The Federal Energy Regulatory Commission approved PJM’s request to cap the quantity of Limited and Extended Summer demand response that clears in the annual base capacity auction, rejecting protests of opponents, who said it will increase costs and stunt the growth of DR.
The commission’s 4-0 ruling late Thursday (ER14-504) allows the changes to take effect in May’s Base Residual Auction for delivery year 2017-18.
The new rules cap the amount of Limited and Extended Summer DR at 10% of PJM’s reliability requirement, with Limited DR providing no more than 4%.
The changes — which the PJM Board filed with FERC despite a lack of stakeholder consensus — could boost capacity prices by $1.8 billion over two years, according to PJM simulations. (See PJM Goes it Alone in Bid to Limit DR in Capacity Auction.) PJM said those increases will be more than offset by a $3.4 billion reduction in energy prices over the same period.
“While we cannot confirm the simulation’s relative estimates,” the commission wrote, “we agree with PJM that additional generation resources clearing the capacity auction under PJM’s proposal would, unlike demand response that does not participate in the energy market until an emergency event occurs, contribute more energy in the energy market, which in turn would tend to place downward pressure on energy price.”
PJM told FERC the volume of limited DR clearing in the capacity market had to be reduced because current rules result in a vertical demand curve that threatens reliability. The RTO said it had erred in 2011 when it won FERC approval for rules incorporating limited and extended summer demand response into the capacity market.
PJM CEO Terry Boston issued a statement this morning praising the FERC ruling. “FERC’s action expands the usefulness of demand response and will allow demand resources to make a bigger contribution during tight power supply situations outside of the summer peak season, as we have been experiencing this January,” Boston said.
UBS Investment Research called the ruling “a coup” for PJM generation owners such as Exelon, FirstEnergy, PSEG, Calpine and NRG Energy, saying it could boost capacity prices by $25/MW-day in the RTO and $10/MW-day in MAAC.
USB termed it “a clear setback” for DR providers, although it said sector leader EnerNOC might benefit because its “relative technological advantage” will allow it to provide more Annual DR.
FERC rejected the arguments of consumer advocates, industrial load, cooperatives and state regulators opposed to the changes. However Commissioner John Norris did acknowledge some of their concerns in a concurring statement, expressing “caution that we not lose sight of the extraordinary benefits demand response has brought to consumers.”
“We must continue to provide demand response opportunities to participate in the PJM market on a level playing field with other types of resources,” Norris wrote.
“…It is my hope that this Commission will strike the right balance that maintains a reliable system while ensuring competition among resources that result in the most efficient costs to consumers.”
FERC is one commissioner short since the departure of former Chairman Jon Wellinghoff, who had championed DR. President Obama last week nominated FERC Enforcement Director Norman Bay as Wellinghoff’s replacement.
The PJM proposal won only 45% support from the Members Committee and 37% from the Markets and Reliability Committee in votes in November. A simulation by PJM found that the changes would have increased total capacity costs by nearly $2 billion over the last two Base Residual Auctions. (See Demand Response Changes Could Cost $1B Annually.)
FERC took note of the stakeholders’ misgivings but ruled that it was “reasonable for PJM to distinguish between each class of resources when designing its capacity market rules.
“On balance, we find that PJM’s proposal retains an adequate opportunity for limited-availability demand response to participate in PJM’s capacity markets,” the commission wrote.
It added: “While there may be other ways to address the problem identified by PJM, as suggested by intervenors, that does not mean that the solution proposed by PJM is unjust and unreasonable.”
PJM’s spending on black start generators will increase by at least $3.4 million — and perhaps as much as $21.6 million — under proposals outlined to the Markets and Reliability Committee Thursday.
The proposed changes, developed by the System Restoration Strategy Senior Task Force, are intended to increase the incentives for existing black start resources to continue providing the service, PJM’s Chantal Hendrzak said. PJM initiated the changes over concern that it will lose much of its existing capacity by 2015 due to coal plant retirements.
Minimum Incentive Proposal
Almost two-thirds of the task force voting supported a “minimum incentive” proposal that would set annual compensation for a 20 MW combustion turbine at $71,609, a 40% boost from the current $51,270.
The proposal, which will be the main motion when the MRC votes on the issue Feb. 27, would increase PJM’s annual black start costs to $24.4 million from the $21 million revenue requirement as of last Sept. 1.
Proxy Proposal
(Source: PJM Interconnection, LLC)
A second “proxy” proposal, which won 63% support from the task force, would increase compensation for a 20 MW CT five-fold to $312,486 while more than doubling annual black start costs to $42.7 million (see charts). It may be considered by MRC if the minimum incentive proposal fails to win support.
The mininum incentive proposal would:
Change the incentive factor from 10% to the greater of 10% or $25,000;
Allow non-ICAP (energy-only) units to receive compensation based on the offered black start MW;
Permit automatic load rejection units (ALR) to recover NERC Compliance costs as documented to the Market Monitor;
Allow compensation for storage of fuels other than oil;
Provide for a 5-year PJM internal review of formula.
The proxy proposal would replace the base formula rate, variable operations and maintenance costs, fuel storage and training costs with a formulation based on the average of responses to PJM’s recent solicitation for black start resources.
No Change to Capital Recovery
Neither proposal changes the capital recovery rate for units requiring capital investments to become black start-capable.
Hendrzak said PJM expects to issue awards to the winners of the solicitation by April 1. The task force also is working on changes to the “back stop” compensation in zones that did not receive bids.
(Source: PJM Interconnection, LLC)
The impact of the proposed changes vary dramatically by region. For example, the minimum incentive proposal would increase costs less than 10% in 10 zones while seven zones would see costs jump by more than a third, with PPL’s doubling (see chart).
Token Incentive
John Horstmann, of Dayton Power & Light Co., said increasing incentives for existing units will be cheaper than paying for new ones, which could cost $250,000 or more annually. The $20,000 increase a 40-year-old 20 MW CT would receive under the minimum incentive is “at least a token effort to keep some of the older units around.”
Black start units must be capable of starting without an outside electrical supply, maintaining frequency and voltage under varying load, and maintaining rated output for a specified time, typically 16 hours.
In September, the Federal Energy Regulatory Commission approved Tariff revisions that PJM said will increase the pool of potential black start generators by 64,000 MW (ER13-1911).
The Markets and Reliability Committee last week endorsed changes to Manuals 14B and 18 to implement proposed capacity import limits and clarify rules on substitution of demand response resources.
Manual 14B: PJM Region Transmission Planning Process
Reason for Change: The MRC endorsed changes to Manual 14B to implement PJM’s proposed capacity import limits, now pending before the Federal Energy Regulatory Commission. (See related story, FERC Demands More Details on Import Cap.)
Stakeholders approved the limits in November out of concerns that PJM might lack sufficient transmission to accommodate its growing volume of capacity imports. Cleared imports grew from about 3,000 MW to more than 4,500 MW in 2009-2012 before more than doubling to nearly 7,500 MW last year.
Impact: The revised methodology would limit external generation resources in this year’s base capacity auction to 6,200 MW — a 17% drop from the volume of imports that cleared in the May 2013 auction — while also setting five import zones with their own limits. (See Members OK Capacity Import Limit; Prices May Rise.)
Manual 18: PJM Capacity Market
Reason for Change: The committee endorsed changes to Manual 18 to clarify Tariff provisions that allow substitutions of demand response resources.
Impact: The change makes clear that curtailment service providers may substitute a non-performing DR registration with one or more other DR registrations in the same geographic area and with the same lead time. Providers may use Limited DR to replace Annual DR but the substitution will not count against Limited’s 10 dispatch-per-year cap. Annual DR has no limits on the number of dispatches.
PJM and other RTOs asked EPA Jan. 28 to allow states to meet pending greenhouse gas regulations through regional caps and to include a “safety valve” to maintain reliability.
EPA is drafting its first limits on carbon dioxide emissions from existing power plants. The ISO/RTO Council (IRC) said that it usually doesn’t take policy positions on EPA regulations but that it wanted to ensure the rules “recognize the relationship between proposed environmental rules, electric system reliability, and economically efficient dispatch.”
The council’s seven-page proposal asks EPA to allow states to adopt State Implementation Plans (SIPs) based on “a regional measurement mechanism for determining compliance with CO2 rule obligations.” The group also said EPA’s regulations should include “a process to assess, and, as relevant, to mitigate, electric system reliability impacts resulting from related environmental compliance actions.”
Meanwhile, major business and manufacturing trade groups announced a coalition to ensure any GHG rules are cost effective, technologically achievable and allow use of all domestic energy resources.
The Partnership for a Better Energy Future is undertaking the effort “because we want a better outcome, not because we want to throw obstacles in the way,” said Karen Harbert of the U.S. Chamber of Commerce’s Institute for 21st Century Energy. The Edison Electric Institute and American Public Power Association are not on the membership list, though the National Rural Electric Cooperative Association is.
The Environmental Protection Agency will issue a final rule on disposal of power plant coal ash by Dec. 19, according to a consent decree EPA signed with environmental groups. Spurred by the disastrous 2008 ash pond collapse at a Tennessee Valley Authority site, EPA started developing regulations but never finalized them. Environmental groups sued and won a ruling requiring the agency to specify a timeline for action. EPA’s proposed rule included options to regulate ash as a hazardous or a non-hazardous waste. Utilities and coal interests oppose a hazardous designation.
The Department of Energy has made $2 million available for development of taller wind turbines that research shows could capture more wind energy. Although wind towers in the U.S. max out at about 300 feet now, the funds would go toward studying 400-foot towers. The taller units are not uncommon in Europe. According to DOE, National Renewable Energy Laboratory research shows higher turbines could unlock more than 1,800 GW of wind potential.
The Internal Revenue Service will be giving special scrutiny to recipients of Section 1603 renewable energy “stimulus” grants because it has found that some also claimed energy tax credits. The grants were meant to be in lieu of credits. A report released last week by the Treasury Inspector General for Tax Administration said the IRS is conducting a compliance study on the 1603 program, which is expected to be completed by June 30. The IRS said some tax practitioners have encouraged use of leasing transactions “because that allows fair market value to be overstated to increase the grant amount.” As of May 2013, Treasury had awarded 9,016 of the grants totaling $18.5 billion.
California Democrat Henry Waxman, a leader of major environmental legislation in the House of Representatives for decades, will not seek reelection. Waxman, who will have served 20 terms, is the top minority member of the Energy and Commerce Committee, and spearheaded the Clean Air Act Amendments of 1990 and the ultimately unsuccessful greenhouse gas cap-and-trade legislation. It is not clear who will succeed him in the lead-Democrat position, but Rep. John Dingell, the Michigan Democrat who is the longest-serving member in history, expressed interest. He is 87 and has served 59 years.
There were more than a few concerned stakeholders at last week’s Members Committee webinar when Market Monitor Joe Bowring presented data showing that only 10 generating units were responsible for 38% of the RTO’s uplift charges in 2013.
Whose generators are they and where are they located? Bowring would like to tell you. But PJM officials said they are prevented by the RTO’s confidentiality rules from disclosing the names.
(Source: Monitoring Analytics LLC)
“The only way that’s ever going to get released by PJM is if we get a FERC order,” Executive Vice President for Markets Andy Ott told the Markets and Reliability Committee Thursday.
The 10 units were responsible for about $335 million of uplift charges in 2013. In total, PJM had $882 million in uplift, or operating reserve charges, for the year, a $231 million increase over 2012. Reactive service charges increased $263.5 million, while black start costs jumped $78 million. (See related story, Black Start Units to See More Green.) Balancing and day ahead charges decreased by a combined $110 million.
Ott said the recent spike in reactive charges is temporary – a result of coal plant closures forcing operators to order more out-of-merit dispatch -– and will be corrected by the addition of new generation and reactive upgrades.
“The reactive issue will be done before we could get [FERC approval for] language changes” to the confidentiality rules, Ott said.
Howard Haas, representing the Monitor, told the MRC the confidentiality rules don’t apply because it is not market-sensitive information. “This is a non-market payment. It’s not hedgeable, so there’s no problem in releasing the information,” he said.
Dave Anders, PJM manager of member services, said that while the Energy Market Uplift Senior Task Force is devising strategies to reduce uplift, PJM staff is considering operational changes it can make without modifying the Tariff or Operating Agreement. “Can we change the model and how we commit units? We may be able to take steps to limit the cost of reactive uplift,” he said.
Bruce Bleiweis, of DC Energy, said it was improper for PJM to take actions “that divide us all into winners and losers without subjecting it to the stakeholder process.”
Ott insisted the changes were permitted. “Similar decisions are made every day.”
The coal industry lobby that sank Ron Binz’ nomination to the Federal Energy Regulatory Commission won’t have a clear shot at President Obama’s new choice as FERC chair.
But that doesn’t necessarily mean smooth sailing for nominee Norman Bay, who has served as director of FERC’s Office of Enforcement since 2009.
While Binz, a former Colorado regulator, called for a new “regulatory compact” and opined on the future of coal and natural gas, those combing through Bay’s history will find little on utility law or energy policy.
A former federal prosecutor and law school professor, Bay has written extensively on criminal law and national security issues. But his opinions on the major policy issues facing the commission — the role of demand response and renewables, implementing Order 1000 — are unknown. Unlike most FERC commissioners in the last decade, Bay has never served as a state utility regulator.
Of the 15 FERC commissioners who have served since 2000, 10 served as commissioners or staffers at state regulatory agencies prior to their appointments. Four of the others worked in energy-related posts in state or federal legislative committees or executive agencies; one was a former utility executive. (See table.)
Of the 15 FERC commissioners who have served since 2000, 10 previously served as members or staffers at state regulatory agencies.
The last five chairmen served a median of 30 months before becoming chair. Only one, Patrick H. Wood III, served less than a year on the panel before his promotion.
Alaska Sen. Lisa Murkowski, ranking Republican on the Energy and Natural Resources Committee, had criticized Obama’s plan to elevate Binz directly into the chairmanship. She also has reservations about the president’s plans for Bay. “It’s curious that they would elevate him to chairman over existing qualified members,” spokesman Robert Dillon told Bloomberg News.
In his favor, Bay has no obvious enemy constituencies — except, perhaps for members of the energy bar, some of whom believe his office has been overzealous in its enforcement actions.
Harvard Law Graduate
The son of Chinese immigrants, Bay studied history at Dartmouth before getting his law degree from Harvard. He clerked with a judge on the Ninth Circuit appeals court and worked in the Legal Adviser’s Office of the U.S. State Department before beginning an 11-year stint as an assistant U.S. Attorney in Washington and Albuquerque, where he prosecuted violent crime.
In 2000, President Clinton appointed him U.S. Attorney for New Mexico, where Bay led a staff of more than 130 and inherited the government’s controversial case against Wen Ho Lee, a scientist at the Los Alamos Nuclear Laboratory.
Lee was indicted on 59 counts for allegedly stealing secrets about the U.S. nuclear arsenal for the People’s Republic of China. But after keeping Lee in solitary confinement for nine months, the government dropped the case in return for Lee’s guilty plea to a single count of mishandling classified material.
The judge who accepted the plea apologized to Lee for what he called misconduct by senior Justice Department officials and Bay’s predecessor as U.S. Attorney. In 2006, Lee received $1.6 million from the federal government and five media organizations to settle a civil suit he had filed against them for leaking his name to the press before charges had been filed.
Although he was not personally implicated in any wrongdoing, Bay was called before a Senate oversight hearing into the case. He resigned as U.S. Attorney in 2001, after the election of President George W. Bush.
As a professor at the University of New Mexico School of Law between 2002-2009, he taught criminal law, evidence, constitutional law, national security law, and ethics. His law journal articles include Prosecutorial Discretion in the Post-Booker World and Executive Power and the War on Terror.
Evolution of FERC Enforcement Unit
When manipulative schemes by traders at Enron and other power marketers roiled the Western energy markets in 2000-01, FERC’s enforcement staff consisted of 20 lawyers in the Office of General Counsel. The maximum penalty FERC could impose was $10,000 per violation per day.
Since then, FERC created a separate enforcement division now staffed with 200 economists, accountants, auditors, former traders and attorneys, including former prosecutors. (Full disclosure: RTO Insider editor Rich Heidorn Jr. worked for the Enforcement Division between 2002-2010.)
Bay created a new unit in 2012, the Division of Analytics and Surveillance, which runs automated screens to detect potential manipulative behavior.
Since passage of the 2005 Energy Policy Act, which increased the penalties to $1 million per violation per day, FERC has collected $873 million in civil penalties and disgorgements. They included cases against Morgan Stanley, Constellation Energy Group Inc., Deutsche Bank AG and JP Morgan Chase.
Barclays PLC meanwhile is fighting a FERC order that it pay a $453 million fine and $35 million in unjust profits over alleged manipulation of Californian and other western power markets by the British bank in the last decade.
But consumer advocates and other critics say regulators’ enforcement actions have neither provided sufficient deterrent nor made consumers and honest market participants whole. Moreover, some say regulators will never be able to catch up with clever traders looking to exploit the rules. (See JP Morgan Settlement: A Verdict on Electric Markets?)
Appellate Loss
FERC also has been criticized for overreaching in its enforcement under Bay. The D.C. Circuit last year threw out FERC’s market manipulation case against Brian Hunter, whose natural gas trades contributed to the collapse of hedge fund Amaranth Advisors LLC.
FERC had accused Hunter of selling natural gas futures contracts at the end of the trading day, which depressed the futures closing price but benefited the hedge fund’s swap positions in physical markets.
The court ruled that the agency had encroached on the jurisdiction of the Commodity Futures Trading Commission (CFTC), which sided with Hunter in the case in claiming exclusive jurisdiction over futures contracts.
“Although the Commission reads the Hunter decision as narrow in scope, some market participants interpret the decision more broadly to cover not only manipulation in the futures market, but also many additional transactions and products, including those squarely within FERC’s jurisdictional markets,” Bay told the Senate Banking Committee in testimony last month. “Accordingly, a legislative fix to eliminate uncertainty on this matter could ensure that FERC has the full authority needed to police manipulation of wholesale physical natural gas and electric markets.”
FERC and the CFTC took a step toward settling their long-running turf battle in January, signing two Memoranda of Understanding to address jurisdictional issues and information sharing.
Criticism of FERC Enforcement
At the National Association of Regulatory Utility Commissioners annual meeting in November, a panel including former FERC Chairman Joseph Kelliher and former General Counsel William Scherman attacked FERC’s enforcement as opaque and a threat to market liquidity.
Kelliher, now executive vice president for NextEra Energy Inc., said he now realizes “it’s much harder to comply [with market rules] than I thought.” He said the commission has not clearly defined what constitutes a “strong compliance culture,” a consideration when calculating penalties. Because most of FERC’s enforcement cases have resulted in settlements, the agency has not created a full record to define behavior it considers manipulative.
Scherman went further, saying that FERC’s actions are causing companies to leave the energy markets, reducing liquidity and increasing volatility.
They were joined in criticism by Harvard professor William Hogan, who said FERC needs to be transparent regarding its definition of market manipulation.
Bay was not present at the NARUC conference. His deputy, Larry Gasteiger, defended FERC’s record, saying it was following the direction of Congress, which allowed FERC to determine on a case-by-case basis whether trading behavior is manipulative.
LaFleur’s Future?
Bay’s nomination leaves the future of acting FERC Chair Cheryl LaFleur in question. LaFleur, named acting chair in November with the expiration of former Chairman Jon Wellinghoff’s term, told reporters last week she’d like to be renominated for another term, whether or not it was as chair. (See Acting FERC Chair Wants to Keep Her Job.) Her term expires in June.
Asked Friday whether President Obama will nominate LaFleur to a second term, a White House spokesman replied cryptically, “I have no personnel announcements to make.”
Wellinghoff, who hired Bay at FERC, reportedly lobbied for him as his replacement. “Norman Bay did a great job as the Office Director of the Office of Enforcement and I think he will make a great commissioner,” Wellinghoff said in an email to RTO Insider.
The Federal Energy Regulatory Commission ordered PJM to provide more information in support of its proposed limits on capacity imports, as opponents said the proposal would unreasonably increase prices.
PJM proposed methodology that will limit external generation resources in this May’s base capacity auction to 6,200 MW — a 17% drop from the volume of imports that cleared in last year’s auction. (See Members OK Capacity Import Limit; Prices May Rise.)
The commission’s Jan. 28 order (ER14-503) came after the MISO Market Monitor and others called on FERC to conduct fact finding on the proposal, contending the reduced competition from imports will increase PJM’s prices. PJM’s Market Monitor and some PJM generators, meanwhile, say the limit doesn’t go far enough to protect reliability.
Among the issues on which FERC requested more information were:
Protests by the PJM Market Monitor and the Indicated PJM Utilities, who contend that all external resources should be required to meet the standards set for resources exempt from the limits (firm transmission service, pseudo-tie, and must-offer requirement).
How PJM planners decided on the five external zones for calculating the limits.
How the methodology used to determine the capacity limits compares with that used to determine the installed reserve margin (IRM) for the capacity auctions.
The contention of MISO’s Market Monitor, Potomac Economics, that PJM should remove the requirement for unit specific deliverability testing. The MISO Monitor contends PJM’s requirement is based on an unrealistic notion that when PJM needs firm capacity-backed energy “from an external resource in MISO that the energy will be sourced at that particular unit.”
How the limit affects the MISO/PJM fact-finding effort on capacity deliverability across the RTOs’ seam.
PJM must respond to FERC’s questions within 30 days.
The PJM proposal won support from PJM generation owners, state regulators, the North Carolina Electric Membership Corp., the Electric Power Supply Association and others. Among those opposing the change in addition to the MISO Monitor are American Municipal Power (AMP) and the Illinois Municipal Energy Agency.
The Illinois agency contended the PJM proposal “grossly overreaches the problem claimed.”
AMP suggested the capacity import limits (CILs) were like “territorial allocations or refusals to deal, both of which can and often do run afoul of federal and state antitrust laws.”
AMP said it would be hurt by the limits because it owns generation in MISO that was planned when about half of its native load was in MISO. Less than 5% of AMP member native load remains in MISO as a result of the moves to PJM by ATSI in 2011 and Duke Energy-Ohio in 2012.
AMP says the value of its MISO generation “would be greatly impaired if PJM’s CILs were to prevent AMP from utilizing those resources to serve the capacity needs of its PJM-area members.” The company said it is already suffering from the “very substantial congestion charges AMP is assessed in bringing energy from MISO into PJM.”
The PJM Power Providers Group counters that the PJM proposal won more than 85% support in a sector-weighted vote by stakeholders.
The Maryland Public Service Commission staked out the middle ground, saying that while it “largely supports” the proposal, it has concerns that big reductions in imports from MISO could “significantly increase costs for end-users.”
It urged the commission to “fully utilize its evidentiary procedures” before ruling.
A proposed manual change on compensation for demand response prompted a protest from curtailment service provider Icetec Energy Services Thursday.
Icetec representative John Webster said one of the changes proposed by PJM goes beyond the ministerial detail included in manuals and should receive a full stakeholder hearing as a potential Tariff change. Webster said the change will have a “disproportionate impact on sophisticated end users with time-variable rates.”
PJM’s Pete Langbein, who presented the proposed manual change to the Markets and Reliability Committee Thursday, rejected Webster’s complaint, saying the changes are “absolutely consistent with the current Tariff.”
Under Order 745, PJM will compensate Economic DR at full Locational Marginal Price when it provides a net benefit to the system. Langbein said stakeholders asked for clarification on how PJM will apply the “net benefit” test.
In response, the Demand Response Subcommittee proposed that Manual 11: Energy & Ancillary Services Market Operations be revised to specify that compensation be limited to demand reductions executed in response to LMPs or PJM dispatch instructions and “that are not implemented as part of normal operations.”
The committee also recommended additional language identifying as ineligible for compensation: “Settlements based on load reductions from normal operations that would have occurred without PJM dispatch, or that would have occurred absent PJM energy market compensation.”
Webster said that addition will subject customers to a “motivational test” that will adversely impact those with time-variable rates — which he called “the next generation of demand response.”
WASHINGTON — Cheryl LaFleur, acting chairman of the Federal Energy Regulatory Commission, said yesterday she’d like to keep the top job and would use the pulpit to ensure electric markets and infrastructure adapt to a world of renewables, cheap gas and greenhouse gas regulations.
Acting FERC Chair Cheryl LaFleur ponders a reporter’s question.
“I would like to be renominated for another term,” LaFleur, whose current term expires in June, said at a press “roundtable” at FERC headquarters. “I’d also like to stay as chairman. Neither of those are up to me… but I’d like to be renominated under any circumstance.”
LaFleur was named acting chair in November with the expiration of former Chairman Jon Wellinghoff’s term and nominee Ron Binz’s flameout.
LaFleur said she had heard nothing from the White House about when President Obama will fill the commission’s fifth seat, or whether she is being considered for chair.
If she remains, she said, she would like to help ensure a smooth transition as the electric generation mix changes.
“We are going through a significant change in power supply in this country, when we look at renewables, when we look at the generational replacement — and that’s before you layer in whatever new carbon regulations come,” she said.
“I’d like to feel at the end of my time that the markets adapted and did what they needed to do for customers — kept the lights on at just and reasonable rates — and that the infrastructure was ready for those changes.
“And that’s quite a piece of work actually, because the infrastructure was built for the old world and not the world we’re moving into.”
Asked about FERC’s long running turf battle with the Commodity Futures Trading Commission, LaFleur said she believes the two Memoranda of Understanding signed with the CFTC earlier this month will help clarify jurisdictional questions.
She said legislation to further clarify the lines of authority “would be useful” but added, “I’m not actively on [Capitol] Hill lobbying.”
Stakeholders backed PJM’s proposal to eliminate speculation in capacity auctions, selecting it over four alternatives in a vote announced yesterday.
The PJM proposal will be the main motion considered by the Markets and Reliability Committee for a vote next month. It will be discussed in a first read at Thursday’s MRC meeting.
Because clearing prices in incremental auctions (IAs) are usually lower than those in the base residual auction (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 proposed solution would reduce the number of incremental auctions (currently three) and set conditions eliminating the potential to arbitrage between the BRA and IA. The alternative proposals adopted some of PJM’s changes but differ in other details. All of the proposals would increase the penalties for failing to deliver promised resources.
The vote asked members of the Capacity Senior Task Force whether they could support the changes in each proposal. Forty-three voters, representing 206 members and affiliates, cast votes, with 141 (69%) backing the PJM proposal (#2 in the matrix).
Proposals by Old Dominion Electric Cooperative (#4) and the Market Monitor (#9) won support of 37% as did proposal 2a which married the PJM proposal with a “force majeure” requirement.
Exelon’s proposal (#10) won 22% support. (RC Cape May Holdings LLC withdrew its proposal before voting commenced last week.)
Qualifying Events
The Market Monitor had proposed that capacity offers be defined as representing “an enforceable commitment to physically deliver — excused only by either ‘qualifying events’ or ‘force majeure’ provisions.”
The Monitor defined a qualifying event as “a physical or regulatory event outside of a seller’s control and that was not reasonably foreseeable.” This would include deratings due to operational restrictions and certain construction delays. Excluded would be buyouts for economic reasons and cancellations or construction delays for “financial, commercial or permitting reasons.”
PJM, ODEC and Exelon declined to include the qualifying event provision in their proposals.
PJM staff said they believed the language was unnecessary in light of the other changes in their package and that it “would be too subjective to effectively administer and would introduce ambiguity and uncertainty for market participants, something we believe is important to avoid.”
Package 2a allowed replacement only under “force majeure” events, as defined in the Tariff.
MRC Vote
If the PJM plan fails to win two-thirds support in a sector-weighted vote of the MRC, the committee could consider the other proposals, which are summarized in the CSTF’s summary report.
The PJM proposal is summarized below:
Capacity Resource Deficiency Charge
Bidders who fail to deliver on promised resources currently must pay a capacity resource deficiency charge equal to the higher of 1.2 times the weighted average resource clearing price (RCP) or the RCP plus $20.
PJM would make the penalty to the higher of 1.5 times the RCP or the RCP plus $50, an increase over the status quo, but not a return to “2.0x” levels that used to be in effect.
PJM’s proposal would increase the penalty by about 25% to 38%, according to an RTO Insider calculation based on clearing prices from the 2013 base residual auction (BRA). The strictest proposals would increase that penalty by 50% to 67%.
Incremental Auctions (Currently three)
PJM would retain the final IA, one year before the beginning of the delivery year, with the other two occurring only if needed for PJM to obtain additional capacity due to increases in its reliability requirement. PJM would release capacity only in the final IA, the only one in which other capacity buyers could participate.
PJM sell offer price
PJM would continue the current practice — an upward sloping offer curve with starting price determined based on intersection of the variable resource requirement (VRR) curve and vertical line at current commitment level — but the price would be floored at the clearing price in BRA.
Allocation of 2.5% Short-term Resource Procurement Target
Current rules allocate 0.5% each to the first two IAs with 1.5% in the final IA. That would continue under PJM’s proposal, assuming all three auctions are held. If not, the allocation from any cancelled auctions would be carried over to the next auction.
Incremental Auction Settlement Calculation
Cleared sell offers and buy bids currently settle against the IA clearing price. PJM would continue to clear sell offers against the clearing price. Buy bids, however, would have to pay the clearing price plus the difference between the BRA and the IA clearing prices — eliminating the ability of market participants to profit by selling at a high price in the BRA and buying back at a cheaper price in the IA.
Prerequisites for BRA Participation
PJM would require all resources to sign a Non-Diversion Agreement, which prohibits the replacement of capacity committed in RPM for the purposes of selling to another market. Resources imported from outside PJM would be required to provide a Letter of Non-Recallability, signed between the resource owner and the host balancing authority.
An executed Facilities Study Agreement would be needed by planned generation greater than 20 MW.
Implementation Schedule
PJM would implement most changes for all auctions related to delivery year 2017/18, starting with this year’s BRA. The sell offer price and mitigation changes would become effective immediately upon FERC approval.
