posted on Tuesday, October 10, 2006 7:11 PM by Gunnar Birgisson

FERC to Consider Settlement in PJM Capacity Market Redesign

Thirteen months after the PJM Interconnection proposed to FERC the Reliability Pricing Model (RPM), a redesign of its capacity market, the nation’s largest RTO and many of its members submitted to FERC a proposed settlement agreement to create a new capacity market.  The submitting parties asked FERC to approve the settlement by December 22, 2005, so that it can take effect by June 1, 2007.

The settlement agreement uses many of the concepts included in the proposal PJM had submitted to FERC, but applies them differently, often in a way less favorable to generators.  A sloping demand curve – which combined with generator bids determines capacity prices – continues to be part of the market design, but the pricing points are suppressed.  Instead of procuring capacity four years in advance, as originally proposed, the settlement would require only three-year forward procurement.  The proposed settlement would ultimately create 23 locational deliverability areas (LDAs) reflecting transmission constraints.  Recognition of LDAs then allows capacity prices to vary between regions to reflect constraints on deliverability.  However, all of the LDAs would not take effect until the 2010-2011 delivery year, leaving in place until then awkwardly shaped LDAs with internal constraints, such as the Rest-of-Market LDA that groups together Dominion-Virginia Power and other areas that are separated by significant transmission constraints.  Other modifications include addition of the Fixed Resource Requirement, which allows utilities to opt out of the RPM and instead self-supply capacity, whether from their own resources or through bilateral arrangements. 

The proposed settlement is the result of four months of settlement talks that began a few weeks after FERC’s April 20, 2006 order finding the existing capacity rules to be unjust and unreasonable.