FERC Filings
MOTION FOR LEAVE TO INTERVENE AND COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: RELIANT ENERGY MID-ATLANTIC POWER HOLDINGS, L.L.C. v. PJM INTERCONNECTION, L.L.C.
COMMENTS
EPSA is sympathetic to Reliant Energy Mid Atlantic Power Holding LLC’s (Reliant) April 2, 2003, Complaint against PJM Interconnection LLC (PJM). In PJM, generating units in chronically transmission-constrained areas, like Reliant’s, are subject to the “incremental cost plus 10 percent” mitigation.
As Reliant states in its pleading, the current PJM mitigation methodology for areas with chronic transmission constraints is not a market-oriented approach and fails to adequately compensate units which are dispatched by the RTO out of economic merit order to provide reliability service. While EPSA is not commenting on the merits of Reliant’s specific proposal for its units in Pennsylvania, the complaint raises issues of overriding concern for PJM market participants.
Mitigation that caps costs below long-run marginal costs, or the price of entry as a proxy, dampens price signals, ensuring that the current local resource problems will endure into the future. Even mitigated prices must reflect the appropriate scarcity and reliability value of the generating units that are dispatched out of economic merit order. Without such pricing or some type of locational capacity payment regime, the market does not send the appropriate economic signals to potential new resources – transmission and load response, as well as generation – necessary to alleviate the problem.
Both the Commission and the PJM RTO are focused on the ultimate goal of workable, competitive, wholesale power markets. To achieve this goal, the application of mitigation measures must be carefully designed and implemented to promote competitive markets, rather than a return to the equivalent of cost-based rates and marginal-cost pricing that does not reflect the realities of generating operations. In the end, such an approach is counterproductive and will undermine efforts to achieve competitive markets.
Certain units in PJM are chronically run for reliability purposes at cost-capped prices. The “cost capping” price mitigation allows no opportunity for the units to earn just and reasonable compensation, and there is no locational capacity market to provide adequate cost recovery. Such compensation shortfalls are especially dire due to the frequency of the out of economic order dispatches. If only short-run variable costs are recovered, there are no price signals to the marketplace to provide proper incentives for the development of future resource adequacy or ensure the viability of existing economic generation. To avoid the adverse impact inherent in this approach, any mitigation of the short-term market that employs bid caps or threshold prices must set a cap or threshold that includes all aspects of marginal costs, including long-run marginal costs, scarcity, opportunity costs, risk, transmission constraints and emission offsets, even in peak load conditions. Such mitigation should also provide for fixed cost recovery. Failure to account for all of these price and market factors results in economic inefficiencies and endangers resource reliability and adequacy.
While specific proposals should be developed by market participants, EPSA fully supports the implementation of an alternative mitigation methodology. In its complaint, Reliant offers a solution for the short term in order to help ensure reliability for the 2003 Summer Peak Season. One of the goals of mitigation, however, must be to promote a long-term solution that obviates the need for mitigation. This should be a goal of the PJM Local Market Power Working Group as they continue to work within the stakeholder process to develop a longer-term alternative mitigation methodology. Such an approach should be formula based and market oriented.
The Commission has made clear in the SMD NOPR that “competitive prices over the long run should recover both the fixed and variable costs of efficient generating units.” The NOPR recognizes that even where market power exists, or in PJM’s case transmission is chronically constrained, “the market power mitigation plan should be calibrated so that it does not inefficiently suppress prices, or mask scarcity prices, providing the wrong economic signals for efficient investment or demand response.” Certainly a mechanism that lowers prices to variable costs or to an arbitrarily small adder above such costs is unjust and unreasonable. In such a situation, there are no price signals to the marketplace to provide proper incentives for the development of future resource adequacy or, of immediate concern to PJM, to ensure the viability of existing economic generation - without adequate cost recover, units could shut down. Further, in load pockets mitigation must be focused on solving, rather than perpetuating, the underlying problem. Mitigation measures set below the cost of entry into those markets only perpetuate the problem because the scarcity prices that might bring new entry or maintain existing resources are artificially suppressed.
The Commission reiterates this overarching goal in its recent order on mitigation in the Midwest ISO (MISO). The March 2003 MISO order is clear: “With regard to recovery of costs through scarcity prices, we note that, during shortages, the prices for energy should rise to reflect supply scarcity to encourage reductions in demand and additional investment in supply.” In its discussion of mitigation for Narrow Constrained Areas (NCAs) in MISO in particular, the order states,
Efficient economic signals provide incentive for entry of new units and retirement of costly existing units. However, where existing units are needed for reliability, it is inappropriate to mitigate these units to levels that do not provide the opportunity to recover both their fixed and short-term variable costs.
The PJM mitigation methodology at question in this complaint is unreasonable in that it clearly does not meet these standards because it does not provide revenues sufficient to allow a new resource to enter the market with the expectation of recovering the return of and on its capital investment. Further, it does not provide existing resources with the appropriate opportunity to obtain market-oriented values, does not provide an appropriate market signal for new resource entry and will simply perpetuate rather than solve the constraints experienced in PJM. It is therefore at odds with Commission precedent and the Commission’s goal of promoting robust long-term wholesale power markets.