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One RTO, Two Systems

By trying to placate regulated states—letting utilities “opt out” from its capacity market—PJM finds its RPM idea under fire.

Fortnightly Magazine - August 2006

While the PJM Interconnection has made no major changes to its prototype capacity market since it proposed the idea a year ago in August, and though it has won a tacit OK from federal regulators for many of the plan’s key elements, don’t expect to see a slam dunk when the time comes for a final review of the controversial idea, known as the Reliability Pricing Model, or RPM.

Instead, consider the fate of RPM’s closest cousin, the divisive LICAP plan once proposed for New England that has now crashed and burned. As with PJM’s RPM market, New England’s location-specific ICAP plan had begun with the idea of a sloping demand curve, as pioneered in New York, envisioned as a purely administrative construct designed as a market surrogate to mimic a theoretical market-based demand by consumers for electric generating capacity, assuming such demand exists.

But the New England model proved far too complex and expensive to gain the trust of local regulators or politicians, and the same could prove true for PJM.

Of course, it is true that the Federal Energy Regulatory Commission (FERC) has endorsed PJM’s very controversial plan of accepting and clearing bids by merchant-transmission developers in the same auction with supply bids from power producers, on the theory that grid expansion adds to capacity resources, as does the construction of a new power plant. And yes, FERC has sanctioned PJM’s idea of conducting forward auctions to procure electric capacity resources for future years, with payments withheld unless developers deliver on schedule. FERC also has agreed to set the market-clearing quantity and price at the intersection of a supply curve derived from actual bids, with an artificial, downward-sloping demand curve set by administrative fiat. Moreover, FERC has OK’d RPM’s locational attributes, plus RPM’s design allowing utilities (also known as load-serving entities, or LSEs) to “opt-out” and skip the RPM auctions, choosing instead to satisfy capacity obligations with self-supplied assets or simple bilateral contracts. (See, Initial Order on Reliability Pricing Model, Docket Nos. EL05-148, ER05-1410, Apr. 20, 2006, 115 FERC ¶61,079.)

Nevertheless, many still question whether PJM can adapt RPM to accommodate those states and utilities within its footprint that remain fully regulated, simply by making the market optional, and whether all these separate plan elements can work together in harmony, without producing distortion or discrimination.

In particular, it remains unclear whether an electric capacity market can succeed in its aim—to encourage development of infrastructure and thus assure compliance with reliability standards (which now carry the force of law, by the way)—if industry players can flit in and out of the bidding, as if on a whim, seeking opportunities for arbitrage. Instead, many think that PJM’s opt-out rule only will increase discrimination between pro-choice and non-choice states, when coupled with a market process built around an administrative approximation of true market demand.

Consider this comment from Exelon, ordinarily seen

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