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Partnership, Not Preemption

How state-sponsored planning can fit with FERC’s capacity markets.

Fortnightly Magazine - December 2013
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price for capacity in Maryland is $180/MW-day. Under the contract for differences, the Maryland ratepayers would pay the generator $20/MW-day and purchase capacity from PJM at $180/MW-day.

Now assume, in the alternative, that the winning bidder is located in western Pennsylvania, outside of the constrained region, where the clearing price for capacity is $120/MW-day. Under this scenario Maryland ratepayers again would have to cover the rest of the guaranteed contract for differences price, now $80/MW-day. In addition, because of constraints, the capacity of the western Pennsylvania generator isn’t actually serving Maryland load under PJM rules. Since the new generation is no longer in Maryland, the area must turn to higher-cost resources, raising the clearing price for capacity in Maryland to $195/MW-day. Thus, Maryland ratepayers pay a total of $275 – the $80 payment under the contract for differences plus the $195 capacity price. In this scenario the Maryland ratepayers pay for a resource in Pennsylvania that they don’t see the benefit of. This result could have been avoided simply by requiring the resource to locate in Maryland. 

States must be allowed to respond to the PJM and FERC rules that create the incentive to locate capacity where it’s needed most so the states can avoid forcing its ratepayers to pay too much for capacity. The states are only playing by the rules that FERC created. 

While the courts have, for now, accepted the plaintiff’s arguments, we hope that all parties will understand the risks that states face. States are in the best position to judge the risk tolerance of their ratepayers and each state can make its own assessment of how much to pay to mitigate the risks it faces.

States of course will take different paths. Massachusetts – faced with circumstances similar to those in Maryland and New Jersey – recently decided not to conduct a long-term capacity procurement. 47 More broadly, because of such difference among states, allowing the states to use long-run capacity procurements tied to resource planning will ultimately give America what it needs most: a diversified portfolio of resources to address the major uncertainties we face going forward as a nation.

 

Endnotes:

1. “Memorandum of Decision,” Case 1:12-cv-01286MJG , In the U.S. District Court for the District of Maryland, Sept. 30, 2013; “Memorandum,” Civil Action No. 11-745 , In the U.S. District Court for the District of New Jersey, Oct. 11, 2013.

2. “Memorandum of Decision,” Case 1:12-cv-01286MJG , In the U.S. District Court for the District of Maryland, Sept. 30, 2013, 111-112; “Memorandum,” Civil Action No. 11-745 , In the U.S. District Court for the District of New Jersey, Oct. 11, 2013, 54.

3. “Memorandum of Decision,” Case 1:12-cv-01286MJG , In the U.S. District Court for the District of Maryland, Sept. 30, 2013, 113; “Memorandum,” Civil Action No. 11-745 , In the U.S. District Court for the District of New Jersey, Oct. 11, 2013, 64-65.

4. P.L. 2011, Chapter 9 (§§1,3,4 - C.48:3-98.2 to 48:3-98.4 §5 - C.48:3-60.1; LCAPP Law), Senate and General Assembly of the State of New Jersey, Trenton, NJ, Jan. 28, 2011.

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