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Buyer's Remorse

The PJM complaint and the rising cost of electric reliability.

Fortnightly Magazine - September 2008

must prove that sellers wielded market power by withholding capacity and manipulating prices, or that PJM’s market-mitigating offer cap, purportedly set at avoidable cost, was not working. Nevertheless, it appears that PJM’s defenders have come up with explanations that dispel these claims.

As the complaint alleges, suppliers bidding in SWMAAC BRA 1&2 offered only 300 MW at prices exceeding $125, but in BRA 3 offered some 3,600 MW at $125 or higher, with a third of such bids coming in at prices above $225, which helped push the clearing price to $237.33/MW-day, along with the fact that offered capacity actually declined by 750 MW in SWMAAC in BRA 3, a fact the buyers ascribe to “deratings of existing units, rising outage rates at existing units, and only 32 MW of new capacity.”

The buyers state further that in BRA 4 (for delivery 2010-11) the same capacity cleared “with offers at or below the RTO-wide clearing price of $174.29. The buyers then argue that if the PJM MMU had capped offers at avoidable cost, as it was required to do, then “those same generators could not have made their much lower offers for 2010-11 without risking significant losses.” The buyers claim that generator manipulation of outage rates (affecting availability factors and the must-offer quantity), plus artificial inflation of avoided costs through an unwarranted inclusion of long-term capital investments, also played a role in distorting bids and clearing prices.

These allegations bear some explaining.

The RPM rules provide a market screen that requires mitigation by capping bid offers at avoidable cost under several different scenarios, such as if any three suppliers taken together are pivotal, meaning that their resources are needed to clear the market. And, since this three-pivotal-supplier (3PS) test was failed in each auction and in each zone, RPM mitigation rules kicked into to cap all offers at avoidable costs—defined in the tariff as “the costs that a generation owner would not incur of the unit did not operate for one year.”

(Note, by the way, that FERC recently opened an investigation to consider possible alternatives to the 3PS test, after finding that it can be triggered “too frequently” to be just and reasonable. See Docket EL08-34, Order issued May 16, 2008, 123 FERC ¶61,169. )

Nevertheless, these claims appear to wither under the testimony of Jonathan Lesser (an economist with Bates White, LLC), submitted on behalf of Constellation. Lesser points out that the apparent deratings and capital infusions followed directly from passage of the Maryland Healthy Air Act. As Lesser explains, the HAA is a “do-or-die” law that does not permit covered facilities to mitigate emissions through a trading of allowances, but that will require actual physical reductions of mercury, SO 2 and NOx, effective Jan. 1, 2010. Thus, as Lesser reports, Constellation and Mirant (each owning 3 plants covered by HAA) have announced spending programs of about $1 billion each to achieve compliance.

RPM rules allow gen-plant owners to include capital expenditures in “avoidable costs,” on the theory that plants would have to be mothballed without such investments. Moreover, such