balking over requirements that officers certify their plants’ ability to meet the Capacity Performance requirements. Borgatti said it could be impossible to certify that a generator holds a firm gas contract three years into the future.

Another member said the requirement introduced both organizational risk and personal risk to the officer. “You’re asking the officer to certify to an unknown risk that won’t be known until after the fact,” he said. He said PJM should eliminate the requirement or add a “safe harbor” provision.

The IMM says performance incentives will be sufficient to ensure reliability and that officer certifications are unnecessary.

Ott said PJM is aware of the risk of unintended consequences from the requirement. “We certainly heard that” from the comments, he said.

Capacity Performance Requirements

Others said PJM should relax its requirement that Capacity Performance resources be able to run at full output for 16 hours for three consecutive days during weather emergencies, saying it unnecessarily excludes demand response, energy efficiency and storage.

Wil Burns, an attorney representing public interest groups said PJM should broaden its Capacity Performance definition to include resources such as DR, EE and renewables that have no fuel risk and “that can be and have been there when needed.”

PJM’s Adam Keech said the requirement was intended to cover the daily summer peak or the two daily winter peaks. But he suggested PJM might relax the requirement saying, “I don’t want to say anything is etched in stone.”

“You’re getting a sense from us that the last thing we want to do is to discourage resources that can be there,” Ott said. But he said the RTO felt that it needed operational requirements and not “just rely on the economic pressure of a performance penalty. Striking that balance will be very key.”

Despite the appellate court ruling voiding FERC’s authority over DR, “PJM believes there’s a continuing role for demand response in the wholesale market,” Mike Kormos, executive vice president for markets, assured stakeholders. “It may be there in a different format.”

Kormos said PJM would integrate its plans for DR with the capacity market “once it’s clear how FERC wants us to move forward.”

Base Capacity Assumptions

Several speakers challenged PJM’s assumption that no base capacity will be available during the peak winter week. Tatum noted that the RTO uses a probabilistic approach to account for forced outages in its calculation of loss-of-load-expectation (LOLE) and installed reserve margins (IRM).

“Zero seems pretty on-off – kind of a low number to me,” Tatum said. “I think it would be good to have a consistent approach.”

Kormos said that to count on any base capacity during the winter peak “might be overoptimistic.”

“If you look at the number of gas units that never get gas on peak [winter] days,” when generation has to compete against gas demand for heating, “it’s not as draconian as it sounds,” Kormos said.

PJM has proposed that all but 15% of peak winter load be served by the new product. “I don’t think our thinking has changed a lot on that,” agreed PJM’s Tom Falin.

Market Power

Load representatives asked PJM and the Monitor to address market power concerns, saying the new product could be subject to withholding.

Susan Bruce, representing the PJM Industrial Customer Coalition, said “strong market power protection” would be essential to winning her group’s support.

Ott endorsed the Market Monitor’s suggestion of a must-offer requirement that allows generators to submit “coupled” offers with one price for Base Capacity and a higher price for Capacity Performance.

Bowring said the best way to reduce withholding risk is to use a single annual capacity product without the new product. (Bowring also has called for eliminating Limited and Extended Summer DR). Given the higher requirements and penalties on CP, Bowring said, there will be a “very substantial incentive” for generators to withhold.

But Bowring said his staff could review proposed costs for winterization or firm fuel within coupled offers the same way it currently screens offers under the avoidable cost rate (ACR) and avoidable project investment recovery rate (APIR).

“It’s very doable. I don’t want to understate the complexity of it. It’s going to be much more complicated than it is now.”

Cost Recovery

One generator representative said his company is concerned with being able to recover the additional costs to allow its plants to meet the CP standards. “Just because you put those costs in has no bearing on whether you’ll actually see recovery for more than one year,” he said.

Bowring acknowledged capacity revenues have “not been adequately compensatory.”

Ken Carretta of Public Service Enterprise Group said generators would face additional maintenance costs as well as capital expenditures – a disconnect with the current backward-looking ACR mechanism.

“We have to figure out a way to reflect that,” Bowring agreed.