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Buyer's Remorse

The PJM complaint and the rising cost of electric reliability.

Fortnightly Magazine - September 2008

additions appear to justify raising the offer cap, and also a derating of capacity output, that would affect the must-offer quantity.

As Lesser notes, installations of FGD equipment (flue-gas desulphurization) using LSFO technology (limestone forced oxidization) “typically have parasitic loads of around 2 percent of nameplate capacity.”

He continues: “If the costs of pollution control equipment are necessary to keep an existing plant in operation and the alternative is to retire … then the costs are avoidable… [T]his is consistent with the Commission’s order concerning capacity market mitigation measures for New York City.” (See, Protest of Constellation, Affidavit of Jonathan Lesser, ¶¶ 13-24, FERC Docket EL08-67, filed July 11, 2008.)

The One-in-Ten Test

When PJM designed its capacity market, it discovered that its traditional installed reserve margin (IRM) of 15 percent (IRM would produce an LOLE (loss of load expectation) of only one outage every nine years. To achieve one-in-ten LOLE, it found it needed to boost IRM to 15.5 percent. Adding in a 1-percent buffer to hedge against the risk that resources might not show up at the tail end of a three-year forward period led PJM eventually to modify its RPM parameters and the shape and plot of the VRR demand curve so that the desired equilibrium point would coincide with an IRM of 16.5 percent.

Moreover, PJM thought it needed to achieve a much stricter standard of one outage per 25 years in each individual LDA pricing zone (such as SWMAAC), in order to keep the outage odds at one-in-ten or lower throughout the entire RTO, as it contains many separate zones. PJM enforced this new standard by adjustments to the zone-specific CETO (capacity energy transfer objective), the amount of transmission capacity needed into each LDA zone to assure compliance with this new one-in-25 test.

To understand why PJM defends a one-in-25 test for separate subzones, consider probability theory. A coin flip carries a 50 percent or one-in-two chance of coming up heads or avoiding tails. Yet if one must try three flips in a row to assure avoiding tails in any single flip, one must multiply the odds, so the chances of avoiding a tail across three successive flips are only one-in-eight, or one-half cubed.

Citing these factors, the buyers complaint points to these oddities and alleges that PJM’s RPM capacity market is actually too reliable—that RPM in effect has led to a certain upward creep in reliability standards, and has raised costs for consumers in a similar fashion. And here the buyers might at last be onto something concrete.

Several months ago, responding to earlier complaints about rising prices, FERC had directed PJM to conduct an internal review of its RPM capacity market. (See, Docket ER05-1410, order issued Apr. 17, 2008, 123 FERC ¶61,037.) Thereafter, on June 30, PJM filed with FERC in the same docket a report conducted by the Brattle Group, which largely endorses RPM as effective, but which in fact also recommends some spots for possible improvement.

Overall, the Battle Report finds that prices in the four transition auctions “have largely followed the pattern