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Retail Suppliers: PJM Using "Express Lane" to Impose Billions of New Capacity Costs on Consumers, Provide $2 Billion Windfall to Existing Resources

October 29, 2014

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

PJM is taking an "express lane" to impose billions of new capacity costs on consumers under its flawed capacity performance and transition mechanism, several retail suppliers, public power utilities, state regulators, and industrial customers (the transition coalition) said in comments to the PJM Board.

PJM is pursuing its capacity performance and transition proposal under the "enhanced liaison committee process," which bypasses the normal stakeholder process in favor of an expedited process.

"Imposing billions of dollars of unforeseen costs on the region deserves a far more thorough analysis than simply squeezing stakeholders through the current procedural 'express lane,'" the transition coalition said.

"These added capacity costs will disturb existing commercial arrangements for wholesale and retail load suppliers that in good faith relied on the prices from previously cleared auctions, and may cause suppliers unable or unwilling to manage the unknown and unhedgeable costs and regulatory uncertainty to exit the market," the transition coalition said, pointing to the lack of participation in Maryland's October SOS procurement.

Most notably, the transition coalition said that rather than incenting improved performance from resources, PJM's capacity performance transition will only pay currently highly-reliable resources a premium for actions such resources would undertake without the premium.

"The most likely resources to offer into the proposed incremental Capacity Performance auctions during the Transition will be the resources that already have the highest expectation of reliable performance under their existing obligations – the 92 GWs of nuclear, coal, and dual-fuel units on interstate gas pipelines and natural gas units with mainline firm transportation contracts," transition coalition said

Such resources would reap a $2 billion windfall in 2016/2017 alone, the transition coalition alleged.

"LaCapra Associates ('LaCapra') estimates that payments to the 92 GW of highly reliable resources described above could be as much as $2.8 billion in the 2016/2017 auction. These resources are expected to meet the Capacity Performance requirements with little or no incremental investment, particularly given other changes happening outside of PJM's proposed Capacity Performance change such as gas-electric alignment, winterization efforts, and actions by generators of all type to improve performance based on their risks last winter and missed revenue opportunities. We estimate that the cost of compliance for these resources would be roughly $850 million, comprised of $170 million in weatherization, fuel inventory and annual testing costs and up to $680 million associated with Capacity Performance penalty risk. As a result, the CP Update would result in this block of resources realizing roughly $2 billion in annual profits unrelated to any reliability improvement, and irrespective of the fact they are already under a capacity supply obligation," the transition coalition said.

The transition coalition included Champion Energy Services, LLC, Direct Energy Business, LLC, DTE Energy Trading, Inc., Duquesne Light Energy, NextEra Energy Resources, Noble Americas Energy Solutions LLC, Washington Gas Energy Services, Inc., Shell Energy North America (US), L.P., the New Jersey Board of Public Utilities, the Delaware Public Service Commission, the PJM Industrial Customer Coalition, and additional load serving entities.

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