RPM "Fixes" Designed to Ensure Higher Capacity Prices, Maryland PSC Says

Recent changes to the Reliability Pricing Model capacity mechanism filed by PJM are meant to inflate capacity prices, the Maryland PSC said in a protest at FERC.

As previously reported (12/2), such changes meant to increase capacity prices include changing the Variable Resource Requirement curve such that the highest point on the VRR Curve would be set equal to the greater of gross Cost of New Entry (CONE) or 1.5 times Net CONE. Such action will have the effect of reducing the downward pressure which would otherwise apply to capacity prices under the Energy and Ancillary Services offset due to recent high energy market prices.

"The changes PJM proposes in this proceeding are the latest in a long series of alterations, each of which is made with the ostensible purpose of 'fixing' RPM but that, in nearly every case, is designed to ensure that clearing prices go up or are prevented from going down. Under the current proposal, prices could increase when the ratio of the Energy and Ancillary Services ('E&AS') offset to Gross Cost Of New Entry ("CONE") exceeds 33% and the clearing price on the VRR curve is to the left of Point B."

"Maryland ratepayers are particularly likely to be exposed to these conditions, and therefore higher prices, because two companies dominate the region's supply and the ability to import less expensive capacity from outside our region is impossible due to a lack of transmission capability. But PJM's filing contains no supported reason to believe that shifting the curve would make new entry or new resources more likely – the only certainty is that consumers would pay more for the same resources under the redrawn curve," the PSC said.

"Customers in many parts of PJM have been paying high capacity prices for years, with little to show for it. There have been certain capacity upgrades and allegedly deferred retirements, but all of PJM continues to suffer from market concentration so high that the Three Pivotal Supplier Test is failed year after year. There is no new entry, even where prices are highest and where there are sophisticated and well-financed merchant developers, due to roadblocks such as a convoluted interconnection process that protects incumbent monopolists from actual competition," the PSC added.

"Ironically, the proposal will raise the VRR curve in years following high energy prices. It is illogical that customers should pay more for capacity after they pay more for energy. This counterintuitive outcome is exacerbated by the effect of how the E&AS offset is applied to capacity prices. As RPM currently is structured, it looks nearly four years in the rear-view mirror for energy prices when setting capacity prices three years ahead for a single year. Without aligning energy revenues with capacity payments, which PJM's consultant repeatedly urges PJM to do to no avail, we are left with a flawed system that will only be made worse by the instant proposal. Such a market construct cannot be just and reasonable," the PSC said.

The PSC further noted that, "the basis for PJM's proposed change is a market simulation by a consultant, as opposed to an actual shortfall of capacity (i.e., an auction resulting in payments too low to attract a reliable quantity of capacity)."

"The sole example PJM's consultant provides as an example of a theoretical, not actual, shortfall is the Base Residual Auction ("BRA") for the 2010/2011 Delivery Year. Notably, the auction for that delivery year was a 'transitional auction' which was held in 2008, only two years in advance, as opposed to the normal three years in advance. Moreover, it was among the first BRAs ever held; it was the third BRA held within a six-month period (as opposed to the now-standard annual BRAs); and PJM's consultant itself highlights volatility during that period and 'major price changes' in that particular BRA for all of PJM as well as the SWMAAC Locational Deliverability Area ('LDA') (SWMAAC is the LDA encompassing much of Maryland). All of these facts render the example worthless – they represent, at most, the results of an auction from a single LDA in a solitary auction for an immature market construct. And that one example cannot credibly serve as the basis for making a major structural change to future auctions, particularly one that is designed to result in higher prices to customers," the PSC said.