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Parochial Power Play

Northeastern politicians declare war on capacity auctions.

Fortnightly Magazine - February 2011

rising costs. “Economic theory would say that if you’re making a handsome profit over time, new entrants will come in and bring that price down,” says Susan Kelly, vice president of policy analysis and general counsel at the American Public Power Association. “That’s the whole idea of competition over time, but we’ve documented that it’s not happening.”

Specifically, in locations like New Jersey, Maryland and Delaware, clearing prices for capacity in the 2013/2014 PJM auction—the Reliability Pricing Model (RPM)—were 10 to 15 times higher than they were in western PJM. Yet new generating capacity hasn’t been built in Jersey or Maryland for several years—and not for lack of trying by companies like LS Power and CPV.

On the other side of the debate, price disparities across the PJM region simply reflect the forces of supply and demand within a capacity-constrained market. And in point of fact, PJM instituted locational pricing in its RPM base residual auction just two years ago—for the 2012/2013 delivery year. So it’s a little premature to say RPM isn’t attracting new power plants to the right locations. But even so, the fact that power plants haven’t been built in some states is irrelevant, because locational clearing prices are rewarding economic dispatch on a regional basis, across the PJM network.

What’s more, capacity prices are attracting investment in the lowest cost resources— e.g., demand response (DR) and efficiency—to alleviate locational constraints. PJM says RPM auctions have brought at least 13,700 MW of DR and efficiency resources into the mix (see Figure 3 ).

Further, proponents of capacity auctions argue that locational price disparities are appropriate, given the vastly different characteristics of urban load centers in the Northeast and the sparsely populated prairies of the Midwest. Over time, those disparities should diminish, as long as the market remains transparent.

And there, of course, is the rub.

Whether we believe in competitive markets or not, we might never know for sure whether markets are allocating resources efficiently, or whether they’re producing just and reasonable rates. Because the markets really aren’t transparent. They never have been and they never will be.

Clear as Mud

Despite all the laudable efforts of RTO architects, even our most sophisticated organized markets bear a heavy mantle of legacy regulation, policy priorities, and vested interests.

Electricity might be tradable as a basic commodity, but the business of owning and operating power plants and transmission lines is anything but simple. These are massive assets with complex technologies, huge costs and environmental footprints to match. As such, it’s naïve to think they’ll ever be separated from regulatory policies—or parochial politics like what we’re seeing in New Jersey and Maryland.

And make no mistake, parochial politics are driving the debate in those states. In particular, the New Jersey legislation seems like a case of unabashed pork-barrel politics, with the bill’s sponsor being none other than state Senate President Stephen Sweeney, whose home town of West Deptford would host LS Power’s proposed 650 MW combined cycle project. Beyond that, though, the lawmakers pushing both policies are demanding new construction