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APPA presses FERC to review capacity markets

From the September 2, 2011 issue of Public Power Daily

Originally published September 2, 2011

By Robert Varela
Editorial Director


"In the longer run, this situation is simply untenable," APPA said of the inability of PJM’s capacity market to get new generation built. The recent changes the Federal Energy Regulatory Commission ordered to the minimum offer price rule in PJM’s reliability pricing model market "are only going to exacerbate the situation," APPA said in Aug. 29 comments on the issues raised at the commission’s July 28 technical conference on the changes to the minimum offer price rule.

The commission should reverse its holdings in its April 12 order that eliminated exemptions from the minimum offer price rule for self-supply and state-mandated generation, APPA said.

The ability to construct new generation, especially natural gas-fired generation (which in many cases would replace power supplied by older coal-fired units) will be required in the coming years, APPA said. If the revised minimum offer price rule continues to be applied to new natural gas-fired generation and uprates, "natural gas-fired generation may well effectively be ‘off the table’ as a way to respond to possible capacity shortfalls in PJM," APPA said. "This simply does not make sense from a policy perspective, and it does not bode well for consumers on either price or reliability grounds."

FERC’s own assessment of likely retirements of coal-fired generation due to environmental regulations "should be setting off alarm bells at the commission," APPA added.

The industry "has added significant amounts of generating facilities when circumstances warranted," FERC Chairman Jon Wellinghoff and Commissioners Cheryl LaFleur and John Norris said in a letter to Sen. Lisa Murkowski, R-Alaska, on the impact of the EPA regulations. That statement "clearly has not taken into account recent experience in RTO-run locational capacity markets such as PJM’s RPM," APPA said. "Hence, this assumption is not warranted, at least in regions with RPM-style capacity markets."

The commission also needs to ensure there is no repeat of the Delaware Municipal Electric Corp.’s experience, where a long-planned new generation unit came close to being "mitigated" out of the capacity market, APPA said. "This ‘near death’ experience relating to a generation resource for which substantial financial commitments had already been made should never have happened."

Witnesses for New Jersey and Maryland explained at the technical conference why new generation developers require long-term contracts and why incumbent generators in constrained areas have little incentive to develop new generation sources, APPA said. As one witness "so eloquently put it, all the incumbent generators in constrained [areas] have to do is ‘clip the coupons,’ collecting high RPM auction revenues without taking any actions to provide additional generation."

In addition to reversing portions of its April 12 order, the commission should undertake a comprehensive review of the operation of locational capacity markets, with the goal of replacing them with more balanced mechanisms that support needed new generation and benefit both generation and load interests, APPA said.


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