(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.
all this really make for a $26 billion mistake? Opponents say the buyers are asking FERC to pull prices out of thin air. They point out, for example, that stakeholders designing New England’s FCM set the initial price floor at $4.50/kW-month ($148/MW-day). And FERC just recently allowed the New York ISO to boost the CONE value in its ICAP market by a 7.8 percent escalation factor for delivery years 2008-09 through 2010-11, reflecting a 5.1 percent rise in plant construction costs (Handy-Whitman Index) plus 2.7 percent for general inflation. (See, Docket ER08-283, Jan. 29, 2008, 122 FERC ¶61,064.)
In its 2007 State of the Market Report, PJM’s Market Monitoring Unit (MMU) reported that for the nine-year period immediately preceding RPM’s launch (1999-2007), average yearly net revenues from economic dispatch for power plants serving PJM fell way short of covering 20-year levelized fixed costs for power plants of all types: including not only simple-cycle gas turbines (CT) but also combined-cycle turbines (CC) and pulverized coal fossil units (PC):
• CT: $32,200 vs. $75,200;
• CC: $61,000 vs. $99,700; and
• PC: $165,000 vs. $231,700.
Robert Stoddard, who heads the energy and environment practice at CRA International (formerly Charles River Associates) followed up on that fact in testifying for the PJM Power Providers Group in comments filed opposing the complaint. Stoddard defends the $26 billion invoice as a pretty reasonable ballpark figure for the cost of resource adequacy in PJM. (See, Answer of PJM Power Providers Group, Attachment A, Affidavit of Robert B. Stoddard, FERC Docket EL08-67, filed July 10, 2008.) He writes:
“First, using a very conservative replacement cost of $800/kW, the value of the PJM capacity resources exceeds $100 billion; annual depreciation alone likely exceeds $4 billion; this figure includes no allowance for any return on equity or payment of debt costs.
“In this context, capacity charges of $4.3 billion for the 2007-08 delivery year, rising to $8.4 billion for the 2010-11 delivery year, appear economically reasonable as return on invested capital for the fleet.”
Money Already Spent
The smart money would expect FERC to deny the buyers’ complaint. As seen from industry comments filed at FERC through the end of July, the overwhelming sentiment sees the complaint as an unlawful collateral attack on PJM’s RPM market, since many of the complainants actually signed off on the final settlement approving the rates. The complaint appears also to violate the filed-rate doctrine; opponents cannot sign on to RPM and then later repudiate its auction-derived prices as excessive, since, in effect, it is the algorithm itself that stands as the rate—not the dollar prices that flow from the auction.
Many argue as well that the rule against retroactive ratemaking also bars the action, since the buyers filed their complaint after the four transitional auctions were completed. Legal precedent holds that the liability to pay the capacity prices became fixed when PJM established the auction parameters, even though the auction’s capacity buyers need not tender payment until the delivery year rolls around. In fact, FERC already has ruled that Duquesne Light could not escape liability