POWER March 2012 - 63

POWER MARKETS
tion and bills the LSEs for their capacity obligation
at the auction clearing price.
PJM calculates a value called the " cost of
new entry " (CONE), which is an estimate of
the cost of installing a new combustion turbine,
and is a significant parameter used to
establish both a price ceiling and a price floor
for certain aspects of the auction. The ceiling
is intended to prevent market manipulation
by sellers who wish to inflate capacity prices,
and the floor is intended to prevent market
manipulation by sellers with affiliated capacity
buyers that could benefit from driving capacity
prices lower.
The RPM auction is governed by numerous
rules, some of which have been the subject
of vigorous debate, that are intended to
ensure that the auction produces a capacity
price high enough to incentivize the maintenance
and new entry of generators in both
constrained and unconstrained areas. The
price also must protect consumers from unreasonably
high charges, and there must be
sufficient monitoring and controls to prevent
market manipulation by those who may want
to increase or decrease the auction price.
The RPM model has both supporters and
detractors. PJM asserts that RPM has successfully
maintained ample reserves for the
PJM area and has allowed for the construction
of significant new capacity. Detractors argue
that RPM is overly complex, has not provided
adequate incentives for new capacity where it
is most needed, and overcompensates existing
inefficient capacity to the detriment of more
efficient new entrants. Others have argued
that the one- and two-year price commitments
for capacity that clears the auction are insufficient
for developers and lenders to invest in
new resources.
This past year saw direct challenges to the
RPM model by two states within PJM-New
Jersey and Maryland-which contend that
RPM is not producing enough generation capacity
within their states to ensure reliability
and keep local capacity prices reasonable.
In early 2011, New Jersey enacted legislation
that required the state's local distribution
companies (LDCs) to enter long-term
contracts with developers of new in-state
generation at capacity prices set by bidding.
The developers were required to offer all of
their new capacity into the RPM auction at a
price ensuring it would clear-for example,
$0-so that they would receive the RPM
clearing price. If the RPM price received by
the developers was above or below the contract
price, the differences would be settled
by the developers and the LDCs exchanging
funds.
1. PJM service territory. Courtesy: PJM Interconnection LLC
The Maryland Public Service Commission
in September 2011 also found that RPM
failed to attract new generation within that
state, and it required LDCs to issue RFPs for
capacity and energy from new in-state natural
gas generators that would be bid into RPM.
These plans by the states collided with an
RPM auction rule, recently amended by PJM
to apply to state-sponsored resources, which
requires that planned new gas-fired generators
must offer their capacity into the auction
at a price no lower than 90% of the CONE
value, unless the generator could show special
circumstances. This rule is intended to
prevent market manipulation by those who
might wish to depress capacity prices. However,
the new gas generators sought by New
Jersey and Maryland may not clear the auction
at an offer price of 90% of CONE, which
would undermine those states' efforts to build
new local generation.
FERC issued two controversial orders in
2011 that upheld the RPM rule, finding that
the states' programs would subsidize the proposed
new plants, which would depress price
signals in the auction. The states argued that
FERC was interfering with their traditional
resource management responsibilities; FERC
responded that it had statutory responsibilities
to govern capacity markets. Those states and
others have appealed FERC's orders to court,
which may present the issue of whether ISO
capacity market rules under FERC's jurisdiction
have priority over state resource planning
jurisdiction.
ERCOT: The " Energy Only "
Approach
The Electric Reliability Council of Texas (ERCOT,
Figure 3), which is not under FERC's
jurisdiction, is the ISO that operates the transmission
system for most of Texas. It has taken
an approach to resource adequacy completely
different from PJM's.
ERCOT has embraced retail competition,
but it has no capacity requirements for
load servers and no capacity market. Rather,
ERCOT's approach to resource adequacy is
known as an " energy only " market. LSEs in
2. The PJM control center. Courtesy:
PJM Interconnection LLC
March 2012 | POWER
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POWER March 2012

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