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Retail Suppliers To Immediately Be Subject To Higher, Uncertain Costs As FERC Accepts PJM's Proposed Transition In Approving Capacity Performance

June 10, 2015

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

FERC generally accepted as-filed PJM's capacity performance proposal, including most notably approving PJM's proposed transition mechanism without modification.

PJM's proposed transition has been severely criticized by retail suppliers and other LSEs for imposing new and uncertain costs on LSEs in advance of full introduction of the capacity performance product, without any attendant increase in reliability.

Under PJM's adopted proposal which will phase-in the capacity performance requirement, PJM will hold two Incremental Auctions to seek voluntary offers of Capacity Performance Resources: one for the 2016-17 delivery year, covering up to 60 percent of PJM's reliability requirement; and the second for the 2017-18 delivery year, covering up to 70 percent of PJM's reliability requirement. Resource offers will be capped at the relevant clearing price cap, i.e., at 0.5 Net CONE for 2016-17 and 0.6 Net CONE for 2017-18

The capacity performance requirement will be included in the Base Residual Auction for 2018/19.

LSEs have argued that resources participating in the transition period incremental auctions earn unwarranted profits ranging from $2.1 to $2.8 billion in the 2016-17 delivery year and $0.4 to $2.4 billion in the 2017-18 delivery year, because such resources are already highly reliable and need not make investments to meet the performance requirements. LSEs have asserted that profits to these generators will range from 67-84 percent of total Incremental Auction costs for the 2016-17 delivery year and 41-79 percent for the 2017-18 delivery year.

Retail suppliers have also argued that the transition period incremental auctions interfere with their forward obligations and contracts to serve retail customers, for which they have already procured and priced capacity.

FERC dismissed all of these concerns.

"We ... disagree with intervenors' arguments that the costs attributable to PJM's proposed transition mechanisms will either not be offset by any additional reliability benefits, or at a minimum, will not outweigh any such reliability benefits," FERC said.

"[W]e disagree with RESA's argument that the transition mechanism violates the filed rate doctrine, to the extent these prospective rule changes may affect existing commercial arrangements, as based on the clearing prices from prior auctions. Contrary to RESA's characterization, PJM's transition proposal does not impermissibly propose to revise the already-cleared BRAs for the 2016-2017 and 2017-2018 delivery years; rather, like the incremental auctions PJM already conducts, and will continue to conduct, between the initial BRA for a particular delivery year and the commencement of the delivery year, the transition auctions allow PJM to adjust the type and amount of resources needed to ensure reliability in the appropriate delivery year, and to ensure that those resources are fairly compensated. PJM does not seek to retroactively revise the rules upon which it conducted the original 2016-2017 and 2017-2018 BRAs, but instead proposes incremental procurements, with separate payment structures, to ensure that reliability is met in those delivery years. However, under RESA's view of the filed rate doctrine, the three-year forward nature of the capacity market would bar PJM from making these types of incremental adjustments in advance of the actual delivery year, an outcome that is not consistent with Commission precedent. We further note that the instant proceeding concerns prospective changes only and provides ratepayers with sufficient notice that PJM proposed to change its tariff on file," FERC said.

In another blow to customers, FERC accepted PJM's proposed elimination of its existing 205% capacity holdback provision, to be made effective for the Base Residual Auction for delivery year 2018-19. The holdback, which held 2.5% of demand from the BRA, has been seen as necessary by LSEs to prevent an over-procurement of capacity due to forecasting errors.

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