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Effort to change PJM capacity auctions debated

Direct Energy, NextEra BRA request sparks heated row

Rockville, MD (August 24, 2015) – PJM urged FERC to reject a complaint by Direct Energy and NextEra Energy (UMT, Aug-7) in an answer filed last week, arguing the two firms were trying to "reshuffle the deck chairs." The two had argued the transitional capacity performance (CP) auctions should take into account the geographically constrained results from the base residual auctions (BRAs) run for the same years.

The BRAs produced higher prices in some parts of PJM than others, but the transitional auctions will not have any such constraints and that could lead to higher costs if the RTO does not take the earlier different prices into account.

PJM argued that introducing an untested and insufficiently defined paradigm into the market-clearing algorithm would work against the goals of the transition auctions, which is to properly price the new capacity product, capacity performance. That has to be priced to reflect a seller's costs and risks in providing it.

Linking the auction for that new product to "an unrelated past clearing price for a different capacity product introduces its own complexities and ultimately establishes an unworkable precedent for handling transitions in the future," PJM said. "The commission should not be swayed by indicated market participants' protestations that it could not have known that the transition auctions would be cleared using the same clearing approach PJM has used in all other auctions," it added.

"Nothing in PJM's voluminous filings regarding the capacity performance proposal signaled explicitly or even implicitly that PJM planned to clear the transition auctions any differently than it has always done," the RTO said.

Direct and NextEra challenged the transitional auctions in the main capacity performance case, but they failed to raise the argument in their complaint or request for clarification, it added.

The approach advocated in the complaint would lead to a preference for resources in specific local delivery areas and that would be in flat contradiction to the RTO's tariff and its statements to FERC in its capacity performance filing.

The transition auctions are tantamount to a new BRA for an identified share of the reliability requirement for the new capacity performance product and are open to all sellers, whether they committed in the earlier BRA for the old product or not, PJM said.

The RTO won some support from those who will be selling capacity in the transitional auctions, but parties representing buyers urged FERC to accept the complaint.

NRG and Dynegy, two generators, urged FERC to throw out the complaint on the grounds it was a collateral attack on the capacity performance order and should be dismissed as such. Many suppliers have already started to prepare for the transitional auctions based on the rules as FERC approved them.

They have worked to get more secure sources of fuel for their power plants, including developing gas addition projects, installing back-end controls and securing fuel supply contracts, NRG and Dynegy said. Those efforts will be thrown into disarray if the rules are tinkered with yet again.

Exelon also filed a protest, arguing PJM's algorithm for the transition auctions was designed properly and does not need to change. It will pick the power plants that are most ready to provide the new product first and that will lessen overall costs.

The complaint sought to carry forward the flawed pricing under the prior capacity market construct, Exelon argued. It would result in power plants in zones that happened to clear at higher prices, such as MAAC or the FirstEnergy American Transmission System's, to clear first, regardless of a plant's ability to provide the capacity performance product more efficiently.

"Such an approach could potentially lead to the premature retirement of precisely the type of resources that the CP reforms should reward, merely because those resources failed to clear in the original RPM auctions for the transition years or are located in LDAs that cleared low," Exelon said. LDAs are locational deliverability area's, sub-regions used to evaluate locational constraints, PJM's website said.

A group of a dozen consumer representatives, state regulators and public power entities urged FERC to accept the complaint, arguing it could save consumers over $1 billion in capacity costs. FERC has repeatedly held that RTOs conduct their markets on a least-cost procurement basis, so that when auctions are cleared, supply offers are stacked from lowest to highest and then supply is acquired by moving up the stack until the total quantity requirement is satisfied.

RESA supports complaint

"The two transitional auctions scheduled for late August into early September should also follow this strategy," the consumer groups said, "yet they present a significant implementation issue that was just recently discovered and confirmed."

Such recent discovery means the issue could not have been addressed in the main capacity performance hearing, thus the consumer groups urged FERC to grant the complaint so the capacity performance transitional auctions are run as all others have been under ISO/RTO markets.

The Retail Energy Supply Assn (RESA) also supported the complaint, noting that if PJM runs the auctions as set up now, it will lead to higher costs for its load-serving members.

Failing to take into account the payments already committed to be paid under the BRA may result in selection of higher cost units, which will result in excessive payment for capacity performance resources in the transitional auctions, RESA said.

This story was originally published in Utility Markets Today ( August 19, 2015 and has been slightly edited for this format. To read more articles like this one, sign up for a Free Trial to Utility Markets Today.

UTILITY MARKETS TODAY is published 245 times per year on business days by Modern Markets Intelligence Inc. UMT's mission is to deliver exclusive news chronicling ongoing efforts to build competitive wholesale and retail energy markets with in-depth analysis on why some fail and others succeed.


James Downing
Editor, Utility Markets Today
Modern Markets Intelligence Inc.

Season Crawford
VP of Marketing
Modern Markets Intelligence Inc.


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