Opinion

Bay’s Dissent Highlights Flaws in Mandatory Capacity Markets

The American Public Power Association is disappointed that the Federal Energy Regulatory Commission has once again fueled the many ills of mandatory capacity markets by accepting the PJM’s Capacity Performance Proposal. Despite the flawed reasoning of the FERC order accepting the proposal, it is encouraging to see that FERC Chairman Norman Bay, who wrote a clearly expressed dissent to the decision, stands out as  a powerful voice of reason.

The FERC order could significantly increase electricity costs for customers without achieving PJM’s purported goal of increased long-term reliability by shoring up diverse fuel resources for the future.

As Bay noted in his dissent (see p. 181 of the FERC order document), “The majority today accepts a flawed, complex, highly technical market construct in which there is a potential mismatch between incentives and penalties, in which mitigation has largely been eliminated in a market characterized by structural non-competitiveness, and in which there may be billions in additional capacity market costs borne by consumers. The reality is that once a market construct is accepted and implemented, it is very difficult to unwind.”

FERC approved the reforms, stating in its order, “we find that these reforms are a significant step toward addressing a confluence of changes in the PJM markets, including both recent performance issues that PJM has demonstrated are impacted by inadequate incentives and penalties for resource performance under its current construct, and ongoing changes in PJM’s resource mix that are projected to accelerate.”

However, in a May letter to members of Congress from the PJM region, public power utilities and associations warned that PJM’s Capacity Performance Proposal would increase costs to consumers. The letter noted that the PJM plan would “dramatically increase electric costs without providing meaningful and necessary improvements in system reliability.”

In his dissent Bay also lamented that FERC did not do a cost-benefit analysis of the proposal. “Given the potential multi-billion dollar cost of the CPP and the burden consumers will be asked to bear, any analysis, no matter how rudimentary, would have been helpful before concluding this proposal is just and reasonable,” he pointed out.

Bay also wrote, “One way of viewing the CPP is that it fixes a several hundred million dollar uplift problem in the energy market with a multi-billion dollar redesign of the capacity market.”

He noted discrepancies between rewards and penalties in the PJM proposal that could lead to an outcome where a “rational profit-maximizing resource could simply seek a capacity award in the auction, fail to perform during each performance assessment hour, and likely pay a penalty less than the carrot it has received. To put it more bluntly, the resource could be paid for doing nothing during the emergency hours of the year when it is most needed and for which it has been well compensated.”

Bay said he fully understands the importance of reliability. He also believes in the benefits of competition and markets. But he questions costs relative to the potential benefits and whether PJM’s capacity performance proposal is a just and reasonable way to achieve a higher degree of performance in emergencies.

APPA agrees and thanks Chairman Bay for being the voice of reason.

 

Delia Patterson is General Counsel at the American Public Power Association.

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