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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


• Too Many Zones . PJM implements the full complement of 23 LDAs in years three and four (June 2008 through May 2010), though it admits that not all zones will exhibit constraints, and thus not all LDAs will carry LPA pricing premiums, or exhibit capacity pricing differentials between zones. Critics say this unnecessary granularity will balkanize markets and reduce the number of sellers in any one zone.

• Resource Delivery Period. RPM plans a four-year span between the initial “base residual auction” and the resource delivery period (sprinkled with intervening catch-up or true-up auctions), so that developers have four years from the offer/solicitation to construct and deliver the resource. Yet many want a 10-year period, saying that large-scale grid projects can take that long to complete.

• Market Power Mitigation . The RPM plan will mitigate all bid offers and clearing prices in any LDA if the number of pivotal suppliers fails to exceed three (the so-called N3PS test).

• VRR Capacity Cost . PJM’s design of the sloping VRR demand curve begins with the basic gross capacity cost (“Cost of New Entry,” or CONE) of a proxy capacity resource (a 2x7FA GT gas-fired peaker). CONE is then adjusted, as in a typical ICAP/UCAP/LICAP plan, to reflect operations and maintenance costs, offsets for energy and ancillary service sales revenues, plus special locational factors (differences in labor, land, taxes, etc.) Critics say RPM understates CONE at $59/kW-yr. (based on an installed capacity cost of $466/kW). By contrast, ISO-NE’s proposed capacity cost for LICAP runs about $87/kW-yr. A competing consulting study offered by PEPCO calculates CONE at $78.76/kW-yr (reflects installed capacity cost of $610/kW).

• VRR Revenue Offset . Opponents question whether PJM should rely on six years of past historical data of natural-gas prices to calculate gen-plant performance and likely energy sales revenues as an offset to the capacity cost. Reliant Energy’s Neal Fitch urges use of forward cost data, such as NYMEX gas futures. “Choosing historical revenues,” he notes, “is tantamount to an individual investor saying, ‘I will invest in Delta Airlines based on its performance over the past six years.’”

• Opt-Out Option . PJM proposes to allow self-supplying LSEs to opt out of RPM auctions, but to do so they must procure a reserve that includes an added 3-percent “uncertainty factor” above and beyond the RPM’s nominal auction target of IRM=15 percent plus 1 percent. West Virginia PSC says that penalizes and discriminates against large, vertically integrated electric utilities that operate in areas without retail choice, and which supply their own capacity.

Transmission as Resource

Perhaps the most novel aspect of PJM’s RPM construct concerns the proposed right of merchant transmission developers to bid grid upgrade projects in the capacity auction as the equivalent to a power plant—the typical capacity resource—if the upgrade will increase transfer limits into an LDA. However, this feature brings with it a whole new set of unique problems and issues. (Note: Only merchant grid projects can bid into the RPM auction, because the RPM model limits bidding rights to grid projects to be