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FERC Chair Says Decision To Deny Retail Suppliers' Complaint Over PJM Transitional Capacity Auction Clearing Mechanism, "Simply Permits Consumers To Be Charged More In Exchange For No Additional Benefit"

August 26, 2015

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

FERC has denied a complaint by retail suppliers to require PJM to clear the transitional incremental capacity performance auctions in a manner which minimizes costs, as FERC Chairman Norman Bay said in a dissent that FERC's denial of the complaint, "authorizes PJM to impose costs on consumers with no corresponding benefits."

In approving the capacity performance product, FERC had previously ordered that the clearing mechanism for the transitional incremental auctions should be, "appropriately designed to attain the lowest overall cost solution to meet PJM's capacity needs."

However, the suppliers noted that under PJM's intended approach to clearing the CP Transition IAs, PJM will seek to minimize the cost of Capacity Performance Resource procurement for each Delivery Year without taking into account existing RPM commitments.

Suppliers said that the objective should be to minimize the cost of Capacity Performance Resource procurement with taking into account existing RPM commitments. In other words, the CP Transition IA clearing mechanism is not based on the offer price difference relative to previously cleared auction clearing prices and, instead, will clear based on the absolute offer prices submitted into each CP Transition IA, the retail suppliers said.

"Given the higher relative payment some resources are receiving for their existing commitments (reflective of locational constraints making capacity more valuable in those regions), these resources are starting from a much higher offer price in the CP Transition IAs and are less likely to clear under PJM's proposed clearing approach. For example, clearing the CP Transition IA in the 2016/2017 Delivery Year at an absolute offer price of $115/MW-Day would result in no MAAC or ATSI resources being accepted, since that price is below the clearing price for their existing RPM obligations. Resources in MAAC and ATSI that could provide Capacity Performance Resource commitments more cheaply (and reliably) are disadvantaged under PJM's clearing approach. If PJM were instead to optimize its clearing of Sell Offers to minimize its additional cost of meeting its additional Capacity Performance Resource procurement target in each Delivery Year, it could select resources in ATSI or MAAC instead of the rest of RTO when the cost of doing so is lower," the retail suppliers had said.

FERC, however, said that PJM's approach is consistent with its tariff, and that PJM's tariff does not require PJM to minimize costs by taking into account existing capacity revenues for the delivery year or other savings in determining the lowest price at which to clear an auction for Capacity Performance products

However, Bay in his dissent said that, "The complaint we reject today demonstrates that PJM’s auction rules do not comply with the obligation in its tariff to minimize the cost of the auction. I would grant the complaint and provide PJM the opportunity to propose an alternative pricing mechanism."

"Under its tariff, PJM must minimize the costs of meeting its reliability needs in conducting the auction," Bay said

Bay further explained:

"The changes include transitional auctions for the 2016/17 and 2017/18 years. Resources that had previously sold capacity for those years can, if they choose, reoffer their capacity in the new auction. If the offer is accepted, they take on the additional obligations and receive the new, higher price. If the offer is refused (or they do not offer their capacity), the resources are still paid, and they retain their preexisting obligations at the preexisting price. In other words, if PJM buys capacity from a resource that is already entitled to a payment, it can eliminate that payment and save consumers money. If PJM buys capacity from someone else, it cannot avoid that preexisting cost. The transitional auction, then, provides PJM the valuable opportunity of avoiding payments that it is otherwise required to make.
"PJM’s methodology ignores the value of this opportunity. Consider an example. Imagine that there are two generators, A and B, equal in every way in their ability to provide capacity. As a result of the previous auction, A is currently entitled to receive $120/MW-day and B is entitled to receive $60/MW-day. Notably, they receive these payments even if they do not offer capacity in the transitional auction or their offer is rejected. If their offer is accepted, they are only entitled to the revenues from the new auction. Assume A bids in the transitional auction at $140/MW-day and B bids at $100/MW-day. PJM proposes to accept the bid from B because $100 is lower than $140. However, accepting A’s bid would only add $20 in additional costs ($140 minus the $120 they are already entitled to receive) while taking B’s bid adds $40 in costs ($100 minus $60). In this example, PJM’s approach adds $20 in costs to consumers. In all, PJM’s approach could impose significant costs on consumers.
"In return for these costs, consumers get very little indeed. Selecting B’s bid does not produce a greater quantity of capacity or a higher quality of capacity. A and B are both offering the same enhanced capacity performance product. As a result, PJM’s approach does not ensure greater system reliability. It simply permits consumers to be charged more in exchange for no additional benefit. PJM’s Commission-approved tariff is clear. PJM must 'minimize the cost of satisfying the reliability requirements' when it purchases capacity. Today’s order is not consistent with the June 9th order approving PJM’s tariff. It directly conflicts with it. Moreover, our obligation to ensure that the auction rules are just and reasonable continues after we have approved the tariff provisions. If a complaint identifies an unjust and unreasonable flaw in the market design, we must correct it, regardless of when the design was approved. While correcting the flaw in this case might delay the auctions, neither today’s order nor the record establishes the costs of such delay.
"I dissented from the Commission’s order in June approving PJM’s Capacity Performance Proposal. I would not have agreed to transitional auctions at all, but having created them it is the Commission’s responsibility to ensure that they result in just and reasonable rates. Unfortunately, that has not happened here. This auction will impose a considerable cost on consumers for no additional reliability benefit. When carefully considered and designed well, markets are an effective means for the Commission to ensure that consumers pay just and reasonable rates and that reliability is maintained. In contrast, today’s outcome demonstrates the problems inherent in a complex, flawed design. For these reasons, I respectfully dissent."

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