A settlement has been approved by the Federal Energy Regulatory Commission in the matter of recovery of costs of PJM's failed Mid-Atlantic Power Pathway (MAPP) project
MAPP was one of four unnecessary transmission projects proposed by PJM in their Project Mountaineer initiative to increase the use of coal-fired resources by shipping 5,000MW of coal-fired electricity from the Ohio Valley to the East coast. Of these 4 projects (MAPP, PATH, TrAIL and Susquehanna Roseland), two have been cancelled, one has been completed, and one is under construction. The only difference between them is timing and execution by their owners.
All four of these projects took advantage of newly-minted transmission project incentives available from FERC, brought to you by the Energy Policy Act of 2005. One of the incentives granted to these projects was the guaranteed recovery of prudently-incurred project investment in the event the project was abandoned and not built through no fault of the owner.
Therefore, once MAPP was abandoned, its owner, Pepco, filed with FERC for permission to recover its investment in the unbuilt project. Unrecovered investment included capital expense "construction work in progress" costs, which is roughly defined as all expenses for electric projects under construction, including such items as land purchased, labor, engineering and regulatory costs. The amount Pepco filed to recover was $87.5M.
Because some parties intervened and protested the recovery, FERC set the matter for settlement and hearing. A settlement was reached and recently approved by the Commission.
The settlement allows Pepco to recover $80.5M in abandonment costs over a three year period, and allows the company to maintain ownership of all land and land rights purchased as part of the project. However, Pepco must remove the land from its rate base (capital account) that earns a yearly return paid by all electric consumers in the PJM region.
In its cost recovery filing, Pepco valued its land acquisition activities at $38.1M, although actual land values would most likely be much less. So, how much land did Pepco buy for MAPP that the company now owns free and clear?
Converter station sites in Calvert and Wicomico County, MD and Sussex
County, DE were acquired;
Takeoff points into and out of the Chesapeake Bay were acquired;
Transition station locations in Dorchester County were acquired; and
Transmission line right-of-way for entire length was acquired, except for one property in Dorchester County where negotiation was pending.
Looks like Pepco has enough land to concoct another unnecessary transmission project at ratepayer expense, and it looks like Pepco still holds these landowners' lives in limbo under the threat of building a transmission line across their properties. Let this be a lesson to you... do NOT sign right-of-way agreements early in the process, before a project is approved and receives a permit from all states through which it is routed.
Ratepayers in 14 states will remember PJM's failed Project Mountaineer as they pay off Pepco's unbuilt MAPP debt in their electric bills for the next three years. Thanks, PJM!
From the train wreck files... the pieces of information you try to drive by without looking closely, but inevitably you turn around and drive by again for
An article on Risk.net entitled Power trading firm blasts Ferc over manipulation probe tells an interesting tale.
In an unorthodox move, a little-known power trading firm has disclosed that it is under investigation by the US Federal Energy Regulatory Commission (Ferc) for market manipulation, mounting a vigorous public defence of its activities and arguing that Ferc has overreached in going after its trader.
The company has put together a website with a bunch of case documents I don't have time or inclination to read, videos, and opinions that support its position that it's being picked on by FERC.
The Risk article describes the issue this way:
Chen's trades made use of an obscure type of PJM transaction called 'up-to-congestion' (UTC) trades, which involve the scheduling of electricity flows across the border between PJM and one of its neighbouring wholesale power markets, such as the one operated by the Midcontinent Independent System Operator (Miso). When carrying out a UTC trade, a market participant can specify the maximum level of congestion costs that he or she is willing to pay to move power across a particular path. For instance, if the threshold of the UTC trade is set at $50 per megawatt-hour (/MWh), then PJM will schedule the flow, as long as the congestion cost between the two specified nodes stays below $50/MWh. If the cost of congestion along that path rises above that level, the trade gets knocked out and no electricity flow is scheduled.
Powhatan – like other financial trading firms operating in US power markets – trades only 'virtual' power. In other words, whenever it schedules any electricity flows in the day-ahead market, it cancels them out in the real-time market, so no physical power actually flows. Such traders essentially act as arbitrageurs between the day-ahead and real-time power market.
Chen's trading strategy involved pairs of UTC trades, with two legs that ran in opposite directions along the same path — for instance, from the Miso border to a node in PJM, and back from that node to the Miso border. According to the documents posted on FercLitigation.com, Chen discovered a profitable trading strategy in which he could enter such paired UTC transactions and then collect money from transmission loss credits (TLCs) – a type of rebate payment that PJM makes to market participants that use its transmission lines. Until September 2010, when PJM implemented its rule change, it was possible for virtual traders such as Powhatan to collect TLCs from UTC transactions, even though they were not actually sending physical power through the grid.
The article notes that FERC approved an after-the-fact change to PJM's market rules to prevent further use of this trading strategy.
Our friends at RTO Insider also have an article about this issue that provides more information and made me think that FERC might be behaving like a bully. But, I'm still having a hard time mustering up any real, personal sympathy for anybody involved in this case. It just doesn't tug my heart strings like senior citizens who can't pay their outrageous electric bill because there's so much nonsense added to the actual cost of service. Call me jaded.
So, is this the kind of aggressive FERC we would see under the leadership of Norman Bay, who was nominated for the Chairman position in January, after the big green failure of the Binz nomination late last year?
Bay will have to go through the same confirmation process that raked Binz over the coals, and no stone will be left unturned to pick him apart before the Senate Energy Committee.
Meanwhile, I think I'll go organize my record collection.
Regulation vs. deregulation debates pop up from time-to-time. I think the last one I participated in was presented as a way to "fix" Potomac Edison's billing & meter reading transgressions through competition. Of course, deregulation doesn't change your local electric company that meters and bills your service, it simply changes your generation supplier, so deregulation is, once again, useless as a solution.
I've had people swear to me that deregulation saves consumers money, but my research has actually revealed the opposite. Deregulation, an invention of our friends at Enron, actually costs consumers money. Deregulation inserts a middleman between you and the generator, and that middle man wants to get paid. While some may argue that the middleman can insert competition into a monopoly situation to result in savings, that's unlikely to happen. The monopoly is prohibited by regulation from the kind of usurious rate gouging that goes on in deregulated markets. Being from West Virginia I say this with a smirk on my face, because I am also unconvinced that our regulators actually have consumer interests in mind, and believe they will look the other way, or even encourage, regulated rip-offs of captive customers by out-of-state electric conglomerates.
Electric consumers in Pennsylvania's deregulated electricity market are up in arms because the state's regulators have not protected them from signing open ended variable rate contracts. What did they think "deregulated" meant? My experience has been that the average electric consumer is uneducated about his electric bill, the electric rates he pays, and the regulatory process, and he LIKES it that way! It is only when a bill shows up that seems to be higher than normal that average electric Joe gets upset and demands that "someone" do something to lower his bill!
Pennsylvanians who signed variable rate contracts with deregulated electric suppliers got slammed by PJM's markets during this year's "polar vortex." Customers received bills hundreds of dollars higher than normal because their middleman may have been locked into power purchase contracts that didn't adequately protect against price spikes caused by generator outages and high demand for natural gas to generate electricity. And, it's probably going to get worse. At its earnings call last week, FirstEnergy made it clear that the company's future power purchase contracts will contain language that passes this volatility through to customers:
Steve Fleishman - Wolfe
And in the future, do most of your contracts have that clause, so new ones do or not older ones or vice versa?
Leila Vespoli - EVP, Markets, and Chief Legal Officer
I think it would be safe to say that we are going to be adding that language where we can in the future.
Neither the generator, nor the middleman, wants to absorb the cost of PJM's market failure so it will always be passed on to the deregulated customer because no one is protecting average electric Joe in a deregulated environmment. FERC and PJM fail to realize that those poor, persecuted generators who were required to operate at a loss for a few hours or days due to the price cap are making money hand over fist every other day of the year. Pay to play, little generators!
FERC compounded the problem by allowing these greedy corporate entities to further game PJM's malfunctioning markets. FERC has allowed generators to charge whatever they want, and is in denial about any "harm" that may result:
FERC said PJM's proposal met the commission's criteria for approving waivers, as doing so would remedy a "concrete problem," would not harm third parties and would be limited in scope.
Maybe affected customers in Pennsylvania should send FERC a copy of their outrageous "concrete problem" bills so they can make note of the harm PJM's markets have caused to real people.
Deregulation sounds great in theory, but it rarely saves the consumer money in the real world.
Moody's researchers have been busy contemplating investor owned utilities' most recent scheme to "de-risk" their holding companies by shifting investments to the regulated side of the business. After gathering all sorts of information available, Moody's has weighed the risks and decided that this utility investment scheme is a safe harbor for the time being, and utilities engaging in it should receive higher credit ratings.
I think Moody's got it wrong because they discounted the mettle and determination of regulators, elected officials, not-for-profit entities, and the people they represent, to continue to toss banana peels into the utility feeding frenzy that threatens to bleed them dry. We're quite creative and getting smarter every day. :-)
Although the actual report is for subscribers only, an article in Platts tell us that Moody's has concluded that utility holding company transmission subsidiaries have a stranglehold on regional transmission operators.
"FERC transmission regulation provides forward-looking formula rates, true-up mechanisms and premium authorized returns on equity. Transmission owners face limited revenue risk, owing to strong counterparty relationships with the operating utilities and the regional transmission organization," Moody's said.
The report also "highlight[ed] the key role that US Federal Energy Regulatory Commission policies are playing in driving transmission investment"
and attributed "a premium return and good cost recovery"
for transmission as "thanks in part to FERC's regulatory policies, calling the commission's oversight "a material credit positive."
Moody's chose to bat aside the current parade of ROE complaints at FERC. Perhaps Moody's thinks that ridiculous petitions like WIRES' request to stop the complaints actually has merit? Moody's needs to take a gander at the RM13-18
docket and face reality. The money buffet isn't going to last forever.
And Moody's totally checked out on the one thing that utilities, FERC and transmission operators have no control over:
The exploding resistance to new transmission in the form of landowners, ratepayers and local elected officials.
FERC's "premium return" means nothing when transmission can't be built due to overwhelming opposition that equates to political poison, or when ratepayers accept their responsibility to examine and challenge transmission rates they must pay.
But, that's okay, Moody's. We're patient, and we're used to being on the cutting edge of new trends, instead of running behind trying to shore up failing business models.
Big article in the Wall Street Journal yesterday, Assault on California Power Station Raises Alarm on Potential for Terrorism, that reports on a coordinated attack at a California substation that sounds like a scene from an action film.
According to the article, the information came from former FERC Commissioner Jon Wellinghoff, who has taken up lurking around substations in his dotage. Apparently Wellinghoff was horrified at the substation attack last April and the subsequent realization that our grid is astonishingly vulnerable and there's not much FERC can do about it.
I know what FERC can do about it... Stop promoting centralized generation and an increasing network of high voltage transmission lines to trade electricity like a commodity from coast to coast!
If you think substations are vulnerable, spend a few minutes pondering the thousands of miles of high voltage transmission lines strung everywhere. True, an attack on one remote tower may not have much effect and could be easily fixed, but what about a coordinated attack on hundreds of towers that supply our cities at the same time?
Our military isn't dumb enough to rely on a power supply this vulnerable, so why should we? As far back as 2007, the U.S. military was studying electric grid vulnerability and concluded that "distributed generation" (yes, they used quotes, like Dr. Evil with his "laser") was our best defense.
And so it is - our military is practicing distributed generation.
So, when is Congress going to put a stop to the transmission feeding frenzy and start protecting the rest of us?
Complaint Alleges AEP's SWEPCO subsidiary overcharged regional ratepayers for transmission charges in 2012
Martha Peine of Eureka Springs, Arkansas, has filed a complaint with the Federal Energy Regulatory Commission (FERC), alleging that American Electric Power’s SWEPCO transmission subsidiary has improperly charged thousands of dollars in lobbying, advertising, charitable contributions, and other non-transmission expenditures to ratepayers in Southwest Power Pool’s nine-state region, which includes portions of Arkansas.
Electric ratepayer Peine filed her Formal Challenge to American Electric Power Service Corporation’s 2013 Formula Rate Annual Update with the FERC on Wednesday. Her examination of transmission rates, conducted under federal transparency rules, revealed AEP has improperly charged Arkansas ratepayers for general advertising and promotional expenses, charitable donations and related expenses, economic development expenses unrelated to transmission, lobbying expenses, merger expenses, and other non-transmission expenses totaling $92,511. The complaint asks that FERC grant the challenge and order refunds to ratepayers of amounts wrongly included in rates.
According to Peine, “The problem has been that no one reviews these FERC filings on a micro-level to determine if unallowable expenses are included.”
AEP/SWEPCO has already acknowledged over $16,000 in wrongful charges as a result of Peine’s discovery efforts, and has made provisions to credit ratepayers for this amount. However, Peine contends that an additional $95K was also wrongly charged to electric customers in their monthly bills and has not yet been refunded.
The total includes expenses such as lunch with Larry Smith, mayor of Cave Springs, and others in November 2012 while presenting a big-fat-check to the Illinois River Watershed Partnership for the development of a 30-acre watershed sanctuary at Cave Springs. Mayor Smith later gave testimony before the APSC that SWEPCO’s preferred route 33 is perfectly reasonable, even though it would damage the Trail of Tears and National Military Park at Pea Ridge, and that the alternate route proposed to pass through his own city was not reasonable.
Other corporate expenses incorrectly recovered from all AEP ratepayers, including its Arkansas transmission subsidiaries, were expenses for AEP’s “Lemonade Stand” TV commercial that AEP ran during a particularly nasty Ohio regulatory battle with rival FirstEnergy in 2012. The commercial attempted to influence the Public Utility Commission of Ohio’s decision in a case involving AEP’s corporate reorganization to comply with Ohio’s electric deregulation laws.
Oh... ho ho ho... the Lemonade Ad?
You didn't recover that from ratepayers, did you, AEP? Tsk, tsk, tsk! I thought we advised you not to do that
SWEPCO has 30 days to produce its answer to the charges before the federal commission.
The complaint can be downloaded
I'm not sure what's gotten into the tea across the pond, but The Guardian
has named Kansas Republican Governor Sam Brownback a "Climate Change Hero."
Sam Brownback, Republican Kanas Governor, and lawmakers in a dozen other US states who fought off cynical attacks to repeal state Renewable Portfolio Standards, which have catalysed thousands of wind and solar projects across the country and generated hundreds of thousands of jobs.
But, maybe it's some other Sam Brownback, the one who's the Governor of "Kanas?" The Sam Brownback who's the Governor of Kansas is no hero, for the climate or the people of Kansas. Sam Brownback is the "hero" of the corporations who fund his political campaigns, and just because it now happens to be wind energy corporations does not a "hero" make.
noun (pl. heroes)
1 a person, typically a man, who is admired or idealized for courage, outstanding achievements, or noble qualities: a war hero.
The recent disclosure of the manipulation of scientific evidence by climate researchers is exactly the kind of important information that needs to be brought to light. The emails and documents recently disclosed paint an alarming picture of the state of climate research. In the emails that have been disclosed we’ve seen evidence of manipulation, efforts to avoid freedom of act information requests, abuse of the peer review process and a research process that that is driven more by a political agenda than a quest for truth. [Brownback, DeMint, Ensign, Isakson, Vitter, and Wicker, 12/8/09]
Due to an exceptional amount of pressing business, the KCC inadvertently failed to notice the subject proceeding until after the date for timely intervention had passed.
...the KCC’s failure to file a timely intervention was based upon factors outside of its control.
"Pressing business?" What state public service commission isn't constantly embroiled in "pressing business?" An "inadvertent failure to notice the subject proceeding" isn't really "a factor outside [KCC's] control." But, whatever... it gets funnier....
[KCC] is the regulatory agency that has jurisdiction over the wholesale and retail rates that will be impacted by the proposed formula rate and incentive rate adders filed for approval in this docket.
Layperson Internet Energy Blog Education Moment for the KCC and Andrews Kurth:
There is no formula rate or incentives applied for in this docket! It's an application for negotiated rate authority filed by a merchant transmission project. That means that the developer of the project is responsible for all costs of building and operating its project and will recover them directly from customers through rates it is asking FERC for permission to negotiate, NOT FROM RATEPAYERS, in Kansas or elsewhere. And GBE is not eligible to apply for incentives because it is not part of any coordinated transmission expansion plan, nor planning to be.
What a stupid waste of time and billable hours.
FERC issued its findings in the TrAILCo audit
yesterday. No big surprises, if you've been following along the FirstEnergy audit trail with us.
As noted in the FirstEnergy merger audit last month, FERC spanked the company for recovering merger costs in its transmission formula rate. But today's audit report contains some details that the other one lacked and is just plain funny in spots.
For instance, here's FERC's description of the TrAIL line.
The TrAIL Project originated in 2005 as part of PJM’s Project Mountaineer, whose objective was to enhance west-to-east transfer capability in the PJM transmission system. PJM planned to use its RTEP process to identify a comprehensive plan for the project. Following PJM’s announcement, Allegheny began reviewing transmission enhancement opportunities within the AP Zone of PJM that could expand west-to-east transfer capability and be incorporated in the RTEP. On February 28, 2006, Allegheny formally proposed TrAIL to PJM as an effective solution to long-term reliability needs in the PJM region, and requested that PJM include this proposal in the RTEP as part of a major expansion of the PJM system.
Allegheny’s proposal described TrAIL as a 330-mile, 500-kV line stretching from the Wylie Ridge substation in the western panhandle of West Virginia to a new substation on the eastern side of the AP Zone in Frederick County, MD. The project included installation of a static VAR compensator (SVC) of approximately 500-megavolt-ampere reactive power at Allegheny’s Meadow Brook Substation south of Winchester, VA. The entire line would be in the AP Zone. Allegheny proposed to begin initial engineering and planning in 2007, and to place the first phase in service in 2013.
On May 19, 2006, PJM released the 2006 RTEP Baseline report presenting its first 15-year regional transmission plan. The report identified numerous facility overloads, voltage and thermal violations, and contingency overloads on Allegheny’s transmission system, and recommended enhancements to resolve them. On June 22, 2006, the PJM Board approved the RTEP and directed construction of TrAIL with an in-service date of June 2011.
Allegheny filed its request for incentives for the TrAIL Project, in Docket No. EL06-54-000, concurrently with its proposal to PJM.
Reviewed materials on the Allegheny and FirstEnergy web sites and other key industry and news sources.
Along those lines, FERC also wanted to find out how the merger cost recovery error was discovered:
Analyzed the revised reconciliation that TrAILCo submitted December 19, 2011 to remove certain transaction costs related to the FirstEnergy-Allegheny merger improperly included in its 2011 formula rate. Issued data requests to understand Allegheny’s procedures for tracking, accounting for, and allocating such merger-related costs to TrAILCo. Examined how merger-related costs were improperly included in TrAILCo’s revenue requirement, how the error was detected, how TrAILCo worked with PJM to revise customer billings and refund the costs to customers. Scheduled conference calls and interviewed TrAILCo staff during the site visit to clarify our understanding of these matters.
Imagining how a certain someone must have looked twitching his way through that is a never ending giggle fest. I'm going to enjoy it immensely for a long, long time. :-)
And here's what FERC's audit determined:
Audit staff found that TrAILCo included three categories of merger costs in its 2011 formula rate: (1) $14,823 in postage, hotel rooms, security, and other outside services incorrectly charged to operating costs rather than to the special, non-recoverable accounts established for merger costs; (2) $347,654 in executive bonuses charged to recoverable accounts based on an incorrect determination by Allegheny’s accounting department that the bonuses were not merger-related; and (3) $43,718 in 2010 merger integration costs charged to recoverable accounts due to an incorrect interpretation that the Merger Order required only transaction-related costs to be excluded from rates.
Another problem FERC discovered is that TrAILCo was filing erroneous data in its Form 730, Report of Transmission Investment Activity.
Audit staff’s review showed that TrAILCo reported cumulative spending on TrAIL in its FERC-730 reports rather than actual spending in the latest calendar year, as the FERC-730 instructions on the Commission’s web site require. For example, in its first FERC-730, TrAILCo reported spending $2.3 million on TrAIL during 2006. For 2007 through 2011, TrAILCo reported spending $32.9 million, $105.9 million, $546.0 million, $930.6 million, and $1.009 billion, respectively. These figures total $2.63 billion, 2.6 times the amount TrAILCo charged to Project work orders in 2006-2011.
In other words, TrAILCo made a really dumb mistake because they didn't bother to read and follow instructions readily available on FERC's website. I think they've discovered the root cause of FirstEnergy's accounting problems!
And that about sums it up.
Every year, the Federal Energy Regulatory Commission issues a report of its enforcement actions. The 2013 report
was issued last month.
There was an interesting section of the report about formula rates. A formula rate is a type of rate setting that involves a forward-looking collection of rates based on a projected budget. Interstate electric transmission rates are set under FERC's federal jurisdiction and simply passed through unscathed in your state ratemaking process to your electric bill. A formula rate is a blank template that calculates the rate
according to set formula in compliance with FERC's accounting and ratemaking guidelines. Each year, the transmission owner populates the formula with numbers from its projected budget to arrive at the amount it is permitted to charge for service, and then collects that amount from its customers during the year. At the end of the year, the transmission owner must file another formula rate calculation that trues up the projected rate by comparing it to actual spending. The company then adjusts the following rate year to make up any difference between the two, whether an over-collection or under-collection.
Now, here's the rub. This is all being done on the honor system. And, as the old saying goes, there's no honor among thieves
. FERC audits a small percentage of formula rates every year, either on its own initiative or through referral when a problem is reported. FERC does not audit every formula rate every year. Instead, FERC relies on the people who pay these rates to raise the red flag if something is amiss. There are special protocols (instructions) attached to each formula rate that detail the procedures to be followed to review the formula rate and file a legal challenge if any discrepancies between transmission owner and customer cannot be resolved. So, who is doing this job for you, little ratepayer? Is it your local electric company? Is it your state public service commission? Is it your state consumer protection office? Chances are it's none of the above, and NOBODY is reviewing the transmission rates you are paying. It's not that these entities don't care that you may be being ripped off, it's that they don't have the resources or knowledge to do the job, so they simply skip it and hope for the best. This situation does not serve your interests.
Transmission owners know that nobody is minding the store, therefore they have been taking advantage of the situation to "accidentally" include all sorts of expenses and incorrect calculations that jack up rates and cost you extra money. I say "accidentally" because there's always the chance that they will get fingered for a FERC audit, or get challenged by a couple of housewives from West Virginia. In case they are caught by FERC, they pretend any misdeeds were an "accident" and promise to issue refunds. It's a gamble the transmission owner is willing to take because chances are they won't get caught. If they do get caught, they may not have to refund the whole amount they stole from customers, either because the entire amount of the thievery isn't discovered, isn't proven, or is negotiated through a settlement. It's a risk that's profitable to take. Therefore, transmission owners are routinely ripping us off.
FERC notes that certain trends are developing in the way transmission owners rip us off.
During the past several years, DAA observed noncompliance in certain areas that warrant highlighting for jurisdictional entities and their corporate officials. Although there are other areas of noncompliance associated with the topics presented below, the areas discussed relate to areas where DAA has found consistent patterns of noncompliance. Greater attention is needed in these areas to prevent noncompliance and to avoid enforcement action.
Formula Rate Matters. DAA rigorously examines the accounting that populates formula rate recovery mechanisms that are used in determining billings to wholesale customers. In recent formula rate audits, DAA observed certain patterns of noncompliance in the following areas:
Merger Goodwill – including goodwill in the equity component of the capital
structure absent Commission approval;
Depreciation Rates – using state-approved, rather than Commission-approved,
Merger Costs – including merger consummation costs (e.g., internal labor and other general and administrative costs) without Commission approval;
Tax Prepayments – incorrectly recording tax overpayments which are not applied
to a future tax year’s obligation as a prepayment leading to excess recoveries
through working capital;
Asset Retirement Obligation (ARO) – including ARO amounts in formula rates,
without explicit Commission approval;
Below-the-Line Costs – attempting to move below-the-line costs into formula rates (e.g., lobbying, charitable contributions, fines and penalties, and compromise settlements arising from discriminatory employment practices); and
Improper Capitalization – seeking to include in rate base (and earn a return on) costs that should be expensed.
This is completely unsurprising to me, since I've seen (and challenged) many of these incorrect practices. But what does continue to surprise me is that nobody has the inclination to stop it. If formula rates are to be used to set transmission rates, and FERC knows that they are subject to manipulation and purposeful over recovery, then there simply must be some entity designated to monitor them in the interest of consumer protection. While states have agencies designated to protect their consumers from greedy utilities, there is no federal counterpart at FERC.
FERC's mission is to "assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means." FERC is failing us on formula rates.
I've been following the story of PJM's new capacity import limit via RTO Insider
over the past couple months. Last Friday, PJM made its filing with FERC to change an agreement and tariff to impose the new limits before the next base residual auction.
It seems there is a B-I-G problem with low capacity prices. In addition to causing havoc with incumbent generator profits, PJM has come up with other reasons to "fix" its capacity market.
First though, let's look at how PJM's capacity market works. Capacity is a generator's ability to produce electricity. This is unrelated to energy actually produced in real time. Because PJM has to make sure there is enough electricity available to meet peak demand every year, it secures capacity, or the ability to produce electricity, three years in advance. Generators submit capacity bids in the auction. PJM stacks the bids by price. Beginning with the lowest price, bids are accepted until the capacity target is met. The highest price accepted is the uniform capacity price paid to all generators whose bid cleared.
Now let's move on to imported capacity. Generators outside PJM have been bidding higher and higher amounts of generation into PJM's auction, often at low prices. PJM's rules have allowed imported capacity into the auction even though it has no firm transmission path to be used by load in PJM. This sets up a scenario where PJM has cleared capacity that may never be delivered. The effect of this is that PJM may not have enough capacity to serve peak load. It also creates an effect where it can lower capacity prices for other generators in PJM because acceptance of low bids of imported capacity lowers the high bid that sets the capacity price for all generators.
So, on the one hand, it's a reliability problem, but it's also an earnings problem for PJM incumbent generators. PJM believes that artificially lowered capacity prices created by generation that may never serve PJM load is also causing retirement of existing generators in PJM, as well as preventing new internal generation from being built. PJM's market is supposed to encourage new generation to develop when capacity prices are high, adding more supply to meet demand. Instead, it was getting fake bids from outside the region, and that has skewed capacity prices.
Maybe generation from other regions can supply PJM cheaper than existing internal generation, but who wants to rely on generators thousands of miles away to supply their electricity? The longer electricity has to travel between generator and user, the more unreliable the supply becomes and the more electricity is simply wasted by losses along the way. It's encouraging that PJM finally acknowledges these simple physics of electric transmission, but the challenge now is to see if this new found realization is going to have any effect on the midwest wind transmission gold rush.
PJM's new rules make an exception for any external generator with firm transmission service that can be controlled by PJM and agrees to PJM's "must offer" requirement. This still allows external generators like the hated Clean Line Energy to be excepted from the limit. However, Clean Line only has 700 MW of firm transmission service for one of its lines with a capacity of 3500 MW. This still doesn't make Clean Line imports any more reliable than other imports though, nor does it provide this merchant transmission company with any of the east coast customers forced to buy renewables at any price that it seeks.
Let's keep an eye on this one and see who intervenes and complains at FERC (Docket No. ER14-503).