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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

projects go wanting, but only pays them cost-plus rates, funded through a region-wide cost allocation, according to a recent FERC order. (See, Docket No. ER06-456, May 26, 2006, 115 FERC ¶61,261, and FERC Docket No. ER06-880, filed June 19, 2006, with PJM proposing to amend the cost-allocation formula.)

More recently, PJM announced $1.3 billion in grid upgrades mandated through its first 15-year RTEP plan, approved June 23, 2006. (For a more complete rundown of issues and problems, please refer to last year’s “Commission Watch” column on the RPM model, “ PJM’s New Game ,” Public Utilities Fortnightly, December 2005.)

Lately, however, with Exelon’s Moler leading the charge, the focus has switched to the opt-out clause, which establishes a “Fixed Resource Requirement” for utilities choosing not to bid in the RPM market.

Can PJM’s downward sloping RPM demand curve (known as the VRR, or Variable Resource Requirement) co-exist with the FRR, especially if opt-out utilities can jump in or out of the capacity market, electing to buy or sell at opportune times so as to arbitrage the RPM price against the going price for capacity in bilateral contracts? Moler, for one, believes the answer is “no.” (See Figure 2 for the evidence.)

Elsewhere, however, the opinion goes the other way, such as at American Electric Power (AEP), which has indicated it would likely favor the opt-out path.

AEP likens concerns of gaming and arbitrage by opt-out utilities to “childhood fears of monsters under the bed.”

In fact, at the technical conference held at FERC on June 8, AEP’s Craig Baker (senior vice president, regulatory services) told why regulated utilities won’t be able to cherry-pick the RPM market, selling surplus capacity into RPM when prices go high, or choosing to buy from it when prices fall:

“Regulated states,” as Baker explained, “do not allow you to build surplus generation to sell into the market. … If you do that, you are entering into the merchant world.

“I can give you a case in point where we had built generation, expected load to be there, and then didn’t get allowed in rate base.

“We are not going to build a 5,000-MW generator to meet a 2,000-MW load. It doesn’t happen.”