Retail Suppliers Say PJM Won't Clear Transitional Capacity Performance Auctions In Manner That Minimizes Cost, File FERC Complaint

"PJM indicated last week that it intends to clear [the capacity performance transitional incremental auctions] in a manner that does not minimize the cost of procuring capacity in each Delivery Year when satisfying the new Capacity Performance Resource procurement targets in these years," Direct Energy Business Marketing and NextEra Energy Resources, LLC said in a newly filed complaint at FERC

"As we understand PJM's intended approach to clearing the CP Transition IAs, PJM would seek to minimize the cost of Capacity Performance Resource procurement for each Delivery Year without taking into account existing RPM commitments. We believe the objective should be to minimize the cost of Capacity Performance Resource procurement with taking into account existing RPM commitments," the marketers said (emphasis in original)

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.

Although the actual dollar impact of PJM's decision cannot be known until Sell Offers are submitted, the marketers said that, "the impact of PJM's procurement approach could be significant."

The marketers noted that, "allowing PJM to proceed with its proposed auction clearing approach would categorically disadvantage resources in the MAAC and ATSI Locational Deliverability Areas ('LDAs'), undermining competition in the CP Transition IAs," since these LDAs have higher existing capacity costs for the at-issue delivery years.

"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 marketers said.

The marketers said that PJM's proposed clearing process is inconsistent with FERC's prior directive that the auction clearing algorithm used by PJM in the CP Transition IAs shall be, "appropriately designed to attain the lowest overall cost solution to meet PJM's capacity needs."

"The most logical interpretation of this requirement is that the objective of PJM's optimization algorithm should be to minimize the cost of procuring the target quantity of Capacity Performance Resources in relation to total capacity costs for the PJM system," the marketers said