Wednesday, January 23, 2019

FERC Sides with PJM on Capacity Performance Transition Auctions

Bay Dissents, Laments ‘Flawed Design’

By Michael Brooks

FERC on Tuesday rejected complaints from NextEra Energy and Direct Energy seeking to change the way PJM conducts its incremental capacity auctions to transition to its new Capacity Performance product (EL15-88).

The commission found that the companies failed to show how PJM’s clearing methodology for the auctions was inconsistent with the RTO’s Tariff and that their proposed alternative plan “relies on a complicated and untested algorithm to clear the capacity markets.”

“Implementing an untested alternative proposal would require other changes to either PJM’s market design or [Tariff] in order to be justly and reasonably implemented, and therefore complainants’ alternative clearing methodology cannot be said to conform to the [Tariff] itself,” FERC said in its order.

The transition auctions are being held to procure Capacity Performance resources for delivery years 2016/17 and 2017/18. PJM ran the first Base Residual Auction, for 2018/19, under the new product earlier this month. (See PJM Capacity Prices Up 37% to $165/MW-day.) It allows capacity resources to receive higher prices in exchange for taking on more responsibilities and stiffer penalties for non-performance.

Under the rules of the transition auctions, participation is optional, and market participants may offer all or part of resources that were committed under the BRAs for those years as Capacity Performance resources. If cleared, the Capacity Performance commitment would replace the old one and participants would receive the new, higher price.

Incremental Costs

NextEra and Direct Energy argued that this methodology would result in increased costs, in violation of both PJM’s Tariff and FERC’s order authorizing Capacity Performance, which the companies said directed the RTO to procure capacity resources using the “least-cost solution.”

The companies said that in order to do this, PJM needs to take into account the results of the BRAs for 2016/17 and 2017/18 when selecting offers. Rather than simply selecting the lowest price, they suggested that the RTO base its selection of resources on the lowest incremental cost — the difference between the new Capacity Performance price and the price under the original BRA. (See table below.)


Direct Energy and NextEra Energy proposed an alternative clearing methodology for the transition auctions in which PJM would select resources based on the lowest incremental cost (the Capacity Performance price minus the original BRA price), and not simply on the lowest new price.

FERC disagreed.

The RTO’s Tariff does not “require PJM to minimize costs by taking into account existing capacity revenues for the delivery year or other savings in determining the lowest price at which to clear an auction for Capacity Performance products,” the commission said.

FERC also insisted that ordering PJM to revise its methodology now would delay the transition auctions and reduce the amount of time that generators have to install upgrades needed to meet Capacity Performance’s more stringent requirements.

The commission issued its order the day before the first transition auction began. Results for this auction were released on Monday. (See related story, PJM 2016/17 Transition Auction Clears at $134/MW-day.) The second auction will be Sept. 3-4, with results posted on Sept. 9.

Bay Dissents — Again

In a dissent, FERC Chairman Norman Bay agreed with the companies. He said that the transition auctions allow the RTO to avoid making payments it would otherwise make and, in turn, save consumers money.

Bay illustrated NextEra and Direct Energy’s argument with an example of two hypothetical companies, A and B, that are entitled to receive $120/MW-day and $60/MW-day respectively as a result of the BRA. They both bid in the transition auction at $140/MW-day and $100/MW-day respectively. As PJM is required to accept the lowest bid, it takes company B’s bid, resulting in a $40 increase in the price, as opposed to a $20 increase had company A’s bid been taken.

Bay argues that because both companies are offering the same Capacity Performance product, “it simply permits consumers to be charged more in exchange for no additional benefit.” He lamented that “PJM’s methodology ignores the value of this opportunity.”

“This auction will impose a considerable cost on consumers for no additional reliability benefit,” the chairman said, warning that those costs could reach more than $1 billion. “Today’s outcome demonstrates the problems inherent in a complex, flawed design.”

Bay also dissented in FERC’s June order approving Capacity Performance. (See FERC OKs PJM Capacity Performance.) He noted that vote in his dissent to Tuesday’s order.

“I would not have agreed to transitional auctions at all, but having created them, it is the commission’s responsibility to ensure that they result in just and reasonable rates,” he said. “Unfortunately, that has not happened here.”

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