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Load Coalition: PJM's Capacity Performance Transition Essentially a Bailout for Generators Who Have "Seller's Remorse" Over Existing Capacity Prices

January 21, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Given that no improvement in generator performance is evident from PJM's proposed transition mechanism for its sought new capacity performance capacity market construct, a coalition of retail suppliers, wholesale power markets, cooperatives, industrial customers, and state regulators (the Transition Coalition) can only wonder that the transition is designed to address generator claims of revenue shortfall under existing capacity prices, and caves into "seller's remorse" at the expense of breaking existing capacity supply agreements with load.

The transition period, for 2016/17 and 2017/18 would begin procuring a phased-in amount of the new capacity performance product through incremental auctions (IAs).

The Transition Coalition members estimate that the IA Proposal would cost as much as $2.8 billion in the 2016/2017 Delivery Year and $3.6 billion in the 2017/2018 Delivery Year, "and that most if not all of these payments will go to generators that either already have met the performance targets of capacity performance or have taken actions to improve going-forward performance independent of the capacity performance initiative."

"On behalf of the customers we serve, the Transition Coalition members have to ask: what will we get in return for billions of dollars in new payments?"

"Given the lack of any logical connection to performance improvements, the Transition Coalition is left to wonder if the true goal of the IA Proposal is to address PJM’s concerns with respect to generator claims of revenue shortfalls," the Transition Coalition said in comments at FERC.

"We respectfully submit that resources that have cleared in prior auctions must live with the capacity supply obligations to which they have agreed. It is for this reason that RPM changes historically have been made on a prospective basis to avoid disturbing existing arrangements. Nevertheless, we anticipate that some supporters of the IA Proposal may argue that PJM’s market rules are under-valuing resources that perform well and that the IA Proposal is needed to correct that market failure. Even if true (which we question), those arguments amount to little more than seller’s remorse. Sellers with existing capacity obligations accepted those commitments at prior auction clearing prices and should be held to them at those prices," the Transition Coalition said.

"Indeed, for the entities that will be paying for the IA Proposal (i.e., load), altering these existing supply obligations would constitute retroactive ratemaking in violation of long-standing Commission precedent. It goes without saying that PJM could not propose new rules that unilaterally alter existing capacity supply obligations, as that would retroactively change the rate agreed to by suppliers. But it is equally retroactive for PJM to strip load of its ability to rely on existing capacity procured in prior auctions pursuant to rules on file with and approved by the Commission. PJM is merely standing in the shoes of load with respect its procurement of capacity and should not be given authority by the Commission to agree to changes in supply obligations opposed by load simply because a generator counterparty agrees to accept the change," the Transition Coalition said.

More specifically, the Transition Coalition estimates that roughly 96 GW of nuclear, coal, and dual-fuel units on interstate gas pipelines and natural gas units with mainline firm transportation contracts would clear under the IA Proposal in the 2016/2017 Delivery Year at a cost of up to $2.8 billion. "This highly-available block of resources is already under existing capacity obligations and is already expected to meet the new capacity performance requirements with relatively little 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," the Transition Coalition said.

"The results would be similar for the 2017/18 IA Proposal, with payments to 110 GW of the same already-reliable and already-committed block of nuclear, coal, and firm-fuel gas resources reaching as high as $3.6 billion," the Transition Coalition said.

As noted by Direct Energy in separately filed comments, "These resources will be paid additional billions of dollars, with relatively little incremental investment, while load, which has already incurred payment obligations for these Delivery Years, will end up paying again for the same capacity."

Docket No. ER15-623

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