(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
The PJM complaint and the rising cost of electric reliability.
conducted its fifth base residual auction (BRA), for the 2011-12 delivery year (June 1 to May 31). The three-year forward period echoes a similar design feature in the ISO-NE FCM plan. It’s designed to accommodate a typical plant-construction interval, so developers can bid to supply new resources, and then go out and build them in time for the assigned delivery year. Capacity cleared in PJM’s May 2008 BRA for delivery in June 2011 is set at $110 per megawatt-day—under the pricing metric that PJM uses. That’s equivalent to $40.15 per kilowatt-year, or $3.34 per kilowatt-month, as capacity prices are sometimes expressed in other regions.
The first four auctions, however, did not proceed in the same manner. PJM had designed its RPM regime to avert an impending crisis of possible reliability violations in New Jersey and Baltimore-Washington zones [Eastern and Southwest Mid-Atlantic Area Council (MAAC) respectively]. To get off the ball quickly, and foster familiarity among market players as soon as possible, PJM began with four so-called transitional auctions, each targeting a future twelve-month delivery period, but with forward intervals shorter than three years:
• BRA-1 (April 2007), for delivery 2007-08;
• BRA-2 (July 2007), for delivery 2008-09;
• BRA-3 (Oct. 2007), for delivery 2009-10; and
• BRA-4 (Jan. 2008), for delivery 2010-11.
This transitional wrinkle explains a key allegation in the recent complaint. The Maryland Public Service Commission and its compatriots charge that because the first four transitional BRAs featured such short forward intervals, there was no chance for new entry; i.e., no chance for developers to bid on supplying newly constructed projects. Instead, say the complainants, without competition from new projects, the four transitional auctions cleared at exorbitant price levels that produced windfalls for capacity resources already built.
All told, say the complainants, this unfortunate beginning to RPM will force PJM-region ratepayers to pay a hugely excessive bill—some $26 billion—to cover adequacy of electric-resource capacity for the delivery period June 2008 through end of May 2011, without really getting much new plant construction for the money.
Of course, PJM knew full well that implementing short forward intervals for the first few auctions was less than ideal, but stressed in the cover letter attached to its August, 2005 RPM application that the early start would “help build confidence in the new capacity market, discourage retirements or mothballing of plants that may be needed, and provide valuable experience in market behavior.”
The July auction, for example, yielded 1,300 MW of new resources, including 536 MW of demand response, plus 2,300 MW of generation added back to the market through the cancellation of planned retirements, or restarting of closed plants. Commenting on the auction, PJM’s vice-president of markets, Andrew Ott reported: “We had new generation enter the auction largely through upgrades to existing units to produce more power. These are the results we intended to see from RPM.”
The buyers also complain of many additional distorting factors they believe have produced high prices that will harm retail ratepayers when it comes time for utilities to pay the bill for all the capacity resources that