Commissioner Richard Glick Dissent regarding PJM Interconnection, L.L.C., tariff

Commissioner Richard Glick Statement

April 15, 2019

Docket No. ER19-105-001

I dissent from today’s order because PJM has failed to show that its proposal will produce just and reasonable rates. For many years now, the PJM capacity market has suffered from a chronic oversupply of generation resources. The primary factor driving that oversupply is PJM’s excessively high Net Cost of New Entry1 parameter (Net CONE), which has incentivized new resources to enter the market when they are not needed and caused PJM to procure far more resources than it should. Since the 2015/2016 Base Residual Auction, over 31,000 MW of new generation resources have cleared the PJM capacity market, despite the auctions clearing at prices that were on average 60 percent below Net CONE.2 Those figures indicate that developers are willing to enter the market at a fraction of PJM’s estimate of Net CONE.3 An excessive Net CONE distorts the shape of the demand curve that PJM uses in its capacity market, causing PJM to procure too many resources at too high a price, with obvious detrimental consequences for consumers.

But the harm from an excessive Net CONE goes beyond its impact on consumers’ bills. By retaining too many resources, PJM dulls the price signals in the markets for energy and ancillary services (E&AS), impairing their ability to incentivize the services we actually need to reliably operate the grid. A market is only as efficient as the price signals it sends. So long as the flaws in PJM’s capacity market distort the prices throughout the other PJM markets, consumers will pay excessive prices and get a suboptimal resource mix. Net CONE also sets the market seller offer cap, giving it a significant role in protecting against the exercise of market power in the capacity market.4 As a result, an artificially high Net CONE increases the potential for market
power abuse.5

Faced with mountains of evidence indicating that PJM’s capacity market is overprocuring resources—harming customers and hindering price formation in its other markets—one might expect that PJM and the Commission would take a holistic review of the capacity market, starting with the VRR curve. Unfortunately, today’s order does not give this matter the careful consideration it demands. Instead, the Commission uncritically accepts PJM’s filing in the face of contrary Commission precedent, persuasive protestor arguments, and many unresolved questions of material fact. The record in this proceeding simply does not provide a basis for the Commission to make a reasoned finding that the proposed VRR curve is just and reasonable and not unduly discriminatory or preferential. Rather than summarily accepting PJM’s filing in the face of these shortcomings, I would instead set the issues for hearing in order to develop the record needed to adequately address them.

Today’s order approves the use of a combustion turbine power plant configured with one GE Frame 7HA turbine as the reference resource over considerable evidence (including from PJM’s own consultant) indicating that it is unjust and unreasonable to make a combustion turbine the reference resource rather than a combined cycle unit. As PJM explains, the “well-accepted economic theory” of the capacity market is that, over time, the “cleared capacity [should] converge[] at the target Installed Reserve Margin and new economic generation—regardless of resource type—should converge at the same Net CONE.”6 For that to occur, “Net CONE must accurately reflect the price at which developers would actually be willing to enter the market.”7 A Net CONE value that is consistently above that price will frustrate the economic theory on which the PJM capacity market is based, calling into question whether the market produces just and reasonable results. The reference resource used to establish Net CONE is, therefore, critical to determining whether the VRR curve is just and reasonable.

As noted, the record in this proceeding indicates that resources are entering the PJM capacity market at a fraction of the current Net CONE, indicating that the current Net CONE is excessive. Although PJM’s proposal would reduce Net CONE, PJM’s own consultant finds that using a combustion turbine as the reference resource for the VRR curve will perpetuate the oversupply of capacity since new resources can continue to clear the capacity market at prices far below the administrative estimates of a combustion
turbine’s Net CONE.8 Nevertheless, the Commission accepts PJM’s proposal to select a combustion turbine as the reference resources, relying heavily on its previous approval of a combustion turbine as the reference resource.9 But circumstances have changed. The additional four years of capacity auctions since the last VRR Curve filing in 2014 have seen even greater combined-cycle unit entry than previous years and little combustion turbine entry.10 Those auctions have confirmed that combined-cycle units remain the dominant form of new entry, supporting Brattle’s finding that the advantages of combined-cycle units reflect fundamental, long-term cost drivers. By ignoring Brattle’s recommendation and insisting on using a combustion turbine as the reference resource, PJM’s proposed VRR curve will continue incentivize new entry when it should no longer be profitable.

In addressing this issue under the analogous provision of ISO New England’s tariff, the Commission considered (1) whether the reference resource is likely to be developed in the region, (2) whether cost and revenue estimates for that unit can be developed with confidence, and (3) whether the resulting curve produces “prices high enough to meet the reliability standard but not so high as to add unnecessary costs.”11 The record does not indicate that PJM’s choice of a 7HA combustion turbine as the reference resource is consistent with any of these principles.

First, the record does not show that a greenfield combustion turbine is economically viable or likely to be developed in PJM.12 PJM argues generally, that a combustion turbine is economically viable based on two new merchant plants: The 340 MW Doswell Peaking Unit and the 141 MW Perryman Unit 6.13 In both cases, however, those turbines were installed on the sites of existing plants.14 Accordingly, these plants’ costs are below the cost of greenfield combustion turbine and, thus, do not indicate that a greenfield standalone combustion turbine is economic, never mind likely to enter the PJM market. PJM also relies on Brattle and Sargent & Lundy to support its selection of the H-class in a combustion turbine configuration by showing that merchant generators are installing the 7HA turbine in over 4,000 MW of generators in PJM and another 3,000 MW in other markets. But those figures address the 7HA turbine in combined-cycle configurations, not as combustion turbines. Thus those figures do not support the proposition that there is likely to be 7HA combustion turbine development in PJM.
Instead, those figures indicate that to the extent the 7HA turbine is entering the market, it is likely to be developed as a combined-cycle unit.

Second, PJM contends that estimating Net CONE for a combined-cycle unit is more difficult due to the significant revenue that it would likely earn in the energy market.15 As an initial matter, PJM’s own consultant refutes that point.16 Brattle explains that revenues from E&AS “can be accurately approximated” using actual historical data for combined-cycle units, but that no such benchmark is available for combustion turbines.17 In other words, calculating the E&AS revenue for combustion turbine will, in fact, be subject to greater estimation error than a combined-cycle unit. Putting aside the fact that PJM’s assertion is unsupported by the record, it makes no sense to address the purported uncertainty associated with a combined-cycle unit’s energy market revenue by selecting a reference resource that earns only negligible energy market revenues.18 The solution to complexity is not to assume it out of existence.

It is also more difficult to calculate the expected costs of a combustion turbine unit and specifically the 7HA combustion turbine. In choosing a 7HA combustion turbine unit as the reference resource, PJM needed to develop the cost of constructing and financing a resource that no entity has experience building in PJM. Many of the issues raised by protestors in the record go to the establishment of CONE, which could be addressed largely by choosing a technology type that is in operation and where there is
experience in the costs of constructing such units.19 As PJM itself points out, there is significant experience with the 7HA in the combined cycle configuration.

Third, the record does not suggest that using a combustion turbine as the reference resource would incentivize new entry without unnecessary cost. As noted, the record indicates that new resources are entering the market at a fraction of the current Net CONE and still well below the Net CONE likely to be produced using a 7HA combustion turbine.20 It is hard for me to understand how a Net CONE so substantially in excess of what is actually required to enter the capacity market does not impose unnecessary costs on consumers. PJM asserts that the “VRR Curve should not be designed to limit competition from a plant type available to developers that has all the essential features of a peaking plant that is most reliant on capacity market revenues.”21 But the purpose of the VRR curve is not to ensure that all resource types can compete economically.22 Instead, the VRR curve should procure enough capacity to meet, and not substantially exceed, PJM’s resource adequacy requirements stating that “the curve must be anchored on the price at which investors are willing to add capacity.”23

Rather than adopting PJM’s cursory justification for selecting a combustion turbine as the reference resource, I would set these issues for hearing in order to develop a more complete record and permit the Commission to give these matters the careful consideration they demand.

I also want to respond to the significant concerns raised about PJM’s use of a 3-year historical rolling average for the establishment of the E&AS offset. While PJM’s current tariff requires this approach, the record here highlights its significant drawbacks. As the Market Monitor observes, historic revenue is always wrong.24 This is particularly true during periods, like today, where the industry is undergoing a significant change to the resource mix and market design. Brattle has recommended that PJM explore the use of a forward-looking E&AS offset in each of its studies of the VRR Curve. In the 2018 review, as in past reviews, it concluded that forward-looking estimates of E&AS revenues would yield a VRR curve that meets reliability objectives more effectively than relying on historical estimates.25 I encourage PJM and its stakeholders to initiate a process to develop a forward-looking methodology for determining E&AS revenue estimates. Utilizing forward curves for power and gas is consistent with project valuation methods used by market participants and allows energy market design changes to be more readily incorporated into the capacity market.

For these reasons, I respectfully dissent.
 

• 11 Net CONE is used to establish the administratively determined demand curve that—along with the supply curve formed from capacity supplier sell offers—is used to clear capacity auctions in PJM. The higher the Net CONE figure, the higher the market- clearing price and the higher the total capacity cleared.
• 22 2018 CONE Study at 4.
• 33 “As the clearing prices reflect the offer price of the marginal unit clearing the market, new generation resources must have on average been submitting offers into the auction at even lower prices.” Id.
• 44 This cap is calculated by multiplying Net CONE by the historical average of the Balancing Ratios experienced during Performance Assessment Intervals/Hours in the three most recent calendar years. PJM’s tariff states that bids up to the market seller offer cap “shall not, in and of itself, be deemed an exercise of market power.” PJM Tariff, Attachment DD § 6.4(a).
• 55 This is not just theoretical. Recently, excessive Net CONE values have resulted in very high market seller offer caps. These market seller offer caps have elicited concerns from the Market Monitor that the exercise of market power caused the clearing price to exceed competitive levels. See Monitoring Analytics, Analysis of the 2021/2022 RPM Base Residual Auction 3 (Aug. 9, 2018).
• 66 Keech Affidavit at P 7.
• 77 2018 CONE Study at 1.
• 88 Nearly 27,000 MW (ICAP) of new combined-cycle units have cleared in the past several BRAs, with prices ranging from 50-80 percent below administrative estimates of Net CONE for a combustion turbine. 2018 VRR Curve Report at 32.
• 99 PJM Interconnection, L.L.C., 167 FERC ¶ 61,029, at PP 60, 62 (2019) (Order).
• 1010 2018 VRR Curve Report at 41.
• 1111 ISO New England, Inc., 161 FERC ¶ 61,035, at P 38 (2017).
• 1212 A Net CONE analysis assumes the reference resource is a greenfield project.
• 1313 PJM Filing at 10 (citing 2018 CONE Study at 5).
• 1414 The Doswell Peaking Unit is on the site of the existing Doswell Energy Center and Exelon’s Perryman Unit 6 is located at the existing Perryman Generating Station. Wilson Affidavit at P 39.
• 1515 Order, 167 FERC ¶ 61,029 at P 42.
• 1616 2018 VRR Curve Report at 33 (“The conventional wisdom has always been that [combined-cycle units] are subject to more estimation error in E&AS offsets, since their E&AS offsets are larger. We disagree.”).
• 1717 Id. (“No such benchmark is available for [combustion turbines], so we rely on historical estimates that may not be representative of the future deliver year due to historical anomalies and evolving market conditions. Finally, [combustion turbines] face less transparent gas procurement costs since they are committed and dispatched day-of.”)
• 1818 Combustion turbines have capacity factors as low as 3 percent in recent years while combined-cycle units operate with 50 percent to 70 percent capacity factors. Wilson Affidavit at P 40 (citing Keech Affidavit).
• 1919 These issues include the construction and labor costs concerns raised by the PSEG Companies, PSEG Protest at 9-17, the gas interconnection costs raised by the IMM, IMM Protest at 4-6, and the arguments regarding the 10 percent adder—which Brattle found should only be considered for combustion turbine facilities, not combinedcycle units, VRR Curve Report at 23-24—raised by several parties, e.g., Public Interest Entities’ Protest at 34; Joint Protesters’ Protest at 2-5; IMM Protest at 10.
• 2020 Although PJM’s proposal would lower Net CONE, PJM’s consultant explains that the current Net CONE figure is roughly 2.5 times higher than its estimated Net CONE for a combined-cycle unit. 2018 VRR Curve Report at 55.
• 2121 PJM Transmittal at 13.
• 2222 See Public Interest Entities’ Protest at 31 (“What PJM’s logic overlooks is that consumers are not obligated to pay prices set high enough to allow competition by a very expensive capacity-only resource when more than adequate capacity resources are available at significantly lower prices.”).
• 2323 2018 VRR Curve Report at iv.
• 2424 Monitoring Analytics Initial Protest at 18.
• 2525 2018 VRR Curve Report at vi.