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Retail Suppliers Warn PJM Ignoring Transition Costs, Mechanism for New Capacity Performance Procurement

September 23, 2014

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Copyright 2010-14 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

A group consisting of retail suppliers, end users, and state regulators have raised concerns that PJM is ignoring the costs and other issues associated with the transition to a modified capacity market that includes PJM's new capacity performance product.

"In sum, PJM has yet to provide any meaningful details regarding the Transition," the group said in a letter to the PJM Board of Managers. This load group consisted of, among others, Direct Energy, Champion Energy Services, NextEra Energy, Staff of NJ Board of Public Utilities, the Delaware PSC, the PJM Industrial Customer Coalition, and several municipals and cooperatives.

In brief, during the transition PJM proposes to conduct separate capacity performance auctions for the 2015/16, 2016/17, and 2017/18 Delivery Years, for which capacity has already been procured.

Capacity market transitions in PJM have a costly history. A separate group of end users and similar interests previously said that PJM's original transitional capacity auctions held at the start of the Reliability Pricing Model produced capacity prices that were not comparable to those that would be produced in a competitive market, because by their short-lead-time nature, the transitional auctions lacked price discipline from new entrants, while also failing to restrain the exercise of market power by withholding capacity to increase prices.

Returning to the instant comment from the load group on the capacity performance transition, the group said that, "As of the date of these comments, PJM has yet to provide any meaningful details regarding the Transition, which constituted only two paragraphs on the last page of PJM's CP Proposal. Details are wanted regarding the need for Capacity Performance product for the 2015/16, 2016/17 and 2017/18 Delivery Years, the amount of Capacity Performance product that PJM will attempt to procure for each of these Delivery Years, the availability of resources to provide the Capacity Performance product on relatively short notice, and the anticipated cost of procuring the Capacity Performance product in the Transition."

"Load Serving Entities ('LSEs') have already purchased capacity for the 2015/16, 2016/17 and 2017/18 Delivery Years. LSEs have taken on obligations and entered into retail contracts to serve load based on the pricing in the BRA for those years, with no foreseeable expectation that PJM would suddenly declare its intent to replace 85-90% of such capacity with the new, more expensive Capacity Performance product," the group said

"The amount that customers will pay for Capacity Performance resources in the Transition is a significant number that PJM has not even begun to estimate. It is unclear whether stakeholders will have that number from PJM at the conclusion of this EL process. Customers will also incur the potential cost impact associated with the risks of high penalties suppliers will price into their bids, risks that load will pay regardless of whether the suppliers are actually penalized at all during the Delivery Years. Additionally, customers will also be paying costs incurred by suppliers to comply with increased operational requirements, e.g., enhanced fuel acquisition, staffing levels, etc," the load group said.

"Not all LSEs have the ability to pass-through these new costs. Even for those that can and/or do, they risk creating customer backlash and churn. Ultimately the end users bear the increased cost burden. The dollar impact on customers is likely to be severe, particularly if PJM is looking to procure a 12-month product in the Incremental Auctions at a level it is targeting for the 2018/2019 BRA (~85% of Capacity Performance resources)," the load group said.

"PJM has not addressed whether units will have an obligation to offer into the Incremental Auctions, potentially creating incentives for suppliers to withhold capacity in order to increase prices for Capacity Performance products. PJM has not addressed how it would manage the potential (and possibly artificial) shortage of Capacity Performance resources during the Transition and corresponding spike in capacity prices. In light of the foregoing, the earliest the Capacity Performance product should be acquired, if at all, is in the 2018/19 BRA," the group said.

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