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No Generator Left Behind

A new theory on capacity markets and the missing money.

Fortnightly Magazine - May 2008

denying PJM’s bid to boost its CONE value and shift clearing prices upwards in PJM’s RPM market, FERC showed no mercy:

“PJM and the stakeholders need to consider whether PJM’s proposed method of calculating CONE by using projected values, including inflation, creases a mismatch with the determination of energy and ancillary service revenues, which rely on a historic average of the past three years.”

A Short-term Fixation

Out West, the California Public Utilities Commission (CPUC) made news in January when it proposed two alternative models for resource adequacy and capacity procurement and asked for comments, after holding extensive workshops last August on a half dozen proposals, with exotic names like “PG&E Bilateral with Multi-year Forward.” (See, Staff Recommendations on Capacity Market Structure, January 2008, Cal.P.U.C. Dkt. R.05-12-013, at r0512013MarketStructure.pdf .)

Industry comments then came back on leap day, February 29, with many describing the CPUC staff proposals as inadequate. One staff proposal, relying on bilateral procurement to ensure enough new gen investment, essentially would maintain the status quo. The second, a modified CCM (centralized capacity market) was faulted as too vague. Many wondered why the staff had not simply recommended the precise model recommended by the California Forward Capacity Market Advocates (CFCMA), which was designed after New England’s FCM construct, but without the ex post PER adjustment, and which had been thoroughly explained and vetted in the August workshops. Why instead had the staff decided to propose a new, relatively unknown market model, which was ill defined and even less understood, and then asked for comments?

The CPUC staff believes that a bilateral capacity procurement scheme, falling entirely under state law jurisdiction, will do a better job of complying with state-imposed mandates for developing renewable energy. The CPUC also suggests that that a FERC-regulated and Eastern-style CCM, with a uniform single clearing price (rather than pay-as-bid) fails to satisfy least-cost principles, since all resources receive capacity payments keyed to newly constructed, high-cost combustion turbines operating on the margin.

The CPUC staff report echoes concerns expressed late last year by the CAISO Market Surveillance Committee. The MSC had urged the CPUC not to adopt a bid-based capacity market, and only make small refinements to the state’s current RA framework. (See, Opinion on Long-term Resource Adequacy under MRTU, Nov. 5, 2007.)

Also, the CPUC staff faults the CFCMA market proposal because it did not include an ex post PER adjustment, as seen in New England. The CFCMA group had said such an adjustment simply would raise clearing prices, since suppliers would respond by raising their bids to cover the risk that the ISO might dun their capacity payments to offset a possible energy market windfall.

California’s power producers for years have been complaining of a broken regime for resource adequacy, owing to faulty policies at both the CPUC and the California Independent System Operator (CAISO). That RA regime, they say, has long favored vertically integrated load-serving utilities, which can fall back on rate base to recover their missing money, while forcing merchant plants to shoulder the burden.

The CPUC’s RA program gives capacity