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Capacity Roulette

Out of market means out of luck—even for self-supply.

Fortnightly Magazine - July 2011

of utility LSEs—especially the problem of self-supply failing to clear the auction, and whether FERC might develop an optional, less administratively burdensome form of MOPR exception, focused not on inflexible cost benchmarking, but on whether a new gen project relies on improper subsidies, discriminatory payments, or some other form of revenue support that suggests a real intent to suppress prices.

This last idea evoked a similar gen industry proposal from P3 known as the “No Subsidy Off-Ramp,” which FERC summarily rejected in its April 12 order.

But in mid-May PJM went even further, submitting a draft RPM tariff to comply with FERC’s MOPR order that seemed to tilt so far in favor of traditional utilities as to conflict outright with FERC directives.

In setting guidelines for screening below-cost offers by utility self-suppliers, PJM outlined all the different types of supporting documentation it would need to evaluate whether a sell offer should qualify as competitive, but said that wouldn’t amount to conducting a “rate case,” or divining a just and reasonable rate.

Yet PJM promised to credit cost advantages resulting from the seller’s business model, financial condition, tax status, or access to capital, and thus “would not second-guess, or look beyond, an attractive cost of capital enjoyed by a seller simply because it is a franchised public utility in jurisdictions with traditional retail rate regulation, or part of a utility holding company with a large balance sheet and high credit rating.” (PJM Interconnection, Revisions to Open Access Tariff, Transmittal Letter p. 10, Dkt. ER11-2875, filed May 12, 2011.)

What now of the equal playing field for merchant generators?

No wonder that independent market monitor Joseph Bowring (president, Monitoring Analytics) protested outright on June 2 that such clarifying language from PJM “is not required by, and does not fall within the scope of compliance with the April 12th Order.”

Within two weeks FERC was entertaining second thoughts. (See Order Granting Rehearing, June 13, 2011, 135 FERC ¶61,228.) And in a clear sign that the wheels had run off the tracks, FERC called for a staff-led technical conference within 45 days to explore issues arising from widespread industry concern that self-supply sell offers would be held subject to the risk of mitigation under the minimum offer price rule.

Why wasn’t that technical conference held before handing down the order?

A ‘Death Sentence’

Judging the merits of different financing arrangements could prove especially difficult for market monitors.

Hess Corp., one of the three developers (after CPV and NRG) that answered the New Jersey RFP for low-cost capacity, urged reliance on a standard reference financing structure, rather than allow project developers to put forth individual financing structures for evaluation.

As Hess explained, by knowing where the project costs need to be to clear the RPM market, a developer can engineer an attractive bilateral arrangement with a highly capitalized parent or partner. By producing favorable financing costs, says Hess, this out-of-market bilateral contract “would have the effect of lowering the project’s minimum bid offer and greatly enhancing the project’s ability to clear.”

This creative contracting, Hess added, “is