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PJM's New Game

If transmission can substitute for gen-plant capacity, why not clear both products in the same auction?

Fortnightly Magazine - December 2005

(See FERC Dkt. No. ER05-1410, filed Aug. 31, 2005.)

Despite these apparent needs, PJM failed repeatedly to win stakeholder approval for its RPM construct, and was forced eventually to file its application unilaterally with FERC. Many, however, find no surprise in that.

As William McCoy, managing directory for Morgan Stanley Capital Group, wrote in comments filed at FERC in mid-October, RPM is an “entirely artificial, non-economic, centrally planned structure.”

Yet at the same time PJM obscures this point, he adds, by use of market nomenclature.

McCoy repeated Hogan’s warning that it could prove dangerous to define “market failure” as being “when the market doesn’t do what a central planner would.”

Virginia’s State Corporation Commission, echoing a criticism noted by many, said it was “mystified” as to why PJM would seek to solve delivery issues in a few localized areas by instituting a solution across the entire RTO footprint.

Writing for the American Public Power Association, Susan Kelly, vice president, policy analysis, and general counsel, saw it as “very questionable” to burden consumers with high-priced incentives to call forth the needed infrastructure.

“Pay and pray,” she called it.

“While the RPM filing,” Kelly added, “stresses the importance of price stability, what likely is more important to investors is rule stability that provides consistent outcomes over time.”

The Model

PJM’s proposed RPM plan borrows heavily from prior experiments by grid system operators in the Northeast, but at the same time breaks new ground in many key areas.

On one hand, it borrows from the New York ISO (the innovation of a sloping ICAP demand curve to dampen capacity price volatility in capacity prices). PJM labels its demand curve as the VRR—“Variable Resource Requirement”—reflecting the fact that demand for capacity could be supplied by conservation or new transmission facilities, as well as generating capacity. RPM constructs the VRR curve to achieve a target equilibrium where the capacity resources clearing RPM auction equal the standard 15-percent installed reserve margin (IRM) plus 1 percent (a 16-percent IRM).

RPM also borrows the idea of capacity pricing zones from New England’s LICAP construct. These zones (known in PJM as LDAs—“Local Deliverability Areas”—would reflect the reduced delivery capabilities and higher capacity prices anticipated in areas with import/ export constraints. RPM also copies New England’s concept of CTRs—“Capacity Transfer Rights”—LICAP’s zonal analog to financial transmission rights (FTRs) in regions with spot energy markets featuring LMP.

Beyond that, however, RPM also is notable for several reasons:

  • First, it proposes an honest-to-goodness auction for suppliers to submit actual bids of capacity offer prices, volumes, and seasonal variations.
  • Second, it includes an internal system of market power mitigation to keep bids and prices honest.
  • Third, it forces suppliers to give multi-year commitments to invest the RPM payments they receive to build real physical capacity down the road.
  • Fourth, RPM auction will accept bids for demand resources, such as a commitment to suffer an interruption.
  • Last, and perhaps most important of all, the auction will accept bids for transmission capacity itself, which is seen in the RPM construct as a market product in its own