Page 1636 – RTO Insider

May 20, 2014

Dominion, PSEG Proposals Gain in Artificial Island Race

Dominion and PSE&G appear to have vaulted into contention in the Artificial Island contest following a design change by PJM planners.

In a special meeting of the Transmission Expansion Advisory Committee yesterday, PJM planners presented charts summarizing their analysis of 10 finalist proposals to fix stability problems at Artificial Island, home of the Salem and Hope Creek nuclear plants.

A 230-kV proposal by LS Power (proposal #5A), which PJM had previously identified as the cheapest among the 10, fared well in the analysis.

But two 500-kV proposals by Dominion Virginia Power (#1C) and PSE&G (#7K) that were in the middle of the pack in cost — and did poorly in the analysis in their original forms — had their standings improve dramatically when PJM reevaluated them after eliminating a second tie line between the two nuclear plants.

The proposals not only got the top two scores in the analysis but also saw their costs reduced by $34 million and $43 million, respectively. PJM estimates either revised project would cost between $211 million and $257 million, the same range it assigned to the LS Power plan.

The estimates do not include an additional $80 million for static VAR compensators (SVCs), which PJM determined were necessary to improve performance of each of the proposals.

Cost Allocation

The LS Power proposal, which would run a 230-kV line across the Delaware River to a new or expanded substation on the Delmarva Peninsula, could face opposition from Delaware regulators. PJM told stakeholders at the last TEAC meeting that its cost would be allocated entirely to the Delmarva Power and Light zone. (See Delaware Unhappy with Artificial Island Cost Allocation.)

PJM did not provide an allocation for the revised Dominion and PSE&G proposals, which would both add a 17-mile, 500-kV line paralleling an existing 500-kV line from Red Lion to Hope Creek. But officials indicated yesterday that the allocation would be similar to that of a proposal by Exelon and Pepco Holdings Inc. that would follow an identical route. Its cost would be spread among two dozen transmission zones and merchants.

PJM will accept written comments on its analyses through June 2. It plans to review stakeholder feedback and present planning staff’s recommendation for the project’s design and developer at a special TEAC meeting June 16. The planners are scheduled to present their recommendation to the PJM Board of Managers July 22.

Color-Coded Summary

PJM yesterday presented a chart summarizing its analyses of the proposals, assigning color codes for each of 25 attributes in seven categories: green (positive or limited impact); yellow (some impact) and salmon (negative impact). (See p. 197 of the presentation.)

Steve Herling, vice president of planning, said each of the finalist proposals solve the stability problem. “All of these other issues are going to be factored in because the performance is so close,” he said.

Herling cautioned that the three colors included in the chart could not capture the subtleties of the planners’ analyses. “It’s a visual” summary, he said. “We don’t want people to read too much into it.”

RTO Insider summarized the findings by assigning a score of 1 to green, zero to yellow and -1 to salmon.

The PSE&G 7K proposal scored a 1 out of a possible 25 in its original form but received a 9 when the second tie line was removed — the best of all 12 proposals analyzed.

Dominion’s 1C proposal received a -2 in its original form but improved to an 8, second-best, without the tie line.

LS Power’s proposal scored a 7, ranking it third.

Tie Line Eliminated

Deleting the second tie line from the Dominion and PSE&G proposals not only reduced their costs. It also eliminated the proposals’ negative grades in the project complexity and operational impacts categories. The only remaining negatives for the two proposals related to their wetlands impact and land permitting issues.

Supawna Meadows National Wildlife Refuge (Source: US Fish and Wildlife Service)

PJM estimates the proposals will affect 350 acres of wetlands. But one stakeholder questioned that, saying only 30 acres — the ground under the transmission towers’ foundations — would be affected.

LS Power’s proposal received three negative grades under the operational impact, and siting and permitting categories. PJM said its plan for an overhead crossing of the Delaware was likely to face more public opposition than submarine crossings. “Out of sight, out of mind, if you will,” said Paul McGlynn, general manager of system planning.

The PSE&G and Dominion proposals also employ an overhead design but would follow an existing Delaware River crossing.

Sharon Segner, vice president of LS Power, said PJM should leave the decision regarding the manner of crossing the river to the U.S. Army Corp of Engineers, which has jurisdiction over the river. LS Power’s nearly identical proposal for a submarine crossing (#5A) would add as much as $45 million to the project cost.

Segner said the PSE&G and Dominion proposals face potential permitting problems because the route is within a half mile of 350 homes and includes three miles through the Supawna Meadows National Wildlife Refuge and 10 miles of wetlands.

PSE&G may have an edge over Dominion because it already owns some of the right of way needed. Sister company PSEG Nuclear LLC is the operator of the Salem and Hope Creek plants.

In its favor, LS Power holds an option on the site of its proposed substation in Delaware.

May 20, 2014

PJM Proposes Changes to Capacity Auction Parameters for 2015

PJM proposed changing the demand curve to be used in the 2015 Base Residual Auction while recommending the RTO continue using a combustion turbine as the model for determining the Cost of New Entry (CONE).

Proposed VRR Curve for 2015 Auction (Source: PJM Interconnection, LLC)

PJM’s proposed parameters adopt many of the recommendations from a study by The Brattle Group but differ on some issues, notably rejecting Brattle’s recommendation that CONE be determined based on an average of combustion turbine and combined cycle plant costs.

Brattle recommended that the Variable Resource Requirement Curve be changed so that the price cap (point a) for the system curve is set to a quantity equaling a loss-of-load expectation (LOLE) of one event in five years. Brattle said the change would provide stronger price signals when capacity resources are reduced or become more expensive and would not increase long-term average prices. The study also recommended stretching the VRR curve into a convex shape, making it steeper at lower reserve margins and flatter at higher reserve margins.

PJM said it favored the convex curve but would right-shift it by 1%, setting the price cap to 150% of net CONE at an unforced capacity (UCAP) level 0.2% below the installed reserve margin (IRM). PJM would use the same system curve for locational deliverability areas.

CONE Model

Brattle recommended using an average of combustion turbine and combined cycle costs as the reference technology for calculating Net CONE rather than the current reference of the GE Frame 7FA model combustion turbine.

Brattle said the change would acknowledge that combined cycle plants are the favored choice of merchant generators while avoiding a complete switch away from the current CT reference. It also recommended switching from the Handy Whitman “Other” Index to the Bureau of Labor Statistics’ indices for wages, materials and turbines, which it said would provide more accurate escalation factors for CONE estimates.

PJM agreed with changing to the BLS index but is recommending continued use of the frame-model CT as the reference technology, saying it would provide “market stability and avoids perceived opportunistic switching to units with more favorable economics in any given year.” It noted that the New York ISO recently selected a CT as its reference technology.

PJM seeks to have final stakeholder input by Aug. 31, with changes submitted to the Federal Energy Regulatory Commission by Oct. 1.

PJM Opposes Auction “Re-Run”

In a related matter, PJM asked FERC on May 9 to reject a request from the North Carolina Electric Membership Corp. to require the RTO to develop a mechanism for “unwinding” Base Residual Auction results and rerunning the auction. The scenario envisioned by NCEMC would occur if FERC ruled after the auction and reduced supply curve parameters below those filed by PJM.

“The hypothetical series of events that NCEMC envisions as warranting such a mechanism includes a Commission determination on how best to apply any final rulings on RPM parameter changes resulting from a periodic review,” PJM said in its response. “That opportunity for Commission intervention invalidates any suggestion that PJM’s current Tariff could lead to unjust or unreasonable results.”

NCEMC made the request in response to PJM’s April 4 proposal (ER14-1660) to move up by two months the deadlines for filing changes to auction parameters. Proposed parameter changes would be due May 15 instead of the current July 15. PJM said the changes will allow stakeholders more time to assess the parameters before the Base Residual Auction.

May 20, 2014

FERC to Relax OATT Rules for Tie Lines

The Federal Energy Regulatory Commission said it intends to grant a blanket waiver from Open Access Transmission Tariff (OATT) requirements for utilities whose only transmission assets are generator tie lines. The revisions are detailed in a Notice of Proposed Rulemaking (RM14-11).

Current policy requires a tie line owner to make excess capacity available to third parties unless it can justify its plans for future use of the line. The NOPR would allow tie line owners to wait until a third-party request for service is made under sections 210 and 211 of the Federal Power Act before having to demonstrate their plans.

The proposed changes follow a technical conference and a Notice of Inquiry issued in April 2012.

May 20, 2014

Order 1000 Reversal: Reality Check or Surrender to Incumbents?

PJM’s transmission planning process may exclude consideration of non-incumbent proposals on projects subject to state rights of first refusal (ROFR), the Federal Energy Regulatory Commission ruled last week.

FERC had previously required PJM to remove language designating an incumbent transmission owner as the “Designated Entity” to build a transmission project, “when required by state law, regulation or administrative agency order with regard to enhancements or expansions or portions of such enhancements or expansions located within the state,” and when a transmission project is “proposed to be located on a Transmission Owner’s existing right of way and the project would alter the Transmission Owner’s use and control of its existing right of way under state law.”

But the commission ruled 3-1 Thursday that its previous position would require planners to evaluate nonincumbent proposals that had no chance of getting built because of state rules assigning them to incumbent utilities. The commission said it was persuaded by the arguments of North Carolina Utilities Commission, the Indiana Utility Regulatory Commission and others that the language merely acknowledged state jurisdiction and did not create a federal right of first refusal.

The commission made the change in Order 1000 compliance rulings for PJM (ER13-198, ER13-195, ER13-90), MISO and South Carolina Electric & Gas Co. (SCE&G).

Norris Dissents

In a dissent, Commissioner John Norris said the reversal undercuts Order 1000’s requirement eliminating federal rights of first refusal from FERC-jurisdictional tariffs or agreements.

Norris cited Order 1000-A, in which the commission said “[I]t would be an impermissible barrier to entry to require, as part of the qualification criteria, that a transmission developer demonstrate that it either has, or can obtain, state approvals necessary … to be eligible to propose a transmission facility.

“By excluding proposals from non-incumbents when the proposals are being evaluated based on a consideration of state law, we are effectively excluding non-incumbents from participating in the transmission planning process,” Norris wrote. “This is a fundamental change in direction that I cannot support. I simply cannot reconcile the language in the final rule with the approach taken in today’s orders.

“Clearly, incumbents already are well-positioned through their knowledge of the system, including issues related to reliability and congestion,” he continued. “Today’s orders give incumbents a further advantage over non-incumbents by limiting non-incumbents’ participation in the planning process.

“In my view, allowing non-incumbents to participate in the regional transmission planning process without consideration of potential state law restrictions does not infringe upon the state’s authority,” Norris said. “Using this language to exclude non-incumbents denies states and other stakeholders the opportunity to have all essential information regarding the more cost-effective and efficient transmission solutions.”

‘Coercive Pressure’

The Indiana Commission said that allowing a transmission provider to select a transmission developer that is ineligible to construct a transmission facility under state law would lead to increased litigation and “coercive pressure on state commissions.”

The North Carolina Utility Commission and its public staff agencies said the commission was acting inconsistently in requiring that PJM consider state renewable portfolio standards in its transmission planning process while insisting it ignore state rules restricting transmission development to state franchised utilities.

Other Challenges Rejected

While the commission reversed its position on acknowledging state rules, it largely rejected challenges to its previous orders regarding PJM.

It did, however, order PJM to make some additional Tariff changes and compliance filings, including one describing how local transmission owners incorporate public policy requirements into their transmission plans.

It also ordered PJM Transmission Owners to submit a compliance filing ensuring comparable treatment of AC and DC facilities.

May 20, 2014

Consumer Advocates to PJM: No More Changes, Please

CAMBRIDGE, Md. — Consumer advocates asked the PJM Board of Managers last week to assess the impact of recent capacity market changes before making any new ones and criticized what they called the RTO’s new “inflexibility.” Environmental groups, meanwhile, asked PJM to become “proactive” in addressing climate change and to do more to capture the role of energy efficiency in its planning.

The comments came at the board’s yearly meeting with consumer advocates and public interest groups on the first day of the PJM Annual Meeting here. The tone was a bit less rancorous than 2013’s meeting, with several activists praising PJM for its work maintaining electric service during January and for its response to generator retirements.

Still, the participants weren’t going to let their one shot to talk to the board — and it was almost entirely a one-way conversation — go to waste.

“Five major proposals in the capacity market in the last 12 months is a lot to digest,” said Assistant Pennsylvania Consumer Advocate Dave Evrard, who cited four changes that were approved by FERC and one that was rejected. Evrard noted that PJM had provided cost estimates on only one of the four proposals, a restriction on how demand response clears in the auction. (See PJM Wins on DR, Loses on Arbitrage Fix in Late FERC Rulings.)

“We watch somewhat nervously to see what the results of the current base residual auction will be,” Evrard said, noting that demand response offers dropped by 27% between the 2012 and 2013 base residual auctions. The question is whether the recent DR changes “[exacerbate] the decline or if that was simply an aberration,” he said.

Wil Burns, an attorney who represents environmental groups, echoed Evrard’s concerns, saying the board should not make any additional changes until it has analyzed the impact of the recent changes.

PJM’s `Inflexibility’

Brian Lipman, litigation manager at the New Jersey Division of Rate Counsel, criticized PJM for failing to discuss with stakeholders its position on a crucial capacity market rule before filing comments with the Federal Energy Regulatory Commission. PJM sided with FirstEnergy, which petitioned FERC on April 7 to change how the RTO calculates the maximum price generators can offer into capacity auctions (EL14-36).

“We didn’t find out about PJM’s position until it was filed,” he said. “That is concerning to us that we didn’t have any input into that decision.”

PJM’s “recent inflexibility” regarding rule changes “makes stakeholders worry about the future of consensus-building,” he added.

Lipman said PJM should take more time in stakeholder discussions, such as in the current discussions on the use of the Handy-Whitman building cost index in the calculation of the Cost of New Entry (CONE). “We could have been discussing that for a year now,” he said. “Decisions are happening before we have a chance to participate.” (See related story, PJM Proposes Changes to Capacity Auction Parameters for 2015.)

Role of DR, EE

Environmentalists, meanwhile, asked the board to incorporate demand response and energy efficiency into more of its planning efforts. DR and energy efficiency are “factored into one of your eight planning estimates only,” Burns said.

Yorktown Power Station (Source: Dominion Virginia Power)

For example, PJM should consider whether increased DR might allow Dominion Virginia Power to retire its Yorktown coal-fired generators as planned at the end of 2014 rather than continuing to operate temporarily to address reliability problems, Burns said.

Alison Clement, of the Sustainable FERC Project, said PJM could learn from ISO New England, where at least 90% of energy efficiency bids into the capacity market.

Rob Marmet, of the Piedmont Environmental Council, called on PJM to help states find the most effective ways to comply with pending EPA rules on greenhouse gas emissions for existing generators.

PJM Chairman Howard Schneider offered some brief remarks at the end of the session. “We value the issues you bring to us and the way you bring them to us,” Schneider said. “The relationship has improved vastly over the last several years.”

PJM CEO Terry Boston was the only other board member to offer feedback to advocates, saying he liked Burns’ idea of giving DR a bigger role in PJM’s winter reliability plans.

May 20, 2014

Monitor Suggests Price Gouging by Generators

Some generators may have taken advantage of January’s weather to boost their prices, the Market Monitor said in its quarterly State of the Market report Friday.

“The behavior of some participants during the high demand periods in January raises concerns about economic withholding,” the monitor said. “In particular, there are issues related to the ability to increase markups substantially in tight market conditions.”

The Monitor’s report cites the “markup index,” a measure of participant offer behavior. In the real-time energy market, 58% of marginal units had an average markup index at less than or equal to zero in the first quarter. But 14% of marginal units had average markups at or exceeding $150/MWh, compared to only 4% in the first three months of 2013.

In the day-ahead energy market, almost 87% of marginal units had average markups less than zero and an average markup index less than or equal to 0.03. “Nonetheless, some marginal units do have substantial markups,” the report said. Markups increased on days in January when demand was highest.

The markup index is calculated as (Price – Cost)/Price. The index ranges from -1.00, when the offer price is less than marginal cost, to 1.00, when the offer price is higher than marginal cost.

Competitive Offers Required

The Monitor said capacity resources should be required to make “competitive” offers into the energy market, an obligation that is not clear under current Tariff language.

“Selling capacity into the PJM capacity market but making energy offers daily of $999 per MWh would not fulfill the requirements of a capacity resource to make a competitive offer but would constitute economic withholding,” the Monitor explained in the 2013 State of the Market report. “This is one of the reasons that the rules governing the obligation to make a competitive offer in the Day-Ahead Energy Market should be clarified for both internal and external resources.”

The Monitor’s suggestion of economic withholding came a day after Federal Energy Regulatory Commissioner Tony Clark told PJM members that the commission had seen no evidence that market manipulation played a role in the high natural gas and electric prices in January.

In an interview yesterday, Market Monitor Joe Bowring said his staff will be interviewing generators with high markups and may refer the matter to FERC’s enforcement unit if it doesn’t receive satisfactory answers. “The Tariff requires us to refer potential enforcement matters to the commission,” he said.

January 2014 Outage Rates, Morning Peak (Source: PJM Interconnection, LLC)

Bowring said his staff is also investigating whether any generators engaged in physical withholding by improperly claiming outages. PJM saw as much as 22% of its generation out of service in early January, three times the normal winter outage rate.

Bowring said some gas-fired units took losses to operate in January. “We want to make sure that others also followed through” on their obligations, he said.

Inadequate Incentives

The Monitor’s report said the high generation outage rate in early January was an indication that the current balance of incentives and penalties is inadequate. “At present only half of capacity market revenues are at risk for failure to perform on high demand days. Gas-fired units with a single fuel are exempt from any capacity market revenue impact that results from lack of fuel outages on high demand days,” the report said.

The obligation of capacity resources to offer into the day-ahead energy market “exists regardless of whether gas procurement is difficult, regardless of whether gas prices are high and regardless of whether gas procurement is risky,” the Monitor said.

Stakeholders this month began work on developing potential winter testing requirements for generators. Consideration of incentives for generator performance and penalties for failures will be considered in a separate initiative, PJM said. (See PJM Seeks Action on Winter Lessons.)

Day-Ahead Scheduling Reserves

The Monitor also reported withholding in the day-ahead scheduling reserve (DASR) market, a problem it has cited before which worsened in 2014.

PJM uses the market to acquire supplemental, 30-minute reserves. Because the direct marginal cost of providing DASR is zero, offers greater than zero constitute economic withholding, the Monitor said.

In 2013, 12% of offers in the market exhibited evidence of withholding. The clearing price in the first three months of 2014 was $0.06 per MW, double the price for the first quarter of 2013.

About 74% of resources offered at less than $1 in the first quarter, with 11.5% of resources offered at more than $5 per MW.

The 2013 SOM report recommended incorporating the “three pivotal supplier” test in the market to prevent the exercise of market power during times of system stress, ranking it as a low priority item. PJM said it does not believe the change is warranted given the minimal impact of the market on consumer costs.

May 20, 2014

Exelon Sells Its Share of Safe Harbor Hydro

Exelon last week sold its 67% interest in Safe Harbor Hydroelectric Project, one of four run-of-the-river hydro facilities on the lower Susquehanna River, to Brookfield Renewable Energy Partners, L.P. for $613 million.

Brookfield operates 6,000 MW of generation, primarily hydro, in the United States, Canada and Brazil. It will be sole owner of the facility when the deal closes.

The deal is supposed to be finalized by the third quarter of this year, subject to regulatory approval.

Exelon inherited two-thirds ownership of Safe Harbor when it bought Constellation, parent company of Baltimore Gas & Electric. It still owns and operates Conowingo Hydroelectric Generating Station, the last dam on the Susquehanna River before it empties into the Chesapeake Bay, and Muddy Run Pumped Storage Facility, which is perched on the banks of the Susquehanna upstream from Conowingo.

Safe Harbor went into operation in 1931. It was a joint project of the two companies that would become PPL and BG&E. An affiliate of the LS Power Group purchased PPL’s share in 2011, and Brookfield bought it from LS Power in March of this year.

There are three other power-producing dams on the lower Susquehanna in Pennsylvania and Maryland. Furthest upstream is York Haven Dam, a small, 20-MW facility south of Harrisburg, Pa., owned by Olympus Power. Next is Safe Harbor followed by Holtwood Hydroelectric Plant, both between Lancaster and York Counties in Pennsylvania. Originally a 108-MW plant, PPL completed an expansion of Holtwood in 2013 that added another 125 MW.

The Conowingo dam is a 630-MW facility on the Susquehanna, between Harford and Cecil Counties in Maryland.

May 20, 2014

Members Re-elect Three to Board

The Members Committee re-elected Ake Almgren, Susan J. Riley and Charles F. Robinson to the Board of Managers, a formality given that the three were running unopposed.

The three were recommended by the Nominating Committee, which includes Board Chairman Howard Schneider, Board Member Jean Kinsey and representatives of each of the five voting sectors.

Almgren, a PhD in Engineering Sciences who joined the board in 2003, is the former president of ABB Power T&D Co. Inc. Riley, an MBA and a former finance executive for The Children’s Place, has served since 2005. Robinson, a lawyer and general counsel for the University of California system, joined the board in 2011.

The committee also approved the following:

Revisions to Manual 34: Stakeholder Process — Changes to voting methods at the Standing Committees, and posting and notice requirements.

Section 8.4: Voting Method:The voting procedures were changed to allow members to indicate their preference for the status quo over proposed rule changes.
Section 10.4: Posting Process Timelines: Members will have five business days to comment on proposed revisions to governing documents before votes of the Markets and Reliability or Members committees (down from the current 10-day requirement).
Section 11.13: Consultation with Transmission Owners and Members: Except in emergencies requiring immediate action, PJM will be required to provide Transmission Owners and PJM members 30 days’ notice before making a Section 205 filing to change the creditworthiness provisions of the Tariff. The notice time for making Section 205 filings on other matters will remain seven days.

Settlement Formulation Review – Phase II initiative — Clarifications to the Tariff and Operating Agreement (OA) on regulation shoulder hour lost opportunity costs (LOCs). As a result of a review, PJM discovered that the documents didn’t adequately describe the calculation of the deviation between the regulation set point and the expected output of each regulation resource.

Credit Available for Virtual Transactions — Revisions to the Tariff to reflect current PJM practices regarding credit available for virtual transactions. PJM instituted the policy as the result of a FERC Order in 2004 but failed to make accompanying changes to the Tariff. These revisions also correct for changes in credit policy since 2004 (e.g., working credit limit discount is now 25%, not 15%).

Synchronized Reserve penalty charges for Tier 2 resources — Clarifications to the Tariff and OA giving generators providing Tier 2 synchronized resources the ability to aggregate these resources in order to avoid retroactive penalties for failing to respond appropriately when called. New language will also be added to Manual 11: Energy & Ancillary Services and Manual 28: Operating Agreement Accounting. Aggregation will not be used in calculating Tier 2 Synchronized Reserve credits; each resource will continue to be credited independently.

PJM’s change of mailing address — Changes to the Tariff and Operating Agreement to reflect PJM’s new mailing address to: 2750 Monroe Blvd., Audubon, PA 19403.

May 19, 2014

PJM Differs with Most IMM Recommendations

PJM said last week it agrees with about one-quarter of the recommendations in the Independent Market Monitor’s 2013 State of the Market report.

PJM’s response to the Monitor’s annual review disagreed with about 40% of the recommendations. The RTO was noncommittal, or said it was unable to act, on about 35% of the more than 70 recommendations.

PJM agreed with about the same share of the IMM’s recommendations in its 2012 report but directly disagreed with about half of them.

The RTO’s 2012 response urged the Monitor to focus its findings on those with the biggest potential payback, noting that more than 90% of the suggestions pertained to subjects comprising less than 20% of total wholesale power market costs. The RTO said it was happy, however, that the Monitor had begun prioritizing the recommendations in the 2012 report.

In the 2013 report, the IMM prioritized only the new recommendations.

“Given the scope of issues to be considered in the stakeholder process, evaluation of priority and materiality of recommendations is an important consideration,” PJM said in its response. “PJM encourages the IMM to include consideration of priority and materiality in discussion and development of all recommendations along with associated detailed rationales for suggested changes to market rules.”

May 12, 2014

PJM Wins on DR, Loses on Arbitrage Fix in Late FERC Rulings

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.”