FERC Filings
Motion of EPSA for Leave to Intervene Out of Time and Comment on PJM Northern Illinois Control Area Mitigation
Protest
A. PJM’s Application of the Market Power Policy Order Is Improper and Unreasonable
As noted above, the Commission’s Market Power Policy Order was issued on April 14, 2004, three weeks after the order rejecting PJM’s proposed capacity market mitigation scheme for NICA. While the April 14 Order is final, prospective applicants have numerous questions on the data points to be used, how such data can be accessed, and which data is relevant to achieving a reliable finding. Further, the use of the pivotal supplier and market share screens themselves, and their interaction, has been brought in to question by some parties. With all of these issues before the Commission, and seeing the results of the PJM analysis, there is too much uncertainty surrounding the findings in this case to support implementation of additional and egregious mitigation procedures.
Another troubling aspect of PJM’s proposal is its decision to extend market power mitigation over an entire market because one supplier in this case fails one of the two indicative screens intended to be applied to individual applicants. The Commission did not intend for the indicative screens to be used to justify mitigation for an entire market. Further, PJM does not acknowledge that the supplier, who failed the market share screen according to the MMU, now operates in a Commission-approved RTO market and is subject to a Commission-approved mitigation scheme. This, in addition to the MMU’s broad powers to monitor and remedy the abuse of undue market power, is sufficient oversight for that market. PJM has not made an adequate showing that greater mitigation is necessary because they chose to extrapolate that, “[One] supplier, therefore, is presumed to have market power and thus the NICA capacity market is presumptively non-competitive.” The Commission must reject this justification for additional mitigation of the NICA capacity market as it may encourage more regulatory interference over otherwise competitive wholesale markets. If a more surgical approach is appropriate in this particular instance, PJM must offer better justification and an alternate proposal for the NICA capacity market. In fact, given the MMU’s dependence on the April 14 Order, it would seem to be appropriate to consider – as that order provides – that reliance on (existing) mitigation in an approved RTO is sufficient, even when a seller is found to have failed one of the screens, as discussed below.
B. Integration of ComEd into PJM is a Mitigating Factor In Assessing Market Power in NICA
Due to the extensive market monitoring in RTO and ISO markets, and the Commission’s Market Behavior Rules which require compliance with RTO market rules, RTOs create a structural remedy to address market power concerns. The Commission acknowledged this in the Market Power Policy Order, stating, applicants can incorporate the mitigation they are subject to in ISO/RTO markets as part of their market power analysis. For example, if a market power study showed that an applicant had local market power, the applicant could point to RTO mitigation rules as evidence that this market power has been adequately mitigated. We believe the added protections provided in structured markets with market monitoring and mitigation generally result in a market where prices are transparent and attempts to exercise of market power would be sufficiently mitigated. In contrast to other markets, markets with Commission-approved market monitoring and mitigation undertake daily and hourly oversight of seller’s pricing behavior to ensure, consistent with clearly established Commission approved rules, that prices do not exceed competitive levels.
That order goes on to explain that in markets with Commission-approved market monitoring and mitigation, electricity products are often broken up into fungible tradable components with distinct markets such as energy, installed capacity and various ancillary services. This segmentation of fungible products facilitates the development of a competitive market for each of the subcomponents and diffuses generation market power over particular markets.
As the Commission has heard in several forums, the investment community is highly troubled by extensive and pervasive mitigation of markets without a demonstration that market power is being exercised. Regardless, in the organized markets there are complex mitigation regimes in place. The Commission must make note of this reality, and both require a clear demonstration of market power – for specific sellers – and, further, require compelling evidence that current mitigation schemes have proven inadequate as to specific sellers, before approving any additional, “special” mitigation.
The PJM proposal and request for rehearing does not account for the overall RTO market structure and the additional structural assurances that will be realized in the NICA markets. There is sufficient mitigation in the overall PJM market to assure competitive results in NICA. If the MMU suspects anti-competitive behavior such as withholding by a market participant(s), the MMU is fully armed with the capability to investigate quickly and promptly to determine any reasons for this seemingly irrational behavior. Establishing offer caps on the entire market, however, is not the appropriate remedy and does nothing to allay PJM’s concerns with withholding or other market power issues.
C. The $30 per MW-day Offer Cap Is Inappropriate and Does Not Reflect A Competitive Market Price
PJM suggests that the $30 per MW-Day offer cap is reasonable because it represents the “actual [annual] costs of capacity in the context of PJM Capacity market rules” and that it is the “actual avoidable costs associated with maintaining a combustion turbine for a year and thus the cost of capacity for a year”. This assessment of the annual cost-of-service rate for capacity in NICA does not necessarily equal the competitive market rate. Further, the use of a daily cap that is based on an annual cost-of-service calculation is inappropriate in a market that has differing product intervals.
In four of the six capacity auctions that have been conducted in the NICA, buyers have been willing to pay more than PJM’s proposed $30 per MW-day offer cap. While the MMU points to this as exemplifying the existence of market power, it simply reflects the amount buyers have told the market that they are willing to pay in a competitive power market. It is the MMU’s supposition alone that there is market power in this case. For example, the April 20, 2004 NICA capacity auction demonstrates those buyers were willing to pay between $0.53 - $50.00 per MW-day for the June 2004 – September 2004 summer capacity interval. Sellers, on the other hand, offered to sell capacity for that same interval for $32.50 - $43.50 per MW-day. The end result of this auction was that 875 MW cleared at a price of $38 per MW-day for the June 2004 – September 2004 summer interval. On April 29, 2004, another NICA capacity auction was held in the NICA for a July 2004 capacity product. In this case, buyers offered to buy capacity between $26.00-$38.00 per MW-day and sellers offered capacity between $38.00 - $48.75. Interestingly, while there was only 100 MW of demand bid into the auction, there was 900 MW of supply bid in the auction. In other words, there was 9 times more supply offered than there was demand needed. The end result of this auction was that 100 MW cleared at $38.00 per MW-day, clearly a competitive result.
The NICA auctions held so far demonstrate that buyers are clearly willing to pay far in excess of PJM’s proposed $30 per MW-day offer cap during the summer months. Presumably, these buyers expect to benefit from lower capacity prices during the non-summer capacity intervals and have opted to pay more for capacity in the summer intervals to allow them that option. This strategy is a rational approach to meeting load obligations. PJM’s own reserve margin analysis for the NICA estimates that using the 15 percent and 40 percent reserve margins will result in a MW obligation for load that is about 20 percent less over the non-summer period relative to the summer period. Lower load obligations during the non-summer intervals will translate into greater amounts of excess capacity that is available to sell in the non-summer monthly capacity auctions. Greater amounts of uncommitted capacity that can and should be offered into capacity auctions should result in lower capacity prices.
Buyers are not obligated, however, to purchase capacity monthly or even by interval. PJM has structured the NICA capacity market to allow buyers to procure capacity annually, by interval, or monthly. The choice to procure capacity by year, interval, or month appropriately rests with the load serving entities in the NICA. As the auction results clearly indicate, most load serving entities appear to desire to procure capacity for longer durations. As noted by PJM, these longer-term buyers have paid less than PJM’s proposed offer cap without any mitigation. FERC should recognize, then, that approval of PJM’s capacity proposal could reasonably be expected to encourage load to fulfill its capacity obligations on a shorter-term (monthly) basis. This is true because load will have the protection of an annual cost-of-service rate during the months when capacity is relatively scarce (summer) and then be able to rely on market forces during the non-summer intervals when capacity is relatively more abundant. It is inappropriate and bad precedent to approve a market design that allows load to choose between the lower of cost-of-service rates or market prices, even as part of a “temporary” proposal.
D. Over-Mitigation of Capacity Markets is Counterproductive and Counterintuitive to Function of Capacity Markets
FERC has noted in several cases that it is particularly concerned that competitive wholesale markets provide “adequate incentives to attract and retain needed investment as well as rates that are not excessive.” Capacity markets are an essential element of organized markets which provide the opportunity for generators to recover their investments in a price-capped market. They, in fact, act as a foil to pervasive energy price mitigation and a lack of scarcity pricing. Hence, the PJM MMU cannot be permitted to excessively mitigate that very balancing mechanism. In this case, there is inadequate support to treat the NICA capacity market different from the overall PJM capacity market. It is imperative that the Commission recognize the fundamental connection among capacity markets, assurance of infrastructure investment, and the reduction of volatility in spot energy markets. Should this balance be allowed to slip in PJM, EPSA is concerned that there may be unwarranted responsive reactions in other organized markets as well.