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Trash Day: FERC Dumps Capacity Order Raising Costs for PJM Load by $2 Billion Annually on Black Friday

December 1, 2014

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

FERC on November 28 approved most of PJM's sought revisions to the PJM capacity market variable resource requirement (VRR) curve and related revisions sought under the triennial review process, adopting changes which lead to gold-plating of the reliability target and which load interests have said will cost consumers billions of dollars annually.

The proposals generally adopted by FERC, "seek to require end users to pay extremely large sums to achieve a new and higher standard of reliability whose necessity and desirability has never been vetted with stakeholders," the Maryland PSC said in an earlier protest at FERC, pegging the incremental cost of the as-filed package of changes sought by PJM as $1.7 billion annually.

Most notably, FERC accepted without modification all of the sought changes to the PJM capacity market VRR curve, which determines the amount of capacity procured. FERC described the series of changes as creating a more "conservative" VRR curve, meaning a VRR curve, "that will result in the procurement of additional capacity."

Specifically, FERC accepted the following changes (i) extending the higher priced, horizontal segment of the curve (i.e., at the 1.5X Net CONE price cap) from IRM-3% to IRM-0.2%; (ii) adjusting the shape of the curve so that it is convex as compared to the current concave shape; and (iii) right-shifting the entire curve by 1% of capacity on the x-axis.

The Maryland PSC said that these changes alone will increase costs by approximately $1.5 billion per year.

The PSC notes that the proposed curve, now adopted by FERC, with its additional adjustment 1% to the right, "quite clearly proposes an increase in the Commission-approved reliability standard and its associated reserve requirement."

"As both Brattle and PJM note, the average LOLE for this [new] curve is only 0.06%, not the 1% that the approved and stakeholder supported 1 in 10 reliability standard supports," the PSC noted.

FERC, as is standard, saw such an "increase" in reliability beneficial, and dismissed cost concerns.

However, the Maryland PSC noted that concerns regarding the prior design of the VRR curve were inflated, because of the chosen inputs used in running Monte Carlo analyses of the reliability impact of potential shocks to the system under different curve designs (as an aside, we must again note the "market" approach taken to capacity construct -- designs come from simulations with administratively determined inputs, not true buyer and seller interactions)

"Brattle itself states that its Monte Carlo analysis is accurate only if there is no systemic bias in its important inputs, such as its load forecast or the calculation of Gross CONE," the PSC noted. "Yet, over the past 6 years, PJM's load forecast at the time of the BRA has exceeded actual delivery year load levels by 5-6%, and PJM has acknowledged in other proceedings before the Commission that overestimating load as a protection for reliability of service is a continuous and institutionalized practice," the PSC said.

As separately noted by the PJM Load Group:

"Brattle's Monte Carlo model attempts to simulate long-term equilibrium conditions by modeling supply and demand conditions (i.e., curves) in a single, isolated year without regard to the real-world market dynamics that affect both supplier and consumer behavior. Unlike the Hobbs model, the Brattle model additionally fails to account for year-to-year changes in supply and demand dynamics and fails to account for the actual interplay between these forces within the simulated year. Rather than account for such practical dynamics, the Brattle Monte Carlo model exercises random and arbitrary 'shocks' to a multitude of supply and demand curves that are independent of one another, but which purportedly lead to practically useful identifications of VRR curves capable of meeting the chosen reliability standard. That reliability standard, in the instant matter unilaterally chosen by Brattle rather than PJM stakeholders, takes the simulated three-year forward reserve margins (resulting from the simulated base residual auctions – 'BRAs') and converts them to LOLE values."

"The problem with this approach, however, is that it conflates three-year forward BRA reserve margins and delivery year reserve margins, two fundamentally different reserve margins. Brattle's use of three-year forward LOLEs fails to account for a variety of factors that occur between the BRA and the delivery year that effectively reduce reliability risk in the delivery year, as evidenced by recent experience: typically overstated three-year forward load forecasts, premised on overly optimistic economic growth forecasts, are reduced and depress Delivery Year reliability requirements; abundant quantities of capacity are offered and cleared in the intervening incremental auctions to meet incremental requirements; and, market participants often change their minds and defer retirements or upgrade existing units in response to tight supplies heading into the delivery year. In its singular reference to the three-year forward LOLE, Brattle's simulation model negates these real-world factors that contribute to actual delivery year conditions that have historically demonstrated more than sufficient actual reserves to meet system requirements."

The Load Group further noted that PJM's proposal to shift the curve further to the right, by increasing the amount of capacity procured and thereby creating a glut, would actually worsen the "missing money" problem the capacity market is ostensibly designed to address.

"[T]he proposed shift would increase cleared excess capacity, erode EAS [energy and ancillary service] market revenues and thereby increase the 'missing money' recovered via the RPM market," the Load Group said.

More broadly, load opposed addressing the triennial review changes to the capacity market in a vacuum, given the fundamental changes coming to the market in the form of capacity performance and (potentially) demand response participation, given the inherently interconnected nature of the issues. FERC dismissed such concerns

FERC adopted as proposed by PJM revisions to the cost of capital, labor inputs, and inflation adjustments.

FERC did reject one proposal from PJM regarding a locational floor for Net Cost of New Entry.

Specifically, FERC rejected PJM's proposal to require that the Net CONE for a sub-Locational Deliverability Area be no less than the Net CONE for any other Locational Deliverability Area in which the sub-Locational Deliverability Area resides.

"Based on the arguments presented by PJM, we find that PJM has not demonstrated why it is just and reasonable to establish its proposed floor for Net CONE in congested sub-Locational Deliverability Areas. We agree with the PJM Load Group that this proposal could operate to disconnect costs and/or revenues from the areas to which they can be attributed, particularly given that generators in a congested area may receive higher energy market revenues than in uncongested areas, thereby warranting a larger EAS Offset in the congested area," FERC said.

Docket No. ER14-2940

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