No Consensus on Securing Long-term Generation Adequacy

Regional efforts to ensure long-term generation adequacy reveal a wide range of views by various interest groups who either support or to varying degrees oppose the market rules being proposed to ensure that there is sufficient generation available in all regions of the country.  A PJM effort to revise its plan is heating up, while the battle in New England continues and a new plan is approved in California.

Citing growing concerns about generation retirements and looming capacity shortages, PJM filed with FERC in late August a proposed Reliability Pricing Model (RPM).  The RTO proposes RPM as a replacement to the simpler installed capacity model it has used since starting its bid-based energy markets in 1997.  The new resource adequacy plan resembles in various ways the capacity market of the neighboring New York Independent System Operator.  The RPM includes a downward-sloping demand curve for pricing of capacity, locationally-different prices in response to shortages in constrained regions, a four-year forward capacity procurement, enhanced monitoring and mitigation for capacity markets, and various other features such as allowing demand response and new transmission to compete in capacity markets.  Numerous parties responded to the proposal with a wide range of opinions, including claims by certain utilities that RPM is not necessary because most areas within the RTO have no supply shortages, as well as general support from generator interests who claim the existing capacity rules are inadequate.  Tension between state and federal regulators was evident in the comments of the Organization of PJM States, consisting of the state utility regulators from states where PJM has a presence, which argued RPM would not accomplish its objectives and that FERC should convene a hearing on the RPM proposal.

Meanwhile, a contentious FERC proceeding to revise the resource adequacy mechanism in New England persists.  Earlier in the fall, parties in support and against ISO-New England's locational installed capacity (LICAP) proposal presented oral arguments to the FERC Commissioners.  Previous administrative measures had included a hearing and several rounds of written arguments.  Despite this robust record, heated opposition to LICAP, primarily from Connecticut interests opposed to potential price increases caused by the locational differences in capacity pricing, has rendered FERC unwilling to approve the plan.  Instead, evoking past disasters, FERC recently warned that a California-style crisis might visit parts of New England if market rules aren't revised to encourage more development of generation, and directed the parties to engage in settlement talks.  FERC also set a deadline of January 31, 2006 for the filing of any alternatives to the LICAP proposal.

Speaking of California, the state's Public Utility Commission has adopted a long-anticipated resource adequacy plan for the state's three largest investor-owned utilities, PG&E, Southern California Edison, and San Diego Gas & Electric as well as electric service providers and community choice aggregators.  As with the plans being promulgated and debated in other parts of the country, this plan is intended to encourage timely development of generation in areas where shortages might otherwise develop.  Entities covered by the plan would have to demonstrate by June 2006 that they have secured enough capacity to serve expected customer demand, plus a 15-17% reserve margin.  The contracts would have to identify the specific resources that provide capacity.  The PUC's plan also acknowledges the need for localized electricity capacity requirements but defers implementation pending further consideration, and sets penalties that will rise to three times the monthly cost for new capacity as a sanction for a utility's failure to meet its resource adequacy obligation.  The bilateral liquidated damages contracts previously used in California to ensure resource adequacy will be gradually phased out.