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FERC Rejects PJM Changes Designed to Increase Capacity Prices By Limiting Incremental Auction Participation
FERC has rejected as unjust and unreasonable a series of changes proposed by PJM which would have had the effect of increasing capacity prices.
The changes, which PJM said were needed to prevent "speculative" bidding in the capacity market and ensure physical bids, included a series of revisions to incremental auction (IA) procedures to make reliance on the incremental auctions to fill a capacity obligation less economic.
Among other things, PJM proposed to assess on every replacement capacity transaction a Replacement Capacity Adjustment Charge equal to the difference between the Base Residual Auction price and the IA price, assessed anytime the BRA price is higher than the IA price.
"While we recognize the need for PJM to ensure that offers into its market represent physical resources, PJM’s proposed OATT and RAA revisions have significant undesirable effects such as increasing the risk for capacity market sellers, creating undue barriers to entry, limiting opportunity for beneficial trade, and unnecessarily raising the cost of capacity through the acquisition of excess capacity. Given these problems, coupled with PJM's limited demonstration of the presence of speculative sell offers, we find that PJM’s package of OATT and RAA revisions is not just and reasonable and accordingly is rejected," FERC ruled.
"We agree with PJM that offers into its capacity market should not be speculative. However, 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. We are mindful, in this regard, of intervenors who assert that suppliers may indeed have legitimate reasons to buy out their capacity obligations with other physical resources," FERC said.
"We also find that PJM’s proposal exposes load to additional risks due to the payment of higher costs for capacity. Specifically, PJM’s current tariff provides that when PJM procures more capacity three years ahead than it ultimately requires, PJM sells the excess capacity back to the market when the price it receives is greater than the value of that capacity. Under PJM’s proposal, however, PJM’s sell offers of excess capacity will clear only if the clearing price equals or exceeds the original Base Residual Auction price. As PJM previously stated, the current rules 'ensur[e] that PJM loads have an opportunity to obtain some value for [] capacity over-commitment.' However, PJM’s filing eliminates much of such recoupment unless the price equals or exceeds the Base Residual auction price. PJM responds that it is protecting load because capacity market sellers will no longer be able to reap substantial profits resulting from the purchase of cheap replacement capacity, profits that PJM states are funded by load. Yet PJM’s proposal seems to already address this issue through the Replacement Capacity Adjustment Charge which recaptures the profits that the sell-back offer changes are designed to address," FERC said.
"The interplay between PJM’s proposed OATT and RAA revisions suggests that their operation will result in market changes that will simultaneously increase risk to suppliers and costs to load, without guaranteeing equally offsetting benefits to the PJM grid as a whole. The proposal as a whole goes beyond what is reasonable to ensure that offers are supported by physical resources. As such, we find that PJM has not provided sufficient evidence that the concerns giving rise to its filing merit this disruptive a proposal, and therefore find that PJM’s proposed package of reforms, taken as a whole, is not just and reasonable," FERC said.
Still, FERC did agree that PJM has, "identified a reliability issue that merits consideration, and we find that PJM’s existing tariff provisions may be unjust and unreasonable in that they fail to promote long-term reliability in its capacity market by possibly permitting speculative sell offers to be submitted into PJM’s capacity market auctions."
FERC therefore instituted a proceeding under section 206 of the FPA, in Docket No. EL14-48, and directed Staff to convene a technical conference to facilitate the development of a just and reasonable solution.
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May 12, 2014
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Reporting by Karen Abbott • kabbott@energychoicematters.com
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