PJM “will err on the side of caution” in disclosing details from transmission developers’ project proposals, RTO officials told the Planning Committee Thursday.
On April 29, PJM announced opened its first “proposal window” under the Federal Energy Regulatory Commission’s Order 1000, which opens transmission projects to non-utility transmission developers. PJM will accept proposals through June 28 to correct stability issues on Artificial Island in Hancocks Bridge, N.J., the site of the Salem and Hope Creek nuclear plants.
Steve Herling, PJM vice president of planning, said the RTO will release “no brainer information” on proposals submitted in response to the Artificial Island needs and future proposal windows.
Such information would include “a line from A to B, impedance modeling, so people can analyze [the proposals],” Herling said. “We won’t put out right of way information. You’d get the public all stirred up that `we’re looking at your property.’”
Prequalification
Order 1000 eliminated incumbent utilities’ Right of First Refusal on construction and operation of new transmission lines, opening the business to competition from independent transmission developers. Incumbents will retain the right to construct “upgrades” to their existing facilities.
PJM has created a two-step process for complying with Order 1000. First, potential transmission developers must be prequalified based on their ability to construct and maintain a generic transmission project.
Those prequalified will be eligible to submit solution packages in response to proposal windows like that for Artificial Island.
PJM officials said Thursday that seven developers have submitted prequalification packages with more applications expected shortly.
Herling said the application packages will be posted publicly after PJM determines which ones are prequalified. “There has to be some due process to challenge the decisions we’ve made,” he said.
Constructability Template
PJM has created a template to evaluate responses to its proposal windows. The RTO plans to hire independent consultants to validate developers’ cost estimates and identify potential regulatory risks, such as the likelihood of obtaining siting for rights of way.
“If you have half the right of way in hand, that certainly will have an impact on cost and regulatory risk and would probably affect construction time,” Herling said. “To give you credit, we would have to disclose some information. We don’t have to talk about individual pieces of property you have.
“If it becomes obvious that we’re relying heavily on one piece of information we’re going to have to make it public — and you might still not get chosen,” he continued. “… We’ll have to make sure it’s transparent and above board to defend ourselves against challenges.”
The Market Implementation Committee Wednesday approved changes to Manual 11 affecting regulation rules, hydropower generators, station manning and shortage pricing. The changes go next to the Markets and Reliability Committee.
Reason for changes: Clarifications, error corrections and changes to conform with other manuals.
Impact:
The changes:
Clarify and add conforming language for regulation rules:
Resources cannot clear for both RegA and RegD within an operating hour (Section 3.2.9)
Changes language to conform with M12: Regulation resources must return to their regulation range within 10 minutes of the end of a synchronized reserve event (Section 4.2.12). The current language calls for a return within two minutes.
Clarify hydropower units’ opportunity cost when providing synchronized reserve:
Hydro units providing Tier 2 synchronized reserve receive lost opportunity cost payments only when they are held to condense mode rather than off-line. (Section 4.2.7)
Corrects and clarifies Attachment C regarding cost offers and station manning:
Removes language stating that a resource can submit only five cost offers for energy. The actual limit is “in the 60s,” said Rus Ogborn, of PJM.
Clarifies the compensation rules that apply when PJM requests resources to be manned in order to start units more quickly. Units required to provide staffing will be compensated even if the resource is not called on because system conditions change.
Clarifies and cleans up revisions for Shortage Pricing rules. Changes were made to clarify existing rules and remove errors in the current text.
Two-thirds of PJM’s transmission owners have failed to file FERC-approved tariffs disclosing the methodology they use to calculate customer rates, PJM industrial customers told the Markets and Reliability Committee Thursday.
“There’s a vacuum in the tariff,” said Robert Weishaar, an attorney with McNees Wallace & Nurick LLC who represents several industrial energy users. “There’s a lack of transparency and a lack of accountability… Utilities sometimes change methodologies without notice.”
Weishaar will ask MRC June 27 to approve a problem statement that could result in requirements that transmission owners make tariff filings disclosing their calculation of total hourly energy obligations, peak load contributions, and network service peak loads. The calculations are used to allocate energy, capacity, and transmission cost responsibility among load serving entities.
Weishaar said the disclosures are required by the Federal Energy Regulatory Commission’s “rule of reason” as provisions that affect rates, terms, and conditions.
Weishaar’s proposal is intended to require Baltimore Gas & Electric, PECO Energy, PPL Electric Utilities, Dominion, Dayton, PEPCO, AEP, Duquesne Light Company, Rockland Electric, and Duke to file Attachments M-1 or M-2 to the PJM OATT disclosing their methodologies.
Weishaar said FirstEnergy, Commonwealth Edison, Public Service Electric & Gas, Atlantic City Electric and Delmarva Power & Light have already filed such disclosures.
Weishaar said the descriptions need to be detailed enough to allow LSEs to verify the accuracy of the calculations. Attachments “that merely reference methodologies contained in manuals posted on the transmission owner’s website do not adequately address the problem,” the problem statement says. “Because the necessary level of detail is not included in a FERC tariff, transmission owners may change methodologies, or inconsistently apply methodologies, with little recourse to LSEs and their customers.”
The problem statement also calls for PJM to establish default methodologies that would apply for zones without tariff attachments. It seeks a FERC filing within three months after assignment by the MRC.
The Markets and Reliability Committee gave final approvals to the following manual revisions at their meeting this past Thursday.
Electronic Notifications for Curtailment Service Providers: Changes to Manuals 1 and 18 will implement an automated process that will allow Curtailment Service Providers to provide operational data to — and receive dispatch instructions from — PJM. The new Load Response System (eLRS) process replaces the current manual methods, which rely on email and spreadsheets.
Residual Zone Pricing: Residual Zone Pricing will replace physical zone LMPs for real-time load effective June 1, 2015. A Residual Zone is an aggregate of all load buses in the physical zone, excluding load priced at nodal locations. The change was endorsed by the Members Committee in February 2012 and approved by FERC in Docket ER13-347.
East Kentucky Power Cooperative: PJM needs to add the East Kentucky Power Cooperative zone into PJM markets manuals to accommodate the coop’s integration into PJM, effective June 1.
NERC Reliability Standards: PJM needs to amend M-36: System Restoration to reflect NERC Standards EOP-005-2 (System Restoration Plans) and EOP-006-2 (Reliability Coordination – System Restoration). Updates for consistency with other RTOs; updates underfrequency load shed tables; incorporates recommendations from RFC/SERC audit, and adds specific references to transmission operator restoration plans.
Manual 03A: Energy Management System (EMS) Model Updates and Quality Assurance: The changes include numerous edits for updates and clarity.
Regulation Market Cost-Based Offers: New rules implemented in October require regulation offers to include capability (cost, in $/MWh to reserve a resource for regulation) and performance (costs of tracking the regulation signal in miles/MW). Previous rules, as defined in Manual 15, did not include performance costs.
Manual 35: Definitions and Acronyms: Adds language to Economic Maximum and Economic Minimum definitions; changed Operations Analysis Working Group to Operations Assessment Working Group; Replaced TTV4TF (TO/TOP Version 4 Task Force) with TTMS (TO/TOP Matrix Subcommittee).
NERC standard PRC-023-2: Updates to Manual 14B: PJM Region Transmission Planning Process are required to implement standard PRC-023-2 (Transmission Relay Loadability). PJM annually develops a transmission facility list to comply with NERC criteria.
Manual 03: Transmission Operations: Semi-annual update to incorporate procedural changes.
With its market-leading status in demand response, blue chip clients and international expansion plans, EnerNOC Inc. may be a good long-term investment play on the Smart Grid. But as the last week demonstrated, it’s not for the faint of heart.
EnerNOC’s stock is down 25% — a loss of nearly $134 million in market capitalization — since PJM announced the results of its 2016/17 capacity market auction May 24. The auction saw a 56% drop in RTO-wide capacity prices and a 16% drop in the volume of DR clearing as new natural gas-fired plants and imports increased their market shares.
Stocks of PJM-based utilities also have fallen since the auction, with Exelon Corp. and FirstEnergy Corp. each down 9%.
The auction also may scramble New Jersey’s efforts to subsidize new capacity after a 660-MW natural gas generator planned by NRG Energy failed to clear the auction for the second time despite the state incentives.
No one felt the impact of the auction results more than EnerNOC. Demand response was responsible for 88% of the company’s $278 million in 2012 revenues, with PJM representing 40% of sales for the year (see PJM, FERC Rules Buffet EnerNOC).
Analyst Reaction
EnerNOC’s stock dropped Tuesday after Credit Suisse, one of the underwriters of its 2007 initial public offering, downgraded it from outperform to neutral. Needham & Company cut its price target on EnerNOC shares to $18 two days later while maintaining its buy rating.
Raymond James saw it differently, upgrading the company Wednesday from an outperform rating to a strong-buy rating with a $20.00 price target. And Pacific Crest, which had raised its price target from $22 to $24 on May 8, reversed course Wednesday, dropping the company’s rating from outperform to sector perform.
Motley Fool columnist Travis Hoium wrote Tuesday that the market had overreacted. “Is the company really worth nearly $100 million less today than it was yesterday? Not to a long-term investor, so I don’t think today’s move changes the investment thesis, and if you’re bullish (which I’m not) this should be viewed as a discount more than a reason to panic today.”
EnerNOC did not respond to a request for comment yesterday.
In a press release last week, the company said it cleared 4,400 MW of capacity, a small drop from the 2015/2016 auction, and increased its DR market share in PJM to more than 35%.
“Although we are obviously disappointed with the clearing prices in this auction, it is important to put Friday’s outcome into a broader perspective,” Chairman and CEO Tim Healy said in the statement. “Our results are reflective of our ongoing strategy to strike the right balance between growth and profitability and to not simply be a price-taker where we would be managing demand response resources at a loss.”
The company said it will continue its efforts to increase its revenues from non-DR products and from regions outside PJM.
History
Founded in 2001, EnerNOC has grown by focusing on seven categories of commercial and industrial customers: technology, education, food sales and storage, government, healthcare, manufacturing/industrial and commercial real estate. Its customers include AT&T, General Electric, Pfizer, Sears, Shop Rite and Whole Foods Markets.
The company went public in 2007, with shares ending its first trading day at $31. Those who bought at that price had lost about half of their investment through yesterday. The company has had only one year of profitability (2010) as it has acquired five companies and expanded to Australia, New Zealand and the United Kingdom.
Competition
The company said in its 2012 10-K that it was seeing “increasingly aggressive pricing” on DR from its competitors, and that it might be forced to increase the amount it pays to C&I customers to participate.
Those competitors include privately held Comverge, Inc., whose revenues are about half that of EnerNOC, and Energy Curtailment Specialists. ECS, which operates only in North America, has about 2,000 MW of DR under contract, less than a quarter of that claimed by EnerNOC.
The company also cites competition from natural gas peaking plants, which have benefited from the increased supplies and low price of shale gas.
Nearing the Import Limit
PJM said increases in new gas-fired generation and imports were the biggest contributors to the drop in capacity prices. Most of the nearly 90% increase in imports clearing came from west of PJM.
At the Markets and Reliability Committee meeting Thursday, Andy Ott, PJM’s senior vice president for markets, said the almost 7,500 MW of capacity that cleared from outside the RTO “is pretty close to the limit” on PJM’s import capability.
Ott said almost two-thirds of the imports has firm transmission into PJM and another 20% has firm transmission on part of its path. “It [imports] does have some risk, but we don’t view it as a large risk,” Ott said.
Impact on Utility Stocks
Transmission constraints caused prices to separate within the RTO: Prices in the MAAC region cleared at $119/MW-day, double the RTO’s $59, while the Public Service zone in New Jersey cleared at $219, more than three times as high.
There also was a separation in the response to utility stocks following the auction.
Prices dropped 68% in ATSI, home to FirstEnergy in northern Ohio and PennPower in western Pennsylvania. FirstEnergy’s stock is down 9% through yesterday.
Prices in MAAC dropped 29% and utilities in the region (Pepco Holdings, including Atlantic City Electric and Delmarva Power; Exelon’s PECO and Baltimore Gas and Electric, PPL, ConEdison’s Rockland Electric Co.) fell from 3% to 9%.
New Jersey Impact
Prices in the Public Service region increased 31% while PSE&G’s stock dropped 3%.
New Jersey has agreed to provide almost $3 billion in subsidies to three proposed natural gas plants in the state, but one of them, NRG Energy’s proposed plant in Old Bridge, N.J. failed to clear the capacity auction for the second year in a row.
NRG spokesman David Gaier declined to say yesterday whether the company would proceed with the project. “We’re gong to look at our options over the next several weeks,” he said.
PJM will seek stakeholder approval this month for contingency plans to respond to an Internet outage that forces the RTO to suspend the day-ahead market.
PJM has no procedures for dealing with an Internet outage that could prevent the RTO from receiving participant data needed to solve the day-ahead market. Under the proposed tariff changes outlined to the Markets and Reliability Committee Thursday, all market settlements would be done in real time.
The procedure requires changes to sections 1.10.8 and 1.10.9 of the Open Access Transmission Tariff, including clarification that the rebid period will be from 4 p.m. to 6 p.m. but may be revised by PJM if the clearing of the day-ahead energy market is significantly delayed.
Below is a summary of problem statements and manual, Operating Agreement and Tariff changes approved by the Markets and Reliability Committee Thursday, May 30, 2013.
PMU Deployment
The committee endorsed manual revisions requiring new generators to pay for the installation of phasor measurement units (PMUs). There were four no votes and three abstentions. The Planning Committee approved the changes March 7, rejecting an alternate proposal to have PJM cover the cost.
Reason for change: PMU data can enhance grid reliability for both real-time operations and planning applications (e.g., generation dynamic model calibration and validation, primary frequency response, oscillation monitoring and detection). PJM expects to receive PMU data from 82 substations by the end of 2013 but has none located at generation stations.
Impact: The Interconnection Service Agreement will be changed to require installation of PMUs at new interconnections for generators with nameplate ratings of 100MVA or larger. Data collected by the PMU must be transmitted to PJM continuously and stored locally for 30 days.
Commodity Futures Trading Commission Exemption Order
MRC and the Members Committee approved changes to the Operating Agreement and Tariff to comply with conditions in the Commodity Futures Trading Commission order exempting most PJM market participants from CFTC jurisdiction.
Reason for Change: The CFTC agreed March 28 to largely exempt from its regulations Financial Transmission Rights, day ahead and real time energy transactions, forward capacity transactions and reserve regulation transactions, sales that are already regulated by the Federal Energy Regulatory Commission.
However, the CFTC said the exemption did not apply to financial market participants that cannot qualify as “appropriate persons” under the Commodity Exchange Act (CEA). PJM responded April 7 by announcing it may deny trading privileges to small market participants if they are unable to qualify for the exemption.
Impact: The changes approved Thursday expand financial marketers’ officer certification requirements. Although the changes require FERC approval, PJM CFO Suzanne Daugherty said her staff will immediately begin contacting about 100 market participants for whom the RTO does not have sufficient financial information.
The MRC was asked to choose between two options regarding the financial qualifications of an unlimited guarantor.
Stephanie Staska, of Twin Cities Power LLC, proposed language requiring “an issuer that has at least $1 million of total net worth or $5 million of total assets per Participant for which the issuer has issued an unlimited Corporate Guaranty.”
PJM proposed that the guarantor be “an issuer that would qualify for an Unsecured Credit Allowance of at least $1 million.”
Daugherty said the Twin Cities language complied with the CFTC order but was “just a little less thorough” than PJM’s proposal.
Staska said her proposal was identical to that used by MISO for compliance with FERC order 741. “It “does just as much to protect the market,” she said.
The changes were approved with the Twin Cities language with no objections and three abstentions.
MRC and the Members Committee endorsed credit requirements for up-to-congestion (UTC) trades, a fast-growing virtual transaction that previously had no credit requirements.
Reason for Change: UTC trading volumes have grown dramatically since 2010 but there are no credit requirements to protect market participants against defaults.
Impact: Bid screen and cleared portfolio credit requirements are based on a percentile of the difference between each member’s bid or cleared price and the two-month rolling average of real-time value per path.
Traders who fail the credit screen based on their initial bids will be able to rebid within their limits.
MRC approved a manual change documenting the Market Monitor’s current application of the FTR forfeiture rule on increment and decrement transactions and a problem statement to determine how the rule should be interpreted in the future.
Reason for Change: PJM discovered only recently that it disagreed with the criteria by which the monitor has been determining whether a company’s virtual bid is “at or near” the delivery or receipt buses of its FTR.
Impact: The manual change documents the monitor’s interpretation of the rule. The inquiry may result in changes to the application of the rule.
The monitor has been applying the penalty based on the net impact of virtual bids, triggering its application in less than one-tenth of 1% of trades. PJM proposed a different calculation under which companies would lose any profit for an FTR if 75% or more of the energy injected or withdrawn by a virtual bid is reflected in a constrained path between FTR source and sink.
“We believe this is about as clear as we can make it,” Stu Bresler, PJM vice president of market operations, said of the manual change.
The problem statement was approved over the objections of 15 members of the PJM Public Power Coalition.
“There are at least five new problem statements on this week’s agenda,” said Bill Schofield, of Customized Energy Solutions, which represents the coalition. “This is not the time to be adding this to our plate.”
But representatives of financial marketers said revising the rule was important to them.
“Because of the heightened risk in terms of FERC enforcement action … I think it’s important that we get some clarity on how we analyze these power flows,” said Greg Pakela of DTE Energy Trading. “This kind of acts as a safe harbor.”
FTRs are “a fundamental building block to the forward price curve,” said Bruce Bleiweis, of DC Energy, LLC. “Many people would like some additional clarity here.”
Market Monitor Joseph Bowring also supported the review, noting that the rule has been unchanged since 2001. “Are we getting false positives or false negatives?” he asked. “We need to make sure everyone understands the rule. I think there’s a lot of misunderstanding.”
MRC approved a problem statement creating a senior task force to take a broad review of its method of providing Operating Reserve payments.
Reason for Change: PJM said changes are needed to reduce growing uplift costs. Operating Reserves are “make whole” payments that ensure generators dispatched out of merit for system reliability don’t operate at a loss. Because they are collected through uplift charges and not reflected in day-ahead or real-time locational marginal prices, they cannot be hedged.
Impact: The task force will consider revising the sources of Operating Reserve charges and the methodology used to allocate them. The goal will be to minimize uplift costs while ensuring market prices are consistent with operational reliability, decrease charge rates, and reduce transaction risk due to variable fees.
With its reliance on demand response and heavy concentration in PJM, EnerNOC has seen its fortunes wax and wane based on decisions made in Valley Forge and Washington. The company cited the following examples in its 10-K disclosures to shareholders:
The company saw its DR revenues fall in 2011 versus 2010 due in part to lower prices in the PJM, New York and New England markets and fewer demand response events in PJM during the year, which cut energy payments.
The Federal Energy Regulatory Commission’s February 2012 order accepting a PJM proposal on measuring and verifying DR capacity hurt the company’s revenues and profit margins.
PJM’s elimination of its Interruptible Load for Reliability (ILR) program last June “reduced the flexibility that we had to manage our portfolio of demand response capacity in the PJM market and impacted our revenues and profit margins.”
Declining PJM capacity market prices hurt revenues, gross profits and profit margins in 2012. “To the extent we are subject to other similar price reductions in the future, our revenues, gross profits and profit margins could be further negatively impacted.”
PJM system operators took over management of the East Kentucky Power Cooperative system at midnight Saturday, adding almost 3,100 MW of generation and 2,800 miles of transmission to the RTO.
While PJM is a summer-peaking system, EKPC’s demand peaks in the winter. “The diversity of demand between EKPC and other PJM members and the resources they bring will strengthen reliability and have economic benefits not only for EKPC but throughout the region we serve,” said PJM President and CEO Terry Boston.
East Kentucky, which joined PJM as an Other Supplier in 2005, estimates it will save almost $132 million over the next decade by taking advantage of PJM’s economies of scale and generation diversity.
“Our organizations have put a lot of hard work into this integration,” EKPC CEO Anthony “Tony” Campbell said in a statement. “This move will help EKPC to operate more efficiently and economically.”
The biggest savings will come from reduced reserve requirements. East Kentucky maintains a 12% reserve margin. By joining the summer-peaking PJM, it will be able to reduce its reserve to 2.8%, allowing it to sell the difference in the capacity market. The integration also will result in more economical generation dispatch, as the coop replaces its higher cost generation with cheaper PJM power.
East Kentucky said its move was prompted by increasing transmission constraints with potential counterparties and federal environmental regulations, which made it expensive to continue operating as an independent control area and balancing authority. The coop has interconnections with TVA, Duke Energy, American Electric Power and Louisville Gas and Electric Co./Kentucky Utilities Co.
EKPC is owned by 16 distribution cooperatives that serve 1.1 million people in 87 counties across Kentucky.
But last week, PJM’s Senior Vice President for markets and the Independent Market Monitor said there’s at least one thing on which they agree: the MOPR unit-specific review process is “flawed, non-transparent and provide[s] too much discretion to PJM and the IMM.”
The Markets and Reliability Committee approved a problem statement Thursday to standardize and improve the transparency of the unit-specific review process used in applying the Minimum Offer Price Rule (MOPR).
PJM and the monitor wanted to do away with the unit-specific MOPR exemptions in favor of blanket exemptions for winners of competitive solicitations and self-supply resources.
But the Federal Energy Regulatory Commission ruled May 2 (ER13-535) that eliminating the review for generators that don’t meet the exemptions was not just and reasonable. Instead, FERC suggested that PJM conduct a stakeholder process to consider revisions to the process. (See “Split Decision on MOPR.”)
MOPR was added to PJM’s capacity market rules in 2006 to prevent buyer-side market power.
The problem statement and issue charge approved by MRC seeks to develop new financial modeling assumptions, with a goal of standardizing them and making them more consistent with those used to establish Net CONE (cost of new entry). Among the issues to be considered are asset life and calculations of net revenue and cost of capital.
The project, to be assigned to the Capacity Senior Task Force, is scheduled for completion in time for a December 1 FERC filing and implementation in the 2014/15 delivery year.
Compliance Filing
Ott also briefed the MRC on a compliance filing the RTO must make in response to the FERC order.
PJM’s response, filed yesterday:
allows MOPR exemptions for qualifying facilities under contract to capacity market sellers;
pledges to review the net short and net long thresholds for the self-supply exemption every four years; and
defines “repowering” to clarify that it includes both projects that increase capacity and those that don’t. PJM had proposed that repowered gas generators be treated as a new resource under MOPR.
Also yesterday, Calpine Corp., FirstEnergy Corp. and NRG Energy Inc. filed requests asking FERC to reconsider its ruling, joining a rehearing request filed last week by the Illinois Commerce Commission.
The Illinois filing alleges FERC erred in allowing PJM to subject integrated gasification combined cycle (IGCC) generators to MOPR.
Calpine Corp said FERC was mistaken in requiring PJM to retain the unit-specific review. The commission “neglected to address the fact that the MOPR modifications set forth in the December 7 Filing were proposed as a package that was overwhelmingly approved by stakeholders and that reflected significant compromises on the part of Calpine and other parties,” Calpine said.
FirstEnergy said the self-supply exemption is based on PJM’s analysis of the 2015/2016 auction, which it said is not representative of current market conditions. The company said FERC should address the potential that the exemption could be gamed.
NRG said the commission had abandoned its long-standing “regulatory compact” with investors. “The MOPR Order cuts the legs out from under the buyer-side power mitigation rules by selectively approving the elements of the PJM proposal that would weaken the MOPR, while rejecting those elements that would strengthen the buyer-side market power protections,” the company said.
