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Buyer's Remorse

The PJM complaint and the rising cost of electric reliability.

Fortnightly Magazine - September 2008

cleared in the four transitional auctions:

Monopolistic Structure . Concentration of plant ownership in a few hands, allowing plant owners with large portfolios to withhold some resources from bidding to push up prices for other assets sold into the auction. Also, too steep a vertical slope for RPM’s administratively determined demand curve (the variable resource recovery curve, known as VRR), that helped to reward large-scale suppliers for withholding bid offers.

Suspicious Bidding . Bids in certain zones (Eastern & SW MAAC) that fluctuated widely from auction to auction, casting doubts on effectiveness of price mitigation by PJM’s market-monitoring unit (MMU), which purportedly capped all offers at avoidable cost.

Manipulation of Outage Rates . Faulting PJM’s special rule known as the EFFORd offer segment (equivalent forced outage rate-demand), which allows a supply bidder to hedge the risk of higher outage rates in the forward delivery year (increasing the must-off obligation) than in the year prior to auction.

Faulty Offer Caps . Inordinate emphasis on avoided costs of gas-fired, simple combustion turbines as proxy to calculate hypothetical CONE value (cost of new entry). Resources clearing the auctions included incumbent coal-fired plants and demand response. Also, use of outdated figures for the E&AS revenue offset in calculating net CONE for building a new simple gas turbine, net of yearly revenues for sales of energy and ancillary services. Plus, allowing suppliers to boost avoided costs by adding in long-run costs of certain capital expansions under RPM’s special APIR rule (avoidable project investment recovery rate).

Queue Delays . Slow turnaround in processing applications to connect new projects with the grid (as shown by the complaint filed by Dominion, FERC Docket EL08-36 , filed Jan. 28, 2008), tending to boost auction prices by limiting the pool of new resources.

Restrictions on Self-Suppliers . Lack of flexibility in RPM rule that limits MW-capacity that can be bid into the RPM by utilities (such as American Electric Power) choosing to supply their own capacity requirement (or purchase bilaterally) instead of buying through RPM auctions, under the FRR option (fixed reserve requirement).

Excessive Reserve Margins . Unwarranted increase in target IRM to 116.5 percent (installed reserve margin, where price along the VRR curve equals 1.5 x Net CONE), in order to achieve a one-in-ten reliability. Also, unjustified goal of one-in-25 reliability standard for LDAs (local delivery areas), representing RPM auction pricing subzones within PJM, such as EMAAC or SWMAAC.

On the strength of these allegations, the buyers ask FERC for refunds reflecting a hypothetical do-over of the transitional auctions. As the buyers see it, an honest price for electric capacity in today’s world ought not to run any higher than $100/MW-day, which represents a rough approximation of the average capacity clearing price for the “rest of RTO” zone in BRA nos. 1-4. Starting from there, the buyers would set just and reasonable capacity prices for the four transitional auctions based on a graphic “straight-line interpolation,” beginning with $40.80 for 2007-08, and ending with $100/MW-day for 2011-12. (See Table 1, RPM Auctions; Selected Zones.)