FERC Filings
Motion for Leave to Intervene and Protest of EPSA re: PJM Interconnection, LLC
Comments
EPSA filed comments in the Reliant complaint proceeding which instigated this filing to highlight concerns with the “incremental cost plus 10 percent” mitigation of generating units in transmission-constrained areas. Specifically, such mitigation is not a market-oriented approach and fails to adequately compensate reliability units frequently called out of economic merit order. Noting that, EPSA has the same concerns with this model and refers the Commission to its comments in the initial Reliant Complaint. While the instant PJM filing offers some modifications, in essence, the “cost plus 10” methodology remains and the modifications provided, such as eliminating the post-1996 units’ exemption for the cost-capping mechanism, are not acceptable and will do more harm than good.
As to the changes offered in the instant filing, the proposals are marked by a troubling lack of detail or specificity, and did not in fact pass a PJM Member Committee vote. Further, the auction process and offer-cap elimination in localities deemed competitive institute processes or evaluations which inappropriately allow the PJM Market Monitor unfettered discretion over aspects of the market due to the lack of specificity of the processes and the Market Monitor’s responsibilities. These two overriding concerns handicap the PJM filing to the extent that the Commission should dismiss the filing at this time. As the Commission has already done for the Midwest ISO, and has just directed for the California ISO, a technical conference should be held to thoroughly consider PJM’s local market power mitigation within the context of its particular market design and circumstance.
A. PJM’s Current Mitigation Program Remains Problematic
The instant filing, while filed as an amendment and referred to as modifications or enhancements to the current rules, does in fact largely rely on maintaining the current local market power mitigation regime. In fact, since neither the auction nor the suspension of capping provisions are applicable to any existing situation, the proposal is essentially a continuation of the status quo. This reliance on the marginal cost plus 10 percent rule does not allow units adequate compensation for reliability must-run (RMR) services. By design, this program keeps incentives tied to location out of the market. Finally, is does not get the results that FERC has repeatedly outlined, where “there are both adequate incentives to attract and retain needed investment as well as rates that are not excessive,” Simply put, the Commission would achieve rates that are not excessive but that do not have the incentive to attract and retain needed investment.
The Declaration of Joe Bowring and the PJM filing each state that the current PJM local market power rules does not result in inadequate compensation for existing generating units. However, this is contrary to the previous admissions that such mitigation is not compensatory and is belied by the implementation of an Interim Solution to provide adequate compensation for the 2003 summer peaking season. In any event, the explanation here is neither compelling nor convincing. Market Monitor Joe Bowring states,
Capping units with local market power at marginal cost plus ten percent based on the current PJM rules is both compensatory and consistent with a competitive outcome when there is no long-term scarcity. There is no market or reliability based reason to implement a proxy method or, in fact, any method that increases the level of the offer caps.
Bowring states that an offer of marginal cost plus ten percent “reasonably reflects the level to which a unit in a competitive market would offer its energy for sale.” But a market is not dictated by an administratively set price, especially in times of scarcity. If a unit is called out of economic merit order, there is scarcity present and prices must reflect that. Bowring does not offer a long term path to eliminate either the need for the market power rules for the designated area or unit, or explain how the market may respond with needed investment to achieve a competitive solution to the imposition of market power mitigation. Rather, the proposed revisions constitute an unwarranted
intervention in the market designed simply to achieve a regulatory driven objective of lower generation costs in lieu of allowing market signals to provide the necessary means to encourage the efficiency of competition.
B. The Filing Is Not Responsive to FERC’s Directive
Both Reliant and the Commission’s previous and presumably continuing concerns lie with PJM’s current offer-capping methodology. PJM deflects this concern, however, by offering an auction to handle “future” long-term scarcity, “should such a condition arise.” Regardless of the merits of the auction, as the centerpiece of the modifications proposed, it serves as a diversion of sorts. The PJM filing states, “in response to the Reliant Order…PJM has determined that modifications to its local market rules are appropriate to effectively address long-term scarcity,” and goes on to declare that there currently is no long-term scarcity in PJM. This is not responsive to the current problem of adequate compensation for must-run services in PJM load pockets.
Further, the Commission asked PJM for justification for its existing tariff should the ISO believe that the existing tariff provisions are adequate. PJM simply states, “The existing offer-cap mechanisms currently effectively address local market power.” If this is the case, greater analysis and justification is required to support that claim. EPSA contends that any mitigation that relies on marginal cost plus ten percent is not adequate compensation for reliability services. The PJM proposal ignores recent orders in both the New England and New York ISO that have moved towards scarcity pricing objectives and the determination of locational capacity costs that are appropriate in designated load pockets. PJM’s assertions that its current methodology adequately compensates RMR units are belied by the fact that there was a need to institute an Interim Solution for the 2003 summer peak season, and why the LMPMWG has met bi-weekly for over a year to develop a long-term local market power solution. Furthermore, the fact that PJM is now proposing that long term scarcity will be solved by an auction for new resources, the timing of which, the solicitation of which, and the evaluation of which are all to be determined at the discretion of the PJM Market Monitor, is the most obvious evidence that the cost capping is not adequately compensatory. If it were adequately compensatory, it would create on its own the market price signals necessary to incentivize new infrastructure among market participants without the command and control approach embodied in the auction process.
To further complicate matters, PJM has parsed the term scarcity to muddy its meaning, the market situation in which it occurs, and the type of measures necessary to address it while protecting against local market power. This complication draws arbitrary and unfounded distinctions that further hinder the PJM proposal. PJM’s distinction between long-term and short-term scarcity is not present in either the FERC Reliant Order or PJM’s own answer to the Reliant complaint. This distinction again deflects attention away from the problem at hand, as there is scarcity present when a generation unit is called out of economic merit order. If a unit is called out of economic merit order repeatedly, there is a problem with the market, be it generation or transmission, that needs a solution. Neither PJM’s current or proposed revised measures offer an acceptable solution to those issues.
Further, just because there is not physical scarcity of capacity, it does not follow that there is not scarcity of economic capacity. Aggressive mitigation such as the cost plus 10percent method may depress LMP such that appropriate economic generation (or transmission, merchant or regulated) will not be built in needed locations. It is this situation that the Commission sought to address in the Reliant Order, citing to the Market Monitor’s own testimony “that PJM itself has recognized that its current provisions may not be the most appropriate mechanism for providing recovery to RMR units, particularly as they relate to scarcity pricing.” In response, PJM interprets the directives from FERC to apply to solving scarcity alone. It then addresses in its proposal only long-term scarcity, which, according to PJM, doesn’t exist because, in PJM’s view, all capacity is fungible and there is currently an overbuild situation.
The Commission Order states, however, that PJM “should re-examine its mechanism to ensure that it is providing appropriate compensation for mitigating market power for must-run services.” Instead, PJM simply asserts that because short run marginal costs offers are rational in a competitive market (except when scarcity conditions exist), they are the only basis for competitive short term offer caps. The Commission is not concerned with scarcity conditions alone, however, and in any event PJM has misinterpreted scarcity conditions.
While the Commission has asked PJM to “include in its tariff filing or report this more comprehensive analysis” of which plants are needed for reliability and how those units do so (as important support for the development of a long-term solution), PJM instead offers new processes in which such decisions and analysis will be left entirely to the Market Monitor. When and how this will occur is not clear.
C. The Filing Improperly Dissects the Voting Process and Results
Beyond this troubling lack of focus on compliance with the Order and the lack of detail in the proposed mechanisms, the filing contains a lengthy diatribe dissecting the stakeholder vote on the proposed new rules. Over the course of three pages, the 62.5 percent vote to support the rules is broken down on a weighted-basis by sector, on a percentage basis within each sector and on the basis of MW capacity owned by each voting entity. This “narrow” defeat is characterized by PJM as de minimis in terms of the lack of support for the proposal. However, the fact of the matter is that the proposal did not pass the stakeholder process and the PJM Board was required to go forward by filing the amendments under section 206 of the FPA. As PJM explained in great detail in its answer to Reliant’s initial complaint, section 206 filings must meet an arduous burden of proof, and EPSA maintains that PJM has likewise failed to meet this burden in its own section 206 filing.
Further, EPSA is troubled by PJM’s attempts to re-categorize the PJM voting entities. PJM’s post mortem analysis is inappropriate and misleading as it suggests that all those who opposed the filing were generators or companies voting only their generation interests. This is untrue. It is inappropriate for PJM to read the minds of companies, especially when it results in a mischaracterization of voting motives. This is self serving, and misguidedly intended to recast a losing MC vote as a winning vote. Frankly, the stakeholder process is damaged by the approach utilized by PJM in this filing. It is, perhaps, precisely because the Commission specified in the Reliant Order that it prefers to see “a proposal that represents stakeholder input and acceptance” that PJM goes to such lengths to justify its filing, which did not pass the Members Committee in a vote. It is in the best interest of all market participants for FERC to dismiss this filing without prejudice and convene a technical conference to consider the issues of PJM’s market power.
D. Local Market Auction and Offer-Cap Suspension Marred by Unfettered Discretion by Market Monitor
It is admirable that PJM proposes to suspend offer-price-capping in load pockets that are deemed competitive, following the lead of the ISO New England by differentiating competitive and non-competitive localities, then requiring different levels of market interference in each instance. However, how PJM will deem a load pocket to be competitive remains murky and needs a great deal more detail in order to be assessed. The filing states, “The Market Monitoring Unit (MMU) will determine the competitiveness of supply in a load pocket.” While one barometer is outlined (and is in fact only a guideline, not a test) – the presence of four or more pivotal suppliers – the remaining evaluation process remains ill-defined, opaque and overly discretionary. In the Market Monitor’s own words,
If more than three suppliers are pivotal, the automatic application of local market power mitigation could be suspended, subject to MMU analysis. Analysis would be required to verify that structural conditions are consistent with competition and ongoing analysis would be conducted to verify that bidding behavior is competitive.
This MMU ‘process’ appears to be entirely discretionary. There must be a clearer, more well-defined, transparent analytical process so that market participants may rely on the findings of the MMU and may predict the market situation in which they conduct PJM business.
This same over-reliance on the Market Monitor’s discretion mars the competitive Local Market Auction proposal as well. While the establishment of an auction to solicit economic and competitive options to meet reliability needs is reasonable, as outlined, the auction is unacceptable as it is virtually a one-person show. While PJM recognizes that certain auction details still need to be developed, the auction has the following specifications:
• An auction is held when deemed necessary by the Market Monitor;
• Once completed, the Market Monitor may deem the auction results “non-competitive,” at which point no auction offer may be selected, a new auction may be held, or a transmission alternative stemming from the Regional Transmission Expansion Planning Protocol (RTEPP) may be selected;
• PJM can decline to hold an auction if a transmission option can be directed under the RTEPP when that option is obviously the cheapest solution.
Each of these auction tenets is highly discretionary, as the Market Monitor decides when an auction is called, if the alternatives offered are competitive, whether the auction should stand, be re-done or cancelled, and if a transmission alternative that can be directed by the ISO is preferable. Market participants cannot partake in an auction so loosely defined and discretionary at every stage of the process. While the auction proposal and suspension of the offer cap each are designed as measures for mitigating local market power, the Market Monitor is granted unfettered discretion in each case. PJM must take a step back and better clarify the role of the Market Monitor and the rules by which the Market Monitor operates.
As a collateral matter, the Local Market Auction proposal even blurs the line between the MMU and the RTEPP. It is unclear how the auction and the planning process will interrelate, and how the Market Monitor will be integrated into the planning process (and vice versa). The filing states that the planning process will act as a backstop to the auction, but it is not clear if economic transmission upgrades stemming from that process can partake in the auction, if they may replace alternatives which emerge from the auction, or if they function only as an alternative to the auction. Further, are economic upgrade products allowed to compete in each process, and will the Market Monitor have any role in the regional planning process? All of these interactions and details must be better vetted before the auction proposal can be considered properly by market participants or the Commission.
E. Post-1996 Units Must Remain Exempt to Offer Capping
While the PJM filing states that it proposes to eliminate the exemption of post-1996 units from the offer-capping provisions, the Market Monitor explains in his declaration that,
The PJM proposal would apply the modified local market power mitigation rules to all units, while recognizing the special circumstances associated with units for which construction commenced between July 9, 1996 and September 30, 2003…[It is] fair to consider the situation of the individual post-1996 units built with the reasonable expectation that the exemption would apply. The MMU is in the process of approaching owners of [those] units to develop an approach to mitigation…
PJM has not demonstrated that its current mitigation proposal is appropriate for existing facilities, much less for new facilities. FERC wisely exempted new units from mitigation in its original approval of PJM’s market design, and investors must be assured that they can rely on the continued application of existing rules. To change the rules relied upon at the time of construction changes the established regulatory regime upon which investment decisions were made (thereby creating a loss of investment value), and would have a chilling effect on future construction. The prospect of limiting future earnings to short run marginal cost plus 10percent creates an effective and perverse barrier to future entry.
Further, procedurally a Section 206 filing requires the applicant to first show that an existing rate or rule is unjust and unreasonable, thereby opening the door for a proposal of a reasonable alternative. PJM has failed to show that the post ‘96 unit exemption is producing unjust and unreasonable results and, hence, has failed to meet its burden for this change. FERC must reject the proposal to expand a deficient cost plus 10 percent mitigation design to post ’96 units.