MISO Seasonal Procurement, Site Auctioning Proposals Face Opposition

By Rich Heidorn Jr.

ST. PAUL, Minn. — MISO officials last week outlined proposals to boost its capacity resources, winning some support for efforts to streamline the generator interconnection process and redraw its zonal boundaries to reflect constraints.

But its proposal to switch from annual to seasonal procurement ran into stiff opposition from the Independent Power Producer and Power Marketers sectors, and states balked at a proposal to replace the interconnection queue with the auctioning of generator sites.

Jeff Bladen, executive director of market design, presented the resource adequacy “straw proposals” — the result of stakeholder meetings that began in February — at a meeting of the Advisory Committee. (See MISO Stakeholders Call for Seasonal Resource Construct; Cool to Mandatory Capacity Market.)

“We don’t have consensus, which shouldn’t surprise everybody, but I think we’re getting very good input,” CEO John Bear said afterward.

Seasonal Procurement Idea Receives Push Back

Bladen said the proposal for seasonal procurement was driven by concerns over the year-round availability of resources such as demand response and generation imports. Bladen said seasonality was one of the top three concerns cited by stakeholders in discussions.

“It goes well beyond demand response. There’s lots of different resource types that have either limitations in terms of the times of year they can offer to commit to MISO or have limitations in terms of the economics of how often they want to be available. Examples might include … imports from other regions that might need to be committed to the other region in some parts of the year.”

Mitch Myhre of Alliant said he was “supportive of what MISO has proposed so far.”

Exelon’s Marka Shaw, of the Power Marketers sector, questioned the need for the change, saying there is a greater need for a long-term price signal to incent generator construction.

“You may have solved a problem with Canada and may have created a problem with PJM because the PJM market doesn’t have a seasonal construct,” she said.

Representing the Independent Power Producer sector, Dynegy’s Mark Volpe agreed, calling PJM MISO’s “most important seam.”

“They’ve got an annual construct there, and [seasonal procurement in MISO] would seem to be at odds with talk of trying to converge capacity products,” he said.

Bladen noted that MISO’s just-in-time capacity procurement is already different from PJM, in which resources commit three years in advance.

“It’s hard to see how that would preclude resources from making the same kinds of decisions in the future that they make today on whether to commit to PJM three years in advance or to think about committing to MISO,” he said. “The perspective we’ve taken so far is having a better price signal that reflects the real loss-of-load expectation in the seasons might actually draw resources to” MISO.

Representing the Public Consumer sector, Nancy Campbell of the Minnesota Department of Commerce backed MISO’s initiative. “We don’t think that the seams issue should [prevent] going forward with the seasonal resources. In fact maybe that’s something we should encourage PJM to do as well.”

NRG Energy’s Tia Elliott, of the IPP sector, questioned why MISO was citing the 2014 polar vortex as justification for the change after saying it was not sufficient for changing the day-ahead energy schedule. “I think that MISO might be talking out of both sides,” she said.

John Moore of the Sustainable FERC Project also supported the effort, saying winter wind should have a higher capacity factor than the year-round 14.7% it is currently assigned.

“In MISO, a 13 to 14% annual capacity factor for wind, and also a relatively low capacity factor for solar, just doesn’t make sense to us. Where wind does very well it’s higher than that. So we think that a seasonal construct would help address that and bring more value to the resources that are out there.”

Calpine’s Brett Kruse said that NYISO and ISO-NE incorporate seasonality in their capacity procurement, with “pros and cons.”

But he said it would do little to make MISO more attractive to generators. “If you honestly think this is going to help with price signals on the capacity side, I got $100 that I’ll bet you right now that it doesn’t do anything,” he said.

The discussion gave Market Monitor David Patton an opportunity to offer a plug for his recommendation that MISO adopt a sloped demand curve similar to that used by PJM and recently adopted by ISO-NE.

Referring to Kruse’s comment in an earlier discussion about the potential for some combustion turbine owners to move them from MISO, Patton said, “It sounds crazy, but it’s not.”

Patton said seasonality wouldn’t necessarily reduce overall capacity costs but could allow efficiencies for owners of some older generators who would like to reduce plant staffing during shoulder months. “Those are good cost savings because they don’t cost other generators money,” he said.

Bladen said the discussion will continue at Thursday’s meeting of the Supply Adequacy Working Group, where stakeholders will discuss how many seasons to consider.

“We haven’t gotten into the details of what the makeup would be: whether it’s a single auction; whether it’s multiple auctions that are prompt; whether it’s two seasons or more than two seasons. We’ve tried to stay a little bit above that at this point, with a recognition that we will need to tackle that,” he said.

State Officials Wary of New Zonal Boundaries

MISO’s proposal to establish local resource zones based on physical constraints also sparked some opposition, even after RTO officials promised any new zones would respect state boundaries.

Michigan Public Service Commissioner Sally Talberg, representing the Organization of MISO States, said OMS favors keeping the existing zones.

Several speakers, including Indiana Utility Regulatory Commissioner Angela Weber, said they feared basing zones on physical limitations would result in “volatility.”

Chris Plante of Wisconsin Public Service Corp. said the Transmission-Dependent Utilities sector does not have “perfect alignment” in their position on the issue. But he said the sector did agree there is a problem in using “snapshot” power flow analyses to determine zones, because new generation, retirements, new transmission and loop flows can impact the results.

“Our concern is if you try to design those zonal boundaries based on those constraints every year, you’re going to have stakeholders coming to you and saying we need to redraw the boundary because something has changed,” he said. “We see already with the [capacity import and export limits and loss-of-load expectations]. They vary from year to year — sometimes dramatically.”

Dynegy’s Volpe said, however, that much of that volatility is due to recent improvements in LOLE analysis, including the lowering of the threshold from 230 kV to 100 kV. “We haven’t had stability in the ground rules around the LOLE study,” he said.

Patton said while the uncertainty caused by continually changing zonal boundaries can be “damaging,” price changes that signal shifts in the supply-demand balance are valuable.

“Defining interfaces that create potential deliverability problems [that] may bind or may not bind … has a huge benefit over a structure like in New York where you’re continually fighting about … whether you’re going to define a new zone.” Failing to define zones consistent with physical transmission limits can result in not purchasing enough capacity on the right side of the constraint, he said. “So you’re exposing yourself to resource adequacy or transmission security problems that would potentially have been easy to avoid if you just quantify how much capacity you have to have on this side of the constraint versus that side of the constraint.”

Patton said creating additional zones to reflect state boundaries is not a problem. “You can’t have too many zones. If you define zones you don’t need, they just don’t bind and the prices equilibrate. The idea that Amite South and WOTAB are not separately recognized as places where we need generation seems really hard to justify.”

Stakeholders Agree on Need to Reduce Interconnection ‘Churn;’ States Oppose Auction of Generator Sites

MISO’s call for reforms to the generator interconnection process drew wide support, but its proposal to replace the interconnection queues with the auctioning of pre-qualified generation sites drew opposition from Indiana’s Weber, who said auctioning might undermine state jurisdiction.

Dehn Stevens of MidAmerican Energy said the Transmission Owners support measures to reduce “churn.”

“There’s nothing more frustrating than to have something like three of every four projects we look at as owners … never actually get built,” he said. “It’s a very inefficient use of our internal resources.”

“If you’re providing cost certainty to a generator that’s interconnecting, but the costs differ [because of other generators dropping out of the queue], you can be basically moving costs onto the transmission owner or its … customers.”

Beth Soholt of Wind on the Wires said she was concerned that MISO proposals to increase the cash at risk for those in the generation interconnection queue could be a barrier to entry.

“In each queue reform process, we have put different mechanisms in place for the different milestones. So we’ve gone from really a portfolio option, or a smorgasbord of options, for interconnection customers on readiness — site control and the whole raft of things they can do to prove readiness to move through the queue — we’ve really gone to [requiring] a large pile of cash at risk.”

Soholt added that wind developers are willing to put more cash at risk if it leads to more certainty about costs of transmission upgrades they would be required to pay. “But that certainty has been elusive through several rounds of queue reform,” she said.

Next Steps

MISO and stakeholders will refine the seasonal and locational proposals in joint meetings of the SAWG and the Loss of Load Expectation Working Group through December with hopes to make changes effective for delivery year 2017/18.

The interconnection changes will be discussed by the Interconnection Process Task Force with a projected implementation in August 2016.

MidAmerican Energy’s Stevens said MISO’s timeline is “very aggressive” for such large changes.

“I would question the supposition that the sky is going to fall in two or three years with the reserve margins. I think we saw in this last update [to the MISO-OMS survey] that the shortfall moved out a year or two. Sure seems like you might see that again in a year that the shortfall is moved out,” he said. “You are going to be better served getting it right and having fewer than 150 people fighting you at FERC.”

September 1, 2015

FERC’s Clark: Energy Markets Need Tweaks, not Overhaul

By Rich Heidorn Jr.

ST. PAUL, Minn. — FERC Commissioner Tony Clark said last week that the commission has “a sense of urgency” to take action on price formation issues after initiating an inquiry into the subject more than a year ago.

“There’s active discussion going on on the 11th floor [of FERC headquarters] right now with regard to different options,” he said during remarks at the MISO Board of Directors meeting.

Clark said the commission could take action to improve price transparency and reduce uplift but that he is skeptical of the need for major change.

“The thing about the energy markets that’s not lost on any of us is they are our best operating markets. They tend to work quite well,” he said. “Personally I don’t think we need to upset the whole apple cart.”

The commission opened a docket to consider rule changes regarding uplift, price caps and related issues as a result of comments made at technical conferences on capacity markets and the grid’s response to the January 2014 polar vortex (AD14-14).

It closed comments in the docket in February, following a technical conference last September. (See PJM Under Scrutiny at FERC Uplift Hearing.)

Queue Reform

Clark said the commission also may open an inquiry on generator interconnection and queue reform.

“In the 15 to 16 years I’ve been on a regulatory commission, this issue never seems to go away,” he said. “But it does seem like it’s an opportune time for the commission to do one of these periodic checkups” to examine best practices.

“I don’t know how dramatic the reform effort will be or what it might take shape as, but it seems like it’s a good time to at least be opening an inquiry as to how things are going,” he continued, adding, “That’s more of a future topic; we’re not at the decision-making stage by any means.” (See related story, MISO Seasonal Procurement, Site Auctioning Proposals Face Opposition.)

September 1, 2015

PJM Members Committee Briefs

WILMINGTON, Del. — Nominations are being accepted for the fall elections that will fill a number of positions on the Members, Finance and Nominating committees.

Representatives from each of the five sectors are being sought to serve one-year terms on the Nominating Committee. The target for identifying nominees is Oct. 1, with a vote scheduled for the Oct. 22 MC meeting.

PJM General Counsel Vince Duane cautioned members that the Nominating Committee positions will involve a heavier workload and travel as the RTO is conducting searches to fill several executive vacancies.

For the remaining posts, the deadline for nominations is Nov. 1, with a vote set for the Nov. 20 MC meeting.

Four seats are expiring on the Finance Committee, one each for the End Use Customer, Generation Owner, Other Supplier and Transmission Owner sectors.

Positions also are available for five sector whips, who serve one-year terms.

Finally, a nominee from the End Use Customer sector is being sought to take on a one-year term as vice-chair.

ODEC FTR/ARR Proposal Falls Short

A last-ditch effort by Old Dominion Electric Cooperative to redesign the financial transmission rights and auction revenue rights processes fell just short of a two-thirds consensus Thursday, garnering 66.08% of the sector-weighted vote.

The proposal was backed by most members of the End Use Customer, Transmission Owner and Electric Distributor sectors but won support of only one-third of the Generation Owner and Other Supplier sectors.

The vote was so close that a single additional ‘yes’ vote from Generation Owners, who voted 5-10 against the motion, would have put it over the top. Three more ‘yes’ votes from Other Suppliers, who voted 18-36, would have done the same.

The proposal was brought to the MC after also failing to win over the Markets and Reliability Committee, where it received 59% support at the July 23 meeting. (See ODEC Seeks Last-Ditch Vote on Deadlocked FTR/ARR Issue.)The plan contained three elements.

One, drawn from a PJM staff proposal regarding the Stage 1A 10-year process, would have escalated current ARR results using a zonal load forecast growth rate of +1.5%. The other two elements would have changed the method of reporting the monthly payout ratio so that any negative target allocations would be included as revenue, slightly increasing the reported payout ratio. It also would have treated each FTR individually, eliminating the netting of positively and negatively valued FTR positions in a portfolio prior to determining positively valued FTR payout ratios.

The vote included a friendly amendment that would have required a report after no longer than three years of implementation on the effectiveness of the 1.5% factor.

Tariff Changes Approved Unanimously

Members unanimously approved three sets of rule changes:

A Tariff revision instituting previously endorsed fees for proposed transmission projects. Beginning next year, PJM will charge $5,000 to study greenfield or upgrade proposals of between $20 million and $100 million and $30,000 for projects costing more than $100 million. The fees will be implemented on a two-year trial basis. (See “PJM Lowers Proposed Tx Project Study Fee” in PJM Planning Committee Briefs.)
New Tariff language that aims to more accurately reflect how PJM processes requests for merchant network upgrades. The changes address definitions, queue entry, agreements and the capacity market.
The first and second batches of revised definitions in governing documents developed by the Tariff Harmonization Senior Task Force. Also approved was an amended liability provision that clarifies the definition of PJM net assets. (See Task Force Proposed to Resolve Inconsistencies in PJM Governing Documents.)

— Suzanne Herel

September 1, 2015

MISO Proposes $2.4 Billion in Transmission Projects

By Chris O’Malley

ST. PAUL, Minn. — MISO staff will seek board approval in December for about 352 transmission projects totaling $2.4 billion in its 2015 Transmission Expansion Plan.

That’s virtually the same dollar amount as MTEP 14, but this year’s plan includes more baseline reliability projects and what could be the first competitively bid market efficiency project.

The largest of the projects in MTEP 15 is Entergy’s controversial $187 million Lake Charles, La., baseline reliability project to accommodate an industrial upswing in the gulf region. (See Entergy Out-of-Cycle Requests Win MISO Board OK.)

The market efficiency project ranks fifth in cost at an estimated $67 million to $72 million. MISO is considering three alternatives to relieve congestion in southern Indiana, with PJM as a potential partner. MISO Vice President for Transmission Jennifer Curran told the Board of Directors’ System Planning Committee last week that a request for proposals could be posted in January, with developer proposals due in July. (See Southern Indiana Transmission Project Keeps Morphing.)

Another significant portion of MTEP 15 is a bundle of 13 transmission upgrades identified in the voltage and local reliability study to reduce costs in MISO South. Estimated at $300 million, the projects should produce $498 million in 20-year net present value benefits by decreasing the need for uneconomic generation in load pockets such as Amite South and WOTAB, MISO executives told the board.

More Baseline Projects

While the total price tag for MTEP 15 is nearly identical to MTEP 14 — a coincidence, RTO officials said — the complexion of projects differs significantly. Proposed in MTEP 15 are 91 baseline reliability projects totaling $1.2 billion, compared to 50 projects totaling $177 million in 2014.

Projects driven by local needs are fewer in MTEP 15: 251 for a total of $1 billion versus 312 projects for $1.6 billion in MTEP 14.

The big difference was the inclusion in MTEP 14 of the $676 million 500-kV Great Northern transmission line, built in response to a long-term transmission service request from the Manitoba border to the Iron Range in Minnesota.

Interregional Planning

Curran also updated the board on the status of interregional planning efforts, which have shown mixed results.

She acknowledged that at least two of three potential MISO-SPP interregional projects earlier touted to offer $235 million in benefits are now “uncertain to unlikely.”

Curran said the two projects now look less attractive in part because of differences in how the two RTOs modeled the impact of the Environmental Protection Agency’s Mercury and Air Toxics Standards. MISO applied MATS retirement assumptions about SPP generation in the MISO model, but SPP did not have the same retirements show up in its model. (See 2 of 3 MISO-SPP Seams Projects Likely Doomed.)

“There are also differences in the amount and type of generation added, leading to a larger net addition of future generation in the interregional models when compared to the MISO regional models,” MISO spokesman Andy Schonert said. “The magnitude, type and location of these future units can lead to increased transfers and resulting differences in congestion levels at seams, which impacts the projected value associated with certain transmission projects.”

Potential interregional projects with PJM also were pared down.

In June, the RTOs narrowed the list of “quick hit” flowgate projects to two, from 39 in March. Among the survivors is the proposed resagging of the Northern Indiana Public Service Co. section of the Michigan City-La Porte 138-kV line.

The nearly $10 million in congestion relief for the finalists is a big reduction from the $408 million in potential congestion relief that the 39 projects initially identified could have brought. However, Curran told the board that MISO officials found that 22 of the flowgates had already been included in other planned or currently in-service projects.

September 1, 2015

PJM Markets and Reliability Committee Briefs

WILMINGTON, Del. — PJM expects to spend $280 million in 2016, a $3 million increase over 2015, including $36 million on capital projects, according to a preliminary budget presented last week.

The spending plan will result in a composite expense charge of 32.9 cents/MWh, a rate that has remained consistent for the past five years.

About $28 million of the capital projects budget is dedicated to upkeep and enhancement of current applications, systems and infrastructure.

Another $5 million will be spent on new products and services, including the technology to support intraday bidding. The remaining $3 million will go toward interregional coordination, such as coordinated transaction scheduling with MISO.

The Finance Committee is set to consider the budget on Oct. 1 before it goes before the Board of Managers on Oct. 15.

Revisions Will Reveal Closed-Loop Interfaces Earlier

The committee endorsed manual revisions requiring PJM to announce the creation of closed-loop pricing interfaces five days before the close of the next financial transmission rights auction. The rules make an exception for outages of less than 10 days and those setting prices for demand response under current manual and Tariff rules.

PJM uses such interfaces to capture operator actions in LMPs rather than in uplift because its modeling software is unable to set prices for voltage problems. (See “Package Calls for Notice on Pricing Interfaces” in PJM MIC Briefs.)

Changes Pave Way for Transition to Markets Gateway

Members endorsed revisions to the Operating Agreement and Tariff reflecting the transition from the eMarket tool to Markets Gateway. Training on the new tool is expected to be held in the second half of this year.

Change to Manual 37 OK’d

The MRC endorsed changes to Manual 37: Reliability Coordination that modify section 2.4.2 (Change management process), replacing references to the Change Control Review Board with the Enterprise Change Management Standard. The standard ensures that changes to PJM business application systems, programs, data, systems software and hardware are authorized and applied so as not to compromise the stability and security of any information technology component.

They also update the definition of system operating limits (SOL) to make clear that PJM controls to the most conservative limits and that interconnection reliability operating limits (IROL) are an elevated level of SOL, not distinct from them. The changes also clarify what SOLs and IROLs are monitored by the RTO, as well as SOL violations reporting.

— Suzanne Herel

September 1, 2015

Markets Committee Briefs

ST. PAUL, Minn. — MISO, SPP and intervenors in the dispute over MISO’s use of SPP transmission to deliver power between its northern and southern regions have begun circulating drafts of a settlement amid optimism that it will be filed with FERC in October (ER14-1174).

Discussions on how costs paid to SPP will be allocated within MISO will begin in September “on a separate track,” Eric Stephens, deputy general counsel, told members at the MISO Informational Forum last week. Stephens said confidentiality rules on the settlement talks prevented him from discussing specifics of the deal.

But Market Monitor David Patton told the Markets Committee of the Board of Directors later that the settlement will allow MISO to eliminate use of its $9.57/MWh “hurdle rate” in determining whether to allow more than 1,000 MW of power flows between its two regions.

“We need to make sure that’s the case, but I think the team at MISO did a good job of moving the settlement in a direction that allows us to do that,” Patton said.

MidAmerican Energy’s Dehn Stevens told the Board of Directors meeting later that the Transmission Owner sector is “very comfortable with where [the settlement is] at.”

Organization of MISO States President Libby Jacobs told the board that her group is “very optimistic that there’s resolution on the horizon.”

“OMS would encourage that to be rapidly finished so that everyone’s focus can be on other issues,” she said.

In spring 2014, MISO began limiting flows between its northern and southern regions after SPP complained that MISO breached their joint operating agreement by moving power over its transmission footprint in excess of a 1,000-MW contract path.

While seeking to resolve the dispute with SPP, MISO implemented a $9.57/MWh hurdle rate — an adder to the LMPs of the importing sub-region — to establish market signals indicating when the savings from avoided redispatch costs exceed SPP’s additional transmission charges.

Patton: Fear of FTR Gaming over WAPA Integration Hasn’t Materialized

Patton told the Markets Committee that his staff has seen little evidence to confirm fears that SPP’s integration of the Western Area Power Administration (WAPA) could give market participants an opportunity to game the market by buying financial transmission rights from SPP “whose value predictably would change significantly” following the integration.

“We didn’t see a lot of participants engage in strategic FTR purchases the way we had thought they would,” Patton said.

He said his staff is continuing to review how SPP’s dispatch including WAPA affects MISO’s constraints in the FTR market and market-to-market process.

“We don’t have significant concerns, but it is a significant change because WAPA stretches from the Dakotas down to the southern end of SPP. It’s a huge change in their configuration. You can think of it as similar to our integration of MISO South.”

“So, no red flags, just continued vigilance?” asked Director Michael Curran.

“Yes,” Patton replied.

— Rich Heidorn Jr.

September 1, 2015

NRG Plant Closures Could Impact Reliability in NY

By William Opalka

The New York Public Service Commission on Friday requested NYISO to perform reliability studies in western New York after NRG Energy announced it was retiring one coal plant and suspending plans to convert another to natural gas.

NRG said Aug. 25 it would retire the 380-MW Huntley Generating Units in Tonawanda, north of Buffalo, and halt plans to convert the 435-MW Dunkirk Station, southwest of Buffalo, to natural gas.

The PSC request capped a week in which NRG’s announcement and protests over ratepayer subsidies to a third plant roiled the upstate New York power market, putting more than 1,100 MW of generating capacity in question.

NRG said it plans to mothball Dunkirk on Dec. 31, when a current reliability support services agreement expires, and retire Huntley on March 1, 2016.

NRG won approval from the PSC more than a year ago to convert the Dunkirk plant to natural gas at above-market rates. Dunkirk would have received out-of-market payments of $20.4 million per year from National Grid and a one-time $15 million subsidy from New York state.

Entergy, owner of the 838-MW James A. FitzPatrick nuclear plant in western New York, sued the PSC in federal court in February, claiming the subsidies interfered with FERC’s jurisdiction over the wholesale power market. (See FERC: Hearing or Settlement on Dunkirk RSSA Charges.)

NRG said the lawsuit made the planned conversion unworkable. “Currently, NRG expects that the Entergy lawsuit will go to trial and litigation on this case could take years to resolve,” spokesman David Gaier said. “Unfortunately, the Entergy lawsuit has created a tremendous amount of uncertainty for NRG in moving forward with the Dunkirk project, and at this point the project remains on hold.”

NRG blamed low natural gas prices, low energy prices and low capacity prices for the Huntley closure. “Thus, because the facility is not currently economic and is not expected to be economic, NRG intends to retire the units. Should circumstances change, NRG will notify all parties to this notice,” it said.

The PSC requested NYISO consider three scenarios: both Huntley and Dunkirk close; Dunkirk closes but Huntley remains open; and Huntley closes but three Dunkirk generators (Units 2, 3 and 4) remain in service after March 1. The ISO was also asked to describe transmission upgrades or alternative resources that could address any reliability problems resulting from the closures, including cost estimates and implementation schedules.

The PSC also requested that distribution company National Grid reassess its transmission needs. The company had assumed Dunkirk would continue operating, so it may need to plan transmission alternatives if the closure is permanent.

NRG’s announcements could force NYISO to reconsider the conclusions of a recent study that said previous concerns about system reliability were mitigated for 2016 by the restoration of plants such as Dunkirk. (See NYISO: Reliability Concerns Raised Last Year Resolved.)

If the PSC determines reliability is again an issue, it could order National Grid to negotiate an RSSA with NRG to keep the plants running.

August 31, 2015

PJM 2016/17 Transition Auction Clears at $134/MW-day

By Suzanne Herel and Rich Heidorn Jr.

Capacity Performance resources cleared at $134/MW-day in the transition auction for the 2016/17 delivery year, PJM announced Monday.

PJM held the auction Aug. 26-27 to obtain CP resources for 60% of the updated reliability requirement for 2016/17, procuring its target of 95,097 MW.

The clearing price was well below the price cap of $165.27 — results that Stu Bresler, senior vice president for markets, said “demonstrated the competitiveness of the auction.”

But speaking at a conference in Boston, Jim Wilson, a consultant for consumer advocates, said PJM paid far more than it needed to, asserting it could have procured the CP resources for only an additional $30/MW-day rather than the “windfall” that resulted from the auction.

Market Monitor Joseph Bowring, also appearing at the conference, declined to comment on the results, saying he would be issuing a comprehensive report in a few weeks.

Of the capacity that cleared, 90,851 MW represented resources committed in previous auctions that now will be converted to the new product at a higher price. The remaining 4,246 MW did not have a prior commitment, or surpassed the level of a previous commitment.

Total capacity offered into the auction was 117,753 MW.

“There wasn’t anything that surprised me that much,” Bresler said in a press conference after the results were announced late Monday. “The clearing price was just about at the point where we expected it to be.

“I thought the level of demand response and energy efficiency was not surprising, so really I think in just about every way it was consistent with what we expected.”

The auction, part of a five-year transition period leading up to a single capacity product type for the 2020/21 delivery year, had been delayed in order to allow DR and energy efficiency resources to participate, per a FERC order. A second incremental auction, for the 2017/18 delivery year, is set for Thursday and Friday, with results expected to be posted on Sept. 9.

The Base Residual Auction for the delivery year — held in 2013, before the introduction of the tougher CP requirements — cleared at prices ranging from $59 to $119/MW-day in most of PJM, with the PSEG locational deliverability area at $219. (See Capacity Auction: New Generation, Imports Up, Prices, DR Down.)

FERC had ruled that the transition auctions would not be just and reasonable without permitting DR and energy efficiency to participate. (See FERC Orders PJM to Include DR, EE in Transition Auctions.)

Bresler said 619 MW of DR cleared the auction, of which 227 MW represented a new commitment. All 949 MW of energy efficiency offered cleared, including 423 MW of new resources.

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 Base Residual Auctions for those years as Capacity Performance resources.

The parameters of the transition auctions differ in three aspects, Bresler said: There were no locational constraints modeled; the target was 60%, not 100%, of the reliability requirement; and a price cap was implemented that was calculated to be 50% of the net cost of new entry.

The incremental cost of the transition auction was $2.3 billion, slightly below the estimate of $2.5 billion to $3.6 billion PJM and the Market Monitor had predicted, Bresler said.

Bresler sought to counter news reports that the new Capacity Performance auctions would greatly increase consumers’ power bills, noting that CP costs make up about 15% to 20% of energy bills, and that energy payments are expected to be lower because the new construct will result in better resource availability during times of extreme weather and grid stress.

Breaking down cleared megawatts of capacity by generation source, coal cleared 32,622.3; gas 29,629.4; and nuclear 26,099.8.

The RTO’s first Base Residual Auction under its new Capacity Performance rules, the results of which were released Aug. 21, saw prices rise 37% to $164.77/MW-day in most of the RTO, while the ComEd zone broke out at $215 and Eastern MAAC hit $225.42.

The construct allows capacity resources to receive higher prices in exchange for taking on more responsibilities and stiffer penalties for non-performance.

Capacity Performance resources, which represented more than 80% of capacity acquired in the BRA, were priced at a $15/MW-day premium to base capacity in most of the RTO. In the winter-peaking PPL LDA, the premium was $90. (See PJM Capacity Prices Up 37% to $165 /MW-day.)

August 28, 2015

FERC Sides with PJM on Capacity Performance Transition Auctions

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.)

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.”

August 25, 2015

DC Halts Exelon’s Acquisition of Pepco Holdings; Pepco Stock Tumbles

By Michael Brooks, Suzanne Herel and Ted Caddell

WASHINGTON — The D.C. Public Service Commission last week unanimously denied Exelon’s proposed $6.8 billion acquisition of Pepco Holdings Inc., sparking applause in the hearing room and sending PHI shares tumbling on Wall Street.

“When this proposed merger is considered as a whole … we conclude that the joint applicants have not met their burden of persuading this commission that the proposed merger is in the public interest,” the three-member PSC said.

Upon the news, PHI shares dropped more than 18%, and Exelon stock dipped more than 3%.

In a joint statement, Exelon and PHI said, “We are disappointed with the commission’s decision and believe it fails to recognize the benefits of the merger to the District of Columbia and its residents and businesses. We continue to believe our proposal is in the public interest and provides direct immediate and long-term benefits to customers, enhances reliability and preserves our role as a community partner.

“We will review our options with respect to this decision and will respond once that process is complete.”

Exelon and PHI have 30 days to ask the commission to reconsider its 181-page order. The companies on Monday released a joint statement, saying they would continue working to complete the merger.

“We remain convinced the decision fails to recognize the substantial immediate and long-term benefits of our merger proposal to citizens, businesses and communities in the District of Columbia,” the companies said. “We want to deliver these benefits to customers and will strive to make that happen.”

Some analysts, however, are pessimistic about the deal succeeding. “While none of the negative items cited by the PSC in their order are glaring hurdles that could not be overcome, the magnitude of ‘small cuts’ appears in our view to suggest a deeper mistrust between the commission and Exelon,” UBS Global Research said.

Following their initial fall, the companies’ stock prices remained steady over the week, and Monday’s statement did little amid another bad day on Wall Street: Exelon closed at $30.75/share, down 2% on the day, while Pepco closed at $22.98/share, a less than 1% drop.

7 Factors of Public Interest

The PSC called the rejection “one of the most significant decisions” it would ever make, noting, “This proceeding has generated more interest and more active participation by parties and interested persons than any other proceeding in the commission’s more than a century of operations.”

The commission said it weighed the proposal on seven factors of public interest, among them the effects on ratepayers and shareholders, market competition and preservation of natural resources and the environment.

“The public policy of the district is that the local electric company should focus solely on providing safe, reliable and affordable distribution service to district residences, businesses and institutions,” Chairwoman Betty Ann Kane said. “The evidence in the record is that the sale and change in control proposed in the merger would move us in the opposite direction.”

Commissioner Joanne Doddy Fort concurred, saying, “The proposed merger would diminish Pepco’s ability to directly raise issues that address the needs of district ratepayers.”

Commissioner Willie Phillips voted to reject the merger application, but he dissented in a secondary vote to issue the actual order.

He agreed the proposed merger was a “bad deal” for the district, but said, “I am disappointed in the loss of the many opportunities inherent in the proposed merger that could have achieved benefits — tangible benefits — for our local communities and across the region.”

Surprise: Md. Wasn’t Biggest Obstacle

When Exelon proposed the deal 16 months ago, analysts predicted Maryland would be its biggest stumbling block. But after months of securing strategic alliances, Exelon won that commission’s 3-2 approval — albeit with 46 conditions. (See How Exelon Won Over Maryland.)

Meanwhile, in the district, opposition steadily stiffened. More than half of the Advisory Neighborhood Commissions and nearly half of the 12-member City Council opposed the deal. The Office of People’s Counsel and the attorney general’s office also advised against approval without significant concessions. (See Deadline Looms for Decisions in Exelon-Pepco Deal.)

As Kane read the commission’s summary of the order, there was a murmur in the room, as those attending the meeting realized that the commission was siding against the merger.

Many in attendance said they were surprised by the ruling, as they were prepared for the commission to approve the deal with concessions similar to other jurisdictions, such as Maryland.

“Honestly, I was pleasantly shocked. I commend them for their courageousness,” People’s Counsel Sandra Mattavous-Frye said of the commissioners. “It will have a domino effect on the entire proposal. The joint applicants have said they cannot go forward without D.C.

“The commission listened to the parties and, more importantly, they looked at the record,” she said, noting, “The applicants had the opportunity to supplement the record. They, too, heard the concerns being raised and chose not to address them.”

“I’m stunned,” said Anya Schoolman, executive director of DC Solar United Neighborhoods, a local solar power advocacy group. “I think … the commonly accepted wisdom was that they would approve it with conditions. And we were waiting to see how stringent those conditions would be.”

“I would almost go to say I’m shocked, because I fully expected that … the commission could have possibly come out in favor of the merger,” said D.C. Councilwoman Mary Cheh, who led the opposition in the district’s legislature.

“I’m just happy for the people of the District of Columbia,” she said. “The real beneficiaries of this, had this gone through, would have been the officers and the shareholders of Pepco and Exelon Corp. The people who would have been harmed are the ratepayers.”

“It was somewhat of a shocker that all other jurisdictions did in fact support this merger,” said D.C. Councilman Vincent Orange, who said he has remained neutral throughout the process. “At the end of the day, the Public Service Commission has ruled, and we’ll have to live with it and move on.”

‘David and Goliath’ Win

Power DC, which had organized opposition, said it was glad the PSC had “followed the will of the district’s electric customers.”

“The proposed acquisition would have been a substantial step backwards in the district’s efforts to move toward more sustainable electricity generation and greater reliance on local, renewable energy. It would have exposed D.C. residents and businesses to the risk of steeply rising electricity bills.

“Pepco has always affirmed its capability to provide a high level of service for its customers without this merger, and it has demonstrated a much greater willingness than Exelon to integrate new, customer-centered technologies.”

Mattavous-Frye called the win a “David and Goliath” scenario.

“I want to commend the public participation,” she said. “This was about consumer empowerment. People did not think their participation would be meaningful, and it is.”

Other Jurisdictions Approved Deal

The deal had been more than a year in the making. All of the other affected jurisdictions had approved it: Virginia, Maryland, Delaware, New Jersey and FERC.

Dave Bonar, Delaware’s Public Advocate, said the decision was a disappointment, but that it “doesn’t mean the deal is not salvageable.”

“They could appeal, or they could make more concessions,” he said. “Or they could just fold their tent and go back to Chicago.”

He said those who worked on getting Exelon’s concessions and reaching consensus were “disappointed.”

“We worked very hard to get this done,” Bonar said.

Critics in Md. Pleased

Mike Tidwell, director of the Chesapeake Climate Action Network, a group that intervened before the PSC in Maryland against the proposed merger, called the decision a “major victory” for the growth of clean energy across the region.

“One good idea that emerged from the proposed Exelon-Pepco (merger) was to create a PSC-guided process to explore ‘performance-based ratemaking.’ Utilities should be rewarded based on how well they perform on energy improvements that enhance our economy and reduce carbon emissions and climate change,” he said. “Hopefully, we can now move on to these solutions.”

Paula M. Carmody, People’s Counsel for the State of Maryland, had urged the state commission to reject the deal.

Last week, she said of its D.C. counterpart, “I think they got it right.

“They hit on the very issues identified in the proceeding before the Maryland commission,” she said, noting that the D.C. group had concerns about the “loss of local influence” over a utility with headquarters in Chicago.

Carmody, whose organization has one of three appeals pending before the Maryland commission, said she is not sure if the district’s decision is a death knell for the merger, “but clearly they can’t close” the deal as it stands now.

“It depends on what the companies do now,” she said. “They could appeal, they could file for reconsideration.” But, she said, the rejection makes the acquisition “problematic.”

A Win for Consumers, Environment

Roger Berliner, an attorney and Montgomery County councilman who had led that area’s opposition, applauded the D.C. PSC for standing up for consumers and the environment.

“As the testimony of countless expert witnesses made clear, Exelon has shown time and time again its interest in favoring its own nuclear generation holdings over renewable technologies like solar and wind, and the merger does far too little to provide benefits to ratepayers, while Pepco’s shareholders stand to benefit tremendously.”

The acquisition would have created the Mid-Atlantic’s largest electric and gas utility — and the country’s largest utility by customer count. Exelon has said the deal would boost its customer base to nearly 9.8 million from 7.8 million and increase its rate base to almost $26 billion from $19 billion.