PJM IMM Says Creation Of D.C.-Specific Fixed Resource Requirement Would Increase Capacity Prices For D.C. Customers, Though Costs Fall Under One FRR Scenario

In response to a request from District of Columbia PSC Chairman Willie L. Phillips, the PJM Independent Market Monitor analyzed the impacts of the creation of Fixed Resource Requirement (FRR) entities in the District of Columbia (DC). FRR entities elect to not participate in the PJM Capacity Market and to use the FRR option to satisfy their capacity obligations

The IMM stated in its report, "Based on the analysis, the creation of a Pepco/DC FRR is likely to increase payments for capacity by customers in DC. It is expected that the actual price for capacity in DC would be the result of a negotiation between the owners of the required capacity, and the District of Columbia. The resultant price for capacity resources could substantially exceed the capacity market clearing price and the capacity market offer cap."

The IMM analyzed two scenarios. The entire DC region is within the Pepco Zone. The rest of the Pepco Zone is located in Maryland. The Pepco Zone includes the Pepco LDA but is not identical to the Pepco LDA, which is a part of the SWMAAC parent LDA.

In Scenario 1, the IMM assumes that an FRR is established that includes all of the DC portion of the Pepco LDA (Pepco/DC FRR) and that the Pepco/DC FRR procures the entire Pepco/DC capacity obligation at a rate equal to the net Cost of New Entry (CONE) times B offer cap applicable to the Pepco LDA ($210.86 per MW‐day) for the 2021/2022 PJM Reliability Pricing Model (RPM) Base Residual Auction (BRA). The rest of the Pepco LDA remains in the PJM Capacity Market. The IMM concludes that under Scenario 1, net load charges for Pepco/DC FRR under the FRR alternative would increase by $46.5 million or 41.3 percent compared to the results of the 2021/2022 RPM BRA.

In Scenario 2, the IMM assumes that an FRR is established that includes all of Pepco/DC and that the Pepco/DC FRR procures the entire Pepco/DC capacity obligation at a rate equal to the clearing price in the 2021/2022 RPM BRA applicable to the Pepco LDA ($140.00 per MW‐day). The IMM concludes that under Scenario 2, the net load charges for Pepco/DC under the FRR alternative would decrease by $6.9 million or 6.2 percent compared to the results of the 2021/2022 RPM BRA.

The IMM in the report stated, "Creation of an FRR creates market power for the small number of generation owners from whom generation must be purchased in order to meet the reliability requirements of the FRR entities. All participants in the Pepco FRR fail the three pivotal supplier test which reinforces the conclusion that there is structural market power in each case. A fundamental point about the FRR approach is that the FRR approach is a nonmarket approach. In the FRR approach, there is no PJM market monitoring of offer behavior by generation owners, there are no market rules governing offers, and there are no market rules requiring competitive behavior. In the absence of a competitive market that includes the FRR area(s), there is no competitive market reference point to define what a competitive offer would be from the FRR generation owners in a bilateral negotiation or what the competitive market price would be. Prior market results do not define a competitive outcome in subsequent periods because market dynamics and market outcomes may change significantly. As a result, even the higher estimates of the cost impact to the customers of DC from the creation of an FRR are likely to be conservatively low. If DC were to subsidize any generating units, the subsidy costs would be in addition to the direct FRR costs."

Docket GD-2021-02-M