Is PJM Market Monitor’s Challenge to “Paper Capacity” Valid?
January 11, 2017
On December 30, 2016, the Market Monitor (“MM”) for PJM Interconnection, L.L.C. (“PJM”) renewed its protest that non-physical resource adequacy assets should not be permitted to “offer speculative paper capacity.” The MM filed a motion with the Federal Energy Regulatory Commission (“FERC”) in Docket No. ER14-1461-000 to re-commence a compliance proceeding regarding the ability of non-physical assets (e.g., demand response resources or “DR”) to participate in some PJM auctions by acquiring or selling capacity rights.
PJM had filed with FERC on March 10, 2014 to revise its market rules to prevent capacity sellers in PJM’s 3-year forward capacity auction (“RPM”) from submitting “speculative offers.” PJM contended, in part, that capacity sell offers should be tied to a physical resource (e.g., a natural gas-powered electricity generator). Parties should not be making offers into capacity auctions while planning to purchase capacity in subsequent auctions to meet their RPM obligations.
FERC rejected PJM’s filing in a May 9, 2014 order because the proposed tariff revisions were not shown to be just and reasonable. (PJM Interconnection, L.L.C., 147 FERC ¶ 61,108 (2014)). FERC did, however, direct its staff to convene a technical conference to address any alleged RPM tariff flaws. FERC staff has not held such a technical conference, in part, because PJM has requested that the process be deferred while PJM developed and filed a Capacity Performance resource adequacy construct. (FERC conditionally approved the Capacity Performance tariff changes on June 9, 2015; the Capacity Performance rehearing order is currently being challenged in the D.C. Court of Appeals.)
On December 27, 2016, the MM posted a report entitled “Analysis of Replacement Capacity for RPM Commitments: June 1, 2007 to June 1, 2016”; the MM attached this Report to the MM’s December 30, 2016 filing. The Report contended that the RPM process was flawed due “the lack of a specific requirement that all capacity resources be demonstrably physical assets when offered into PJM capacity auctions.” The MM contended that this condition “continues to provide strong incentives to offer speculative paper capacity” into the RPM auction process. The Report also noted that PJM’s periodic Incremental Auction (“IA”) capacity prices have been “substantially lower” than PJM’s annual Base Residual Auction (“BRA”) capacity prices. The Report concluded that there was “consistently extraordinarily high levels of [capacity] replacement” by DR providers.
In essence, the MM is alleging that DR is “gaming” the RPM by offering DR capacity into the 3-year BRA, and buying replacement capacity at lower prices through IAs. The MM contends that it is necessary to modify the RPM to restrict non-physical capacity assets from submitting offers into PJM capacity auctions to prevent such “gaming.”
The MM’s motion appears to assume that the RPM market is somehow flawed if parties are replacing capacity offers at “high levels.” This conclusion seems odd because economists normally believe that parties should actively engage in arbitrage to arrive at more accurate prices for a commodity, as part of a healthy, competitive market. It would be ironic if the MM (which is responsible for encouraging competitive markets) was attempting to limit price discovery and arbitrage in the RPM market by discouraging DR from participating in IAs.
The MM might believe that putting restrictions on the ability of DR to sell capacity in IA auctions is somehow necessary to protect “physical assets” from economic harm. It is unclear, however, what sort of harm is currently occurring to physical capacity assets. Does the MM believe that BRA or IA auction capacity prices do not reflect market conditions? If so, why would restricting participation by non-physical resources “improve” such RPM pricing. Does the MM believe that PJM’s system reliability is somehow being threatened because, for example, DR is somehow inherently “substandard” to physical capacity assets? If so, such belief would be inconsistent with PJM’s 2014 Polar Vortex report regarding the superior performance of DR when compared with some physical capacity assets.
Parties affected by the RPM should consider participating in the subject proceeding to ensure that the RPM tariff creates competitive prices, protects system reliability, and enables valuable DR to continue to provide capacity resources. FERC will likely set the date for comments/protests about the MM’s motion sometime in late January, 2017.
This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. For more information contact Dan Clearfield at dclearfield@eckertseamans.com.