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Capacity Roulette

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

Fortnightly Magazine - July 2011

Price Rule, which deters uneconomic, below-cost bidding. (Dkts. ER11-2875, EL1-20, Apr. 12, 2011, 135 FERC ¶61,022.) The commission followed up the very next day with a similar companion order covering New England and its Forward Capacity Market. (Dkts. ER10-787, et al., Apr. 13, 2011, 135 FERC ¶61,029.)

Together these two rulings promise a new paradigm, as FERC itself announced, one that could impose a virtual prudence review of the costs of utility owned generation, conducted by federally regulated transmission grid operators and their IMMs (independent market monitors).

That prospect prompted American Public Power Association General Counsel Sue Kelly to write to FERC to express “deep and abiding concerns.” The MOPR, she wrote, and its companion order from New England, together were being “widely interpreted as showing a fundamental lack of regard for the business models of load-serving entities [LSEs] … and the role of the states in assuring that their own citizens and businesses have access to a reliable and reasonably priced portfolio of electric generation.”

In its key particulars, the MOPR ruling creates a new minimum floor for supply offers that generating plants and other resources (such as demand response aggregators) bid into the PJM capacity market, called the RPM, and eliminates exemptions that previously had sheltered 1) utilities and LSEs planning their own new resources (self-supply) to satisfy resources adequacy rules, and 2) other bids from planned new resources developed in response to a state regulatory or legislative mandate to resolve a projected capacity shortfall. (See, “ State’s Rights, Gamed Markets ,” Fortnightly’s SPARK.)

Also, the MOPR rule applies only to newly planned resources bidding for delivery into transmission-constrained areas, and then primarily to simple-cycle and combined-cycle gas-fired turbines. It won’t apply to wind, solar, nuclear, or coal-fired units, or to IGCCs (integrated gasification, combined-cycle gas-fired turbines), as FERC felt that such resources wouldn’t likely serve as convenient vehicles for price manipulation.

But even more important, the MOPR order defines this new bid floor in terms of a unit-specific cost-indexing benchmark, to be developed by PJM and then applied case-by-case by its independent market monitor (IMM) to specific categories of resources. That means that a utility directed by its state PUC to develop and build a particular portfolio of generating resources to self-supply capacity to provide for resource adequacy could see its bid disallowed, with its resource failing to clear in the regional capacity market, thus forcing the utility to cover the shortfall and purchase third-party resources at the clearing price—in effect paying twice over for capacity—if the IMM should find that the utility’s proprietary, self-supplied resource isn’t uneconomic and uncompetitive (“out of market,” or OOM), when measured against other units of the same asset class.

And the New England order does much the same for the region’s FCM construct.

As explained by attorneys Scott Strauss and Jeffrey Schwarz (Spiegel & McDiarmid), representing New Hampshire Electric Co-op, and Massachusetts Municipal Wholesale Electric Co., the April 13 FCM order announces for the first time that new self-supplied resources that meet the relevant technical and locational criteria “may nonetheless fail to clear,”