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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

funded through a rate “specific to the facility.”)

  • How do transmission developers formulate a price at which to bid a grid upgrade as a capacity market resource?
  • How are they compensated if the upgrade clears the auction and is completed as promised at the end of the delivery period?
  • What is the status of the grid upgrade during the four-year commitment period? In other words, if the upgrade when completed would boost import capacity into a constrained LDA, can gen-capacity suppliers “use” that hypothetical but promised increase in grid capacity for their own resources that otherwise would be shut in for lack of deliverability?

Bowling Pins. Commenting for National Grid USA, counsel Joel deJesus notes that grid projects bidding into the RPM auction are asked to state an offer price in terms of the price differential between capacity resources located outside and inside the LDA, but that this rule appears “unworkable.”

As deJesus observes, any price differential between resources in different LDAs will be reduced significantly by the construction of the transmission project.

“Because of the rent-destroying nature of such lumpy investment,” notes deJesus, “basing payments to transmission owners on residual congestion ( i.e., congestion that the resource in question failed to eliminate) provides a poor investment signal.

“It would be akin to scoring a bowler for the pins he left up; it would incentivize developers of transmission to leave uneconomic congestion on the system, rather than remove it.”

Moving Targets. What happens, asks deJesus, if a grid project clears the base residual auction at the start of the four-year commitment period, but then fails to clear when submitted into subsequent intervening auctions (in which the developer is also required to submit bids).

“In such event,” deJesus notes wryly, “the transmission owner would need to disconnect its ‘out-of-merit’ transmission facilities to prevent access by transmission customers.”

DeJesus speculates that a would-be grid developer could submit a zero-cost supply bid in all those subsequent intervening auctions, but believes such a bidding strategy would introduce “significant revenue uncertainty for sponsors of merchant grid projects.

In a very similar observation, lawyers from Spiegel & McDiarmid, representing Blue Ridge Power Agency and municipal utility associations in Virginia and Illinois, note that PJM fails to explain how it will calculate LPAs (price premiums for constrained capacity zones).

“Will PJM apply existing transfer capabilities [those prevailing before the auction], or those anticipated for the delivery year if all [grid upgrade] projects are timely completed?”

In other words, do the ground rules change during the delivery-commitment period, governing calculation of constraints, delivery capability, and prices to reflect anticipated and eventual completion of promised grid resources?

In Spiegel’s opinion, PJM’s filing “is far too murky on this crucial point.”