posted on Monday, January 08, 2007 11:33 AM by Gunnar Birgisson

FERC Approves Controversial Settlement on PJM Capacity Rules

Praising the settlement process as much as the results, the Federal Energy Regulatory Commission approved, subject to certain changes, the settlement that the PJM Interconnection reached with market participants for a redesign of PJM's capacity market.

PJM's August 2005 proposal to FERC led to an order in which FERC concluded the existing capacity rules were unjust and unreasonable.  This led to settlement negotiations, encouraged by FERC, and the submission of a settlement agreement supported by a majority of market participants.  The settlement was based on the proposal PJM submitted to FERC in August 2005, but included expanded provisions deemed suitable for vertically integrated utilities.  Among the key provisions of the agreement are a sloping demand curve (which combined with generator bids determines capacity prices), forward (rather than same-year) procurement of capacity, and ultimate use of 23 locational deliverability areas (LDAs) reflecting transmission constraints, to be phased-in over several years – which some generators contended was discriminatory because of the use in the interim of an aggregated Rest-of-Market LDA that contains significant internal constraints. 

FERC ordered changes that limit discretion given the PJM market monitor, bar discriminatory treatment of parties that did not sign the settlement, and require additional attention to demand response solutions.