Commission Watch

PJM would dictate grid expansion, even if not needed for reliability, and then push the cost of the upgrades on those who use them the most.
Fortnightly Magazine - June 15 2003

PJM would dictate grid expansion, even if not needed for reliability, and then push the cost of the upgrades on those who use them the most.

Chairman Pat Wood and his Federal Energy Regulatory Commission (FERC) may well have given up on attempts to impose a standard market design (SMD) on the electric utility industry, but that doesn't mean the nation's grid system operators won't try the same thing.

Witness the PJM Interconnection, one of only two certified regional transmission organizations (RTOs), which has proposed a triple-whammy of three controversial SMD policies that together will out-do anything that FERC has dared to require:

  1. A regional process with total RTO control for planning and construction of so-called "economic" transmission expansion-upgrades not strictly required for the sake of reliability;
  2. Mandatory participant funding for economic upgrades, with costs not rolled in across the RTO footprint, but allocated instead to smaller zones or even sub-zones of customers who benefit most from the upgrades;
  3. Generous rate incentives for the transmission owners who provide grid service and who will collect a "transmission enhancement charge" (TEC) from the beneficiaries of the economic grid upgrades.

PJM acted so as to comply with a series of FERC orders from last fall and winter that had reviewed PJM's draft protocols for transmission expansion planning and had found them wanting for not going far enough to "support competition." So now PJM has come back and has given FERC everything that it asked for-and in spades.

Consider participant funding-the notion of granting financial transmission rights (FTRs) to entrepreneurs who risk private capital for grid expansion, rather than socializing benefits and risk across the larger universe of ratepayers through rolled-in rates. FERC had suggested the idea in its SMD rulemaking, raising the ire of many, even while utilities in the Southeast favored participant funding as a sine qua non of any viable RTO structure.

Now PJM has rekindled the debate, even after FERC's apparent defeat on SMD. Listen to the American Public Power Association:

"The commission's directive … did not require PJM to couple it with a stab at participant funding," writes APPA. The association fears, as do various public power coalitions, that PJM will use participant funding to force costs on transmission-dependent utilities, to pay for upgrades for load pockets that should have been fixed long ago.

APPA even questions PJM's motives for proposing participant funding after FERC's retreat from SMD in its recent white paper:

"This aspect of PJM's filing is either a prohibited attempt to jump the gun … or an effort to sabotage the proposal by attaching a 'poison pill'."

The idea of investment incentives has drummed up a wealth of protest. Just listen to Continental Cooperative Services, Inc. (CCS), an alliance of two generation and transmission (G&T) cooperatives, including Allegheny Electric Co-op. Inc., a utility serving load in PJM West:

EES North America

"The PJM proposal gives it virtually unlimited discretion … Under the April 11 filing in Docket No. ER03-738 [the incentive surcharge], the rate consequences that follow, when transmission development is mandated by PJM, are so dire that … it might be better from the ratepayer's perspective to keep the category of enhancements that PJM can direct as small as possible."

Planning Protocols

With its proposal, PJM would impose a six-step process for deciding when to include an economic grid upgrade within PJM's regional transmission expansion planing protocol, or RTEPP. (Of course, this process would apply only for economic upgrades; not for upgrades needed to maintain reliability.)

  1. 1. Identify unhedgeable transmission congestion. (All hedgeable congestion is left to resolution through market mechanisms.)
  2. Eliminate any de minimus congestion events from step one (those that do not produce a certain "minimum accumulated cost").
  3. For all unhedgeable congestion that passes the step-two trigger, impose a one-year window during which time PJM will invite industry participants to solve the problem with market solutions, such as merchant transmission, distributed generation, or demand-side management.
  4. Study and measure potential benefits of relieving congestion that remains unsolved after step three.
  5. Determine the cost of RTO-mandated transmission expansion necessary to relieve the constraint.
  6. Identify all grid projects with step-four benefits outweighing step-five costs, and add them to PJM's regional transmission expansion plan (RTEP).

PJM explains that where necessary, it will "evaluate multiple hedging vehicles or patterns" and will calculate a weighted average to determine the extent to which a particular congestion event can be hedged. Yet the PJM plan still raises hackles.

Merchant generators such as Mirant accuse PJM of bias in favor of transmission solutions-one that will "quench" opportunities, "precisely where they are needed most," by making merchants wary of trying to compete against RTO-sponsored projects. NRG echoes Mirant's argument that introducing a locational element in markets for installed capacity (ICAP-as in New York) would prop up commodity prices and solve a lot of supposedly unhedgeable congestion.

From the opposite side, Virginia Corporation Commission General Counsel William Chambliss argues that much congestion owes its existence to the unfettered exercise of generation market power. Thus, he sees no benefit from a one-year window for market solutions. Neither does Delaware Municipal Electric Corp. (DMEC), which repeats oft-heard reports of rampant grid congestion across the Delmarva Peninsula.

Representing transmission-dependent utility systems (primarily co-ops and municipal systems), lawyer Susan Kelly of Miller Balis & O'Neil asks whether PJM will evaluate hedgeability on a physical or economic basis. As National Grid points out, any risk can be hedged for the right price.

National Grid then asks PJM whether it would ever treat the high cost of hedging against a particular congestion event as a trigger factor in identifying need for a supposedly unhedgeable economic grid upgrade.

But PJM answered on May 8 that adding the cost of hedging into the mathematical test of whether the upgrade benefits outweigh the avoided cost of congestion would lead to "absurd results" and cancel out the purpose of awarding FTRs to those who create new grid capacity:

"Suppose a load-serving entity [LSE] that faces congestion costs of $3 million per year buys FTRs from a merchant transmission owner for ten years at $1 million per year and that the merchant's line eliminates 95 percent of all congestion for the ten-year period. Thus, the merchant line effectively leaves the LSE with $150,000 per year of congestion [5 percent of $3 million].

"However, if the cost of the LSE's FTRs was included in PJM's cost-benefit analysis … PJM would evaluate economic upgrade options against an annual cost of $1.15 million, rather than against the actual $150,000 per year attributable to unhedgeable congestion. [However] there would be no market response to mitigate the $1 million per year attributable to the LSE's hedge (FTRs) because there would be no need for further hedging [because all hedgeable congestion has already been mitigated] and therefore, no customers for any new FTRs that a supplier could create."

The Delaware municipal utilities find it chilling that PJM must impose top-down planning to save an unhedgeable risk. That suggests, says DMEC, "that the whole locational marginal pricing model [LMP] is flawed and inappropriate for this or any other RTO."

RTO Hegemony?

Jurisdictional questions appear more troubling than simple spats over PJM's six-step planning protocol.

For example, the FirstEnergy subsidiaries Metropolitan Edison, Pennsylvania Electric, and Jersey Central Power & Light (formerly with GPU) argue that PJM (and FERC, too!) lack legislative authority to compel construction of transmission for purely economic purposes, unrelated to reliability. That's so, they say, because the current law and FERC's RTO policies (Order 2000, and so on) envision federal intervention only to remedy undue discrimination under sections 205 and 206 of the Federal Power Act.

APPA agrees with First Energy that RTOs cannot legally sponsor any grid upgrades designed strictly for economic advantage. So does Con Ed, along with Central Hudson Gas & Electric, the New York Power Authority, and other utility transmission owners from New York.

As they explain, RTO relief of so-called "uneconomic congestion" distorts the competitive playing field, directly interfering with manipulating LMP-the core principle of PJM's market.

How can RTOs stay independent if they remain free to manipulate LMP to their own liking? Yet, paradoxically, that seems to be exactly what FERC requires.

As National Grid explains, during the past several years FERC has rejected at least two transmission planning proposals in which the RTO would distinguish between planning for reliability and economics.

Ironically, the consumer advocates for Ohio, Maryland, and Pennsylvania actually prefer that PJM take control over economic grid projects:

"This process," they say, "will offset the self-interest calculation that has provided a disincentive in the past for companies with interests in energy markets to undertake projects that eliminate profitable congestion."

In Brief . . .

  • Gas Hedging Profits. Missouri regulators denied permission to Laclede Gas Co. to retain approximately $4.9 million in proceeds from the sale of call options exercised by the local gas utility as gas prices spiked during the winter of 2000-2001. They found "no reason" to allow the utility to share in "illusory profits" earned in trading at the same time that consumers were forced to pay prices that "soared."
  • Purchased Power Costs. Wyoming regulators turned down a bid by PacifiCorp to employ a series of "excess power cost" surcharges to recover unexpected purchased power costs from the western power crisis of 2000-2001, since the utility had failed to net such costs against prior years with unusually low costs. But they said PacifiCorp could keep proceeds from legal suits for market manipulation. -P.C.

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