UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION PROTEST OF PUBLIC INTEREST ORGANIZATIONS

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION PJM Interconnection, L.L.C. Docket Nos. ER EL PROTEST OF PUBLIC INTEREST ORGANIZATIONS On December 12, 2014, PJM Interconnection, L.L.C. (PJM) made two filings related to Reliability Pricing Model (RPM) changes pursuant to Federal Power Act sections 205 and in Docket Nos. ER and EL15-29, respectively. They contain Open Access Transmission Tariff (Tariff) and Reliability Assurance Agreement changes (the 205 Filing ) and Operating Agreement changes (the 206 Filing ). These filings, especially the 205 Filing, form the basis of PJM s RPM overhaul to require that all capacity resources become annual products satisfying stringent performance requirements by the 2020/2021 Delivery Year. 2 Pursuant to Rule 211 of the Federal Energy Regulatory Commission s (Commission) Rules of Practice and Procedure, 3 the undersigned Public Interest Organizations (PIOs) respectfully submit this protest and comment on certain aspects of the 205 Filing. 4 PIOs believe that, as written, the broad capacity market overhaul proposed in the 205 Filing would unduly 1 16 U.S.C. 824d and 824e. Tariff. 2 As PJM does in its filings, capitalized terms not defined herein are defined in PJM s 3 18 C.F.R and PIOs are not protesting the 206 Filing at this time. The 206 Filing: (1) revises the procedure for determining parameter limits for resources eligible to be made whole through Operating Reserve credits for operation during emergencies; (2) reforms PJM s force majeure rules to excuse from performance only for catastrophic conditions; (3) reduces opportunities to effectively avoid capacity resource performance by submitting uneconomic offers in the Dayahead Energy Market; and (4) include in the market rules more transparent and rigorous criteria for PJM s consideration and approval of requested planned and maintenance outages. 1

2 discriminate against certain renewable energy and demand-side resources, 5 effectively restrict capacity market competition to certain types of more costly resources, and result in unjust and unreasonable rates. PJM made these filings after a contentious and expedited stakeholder process, but we believe a change of this magnitude would benefit from the full PJM stakeholder process. Further, PJM has taken significant measures to address any immediate resource adequacy concerns related to cold weather performance and market constraints that undermine the need for the proposed RPM overhaul. We therefore respectfully request that the Commission reject the 205 Filing and direct PJM to implement the full stakeholder process before making a replacement filing. 6 As an alternative to rejection, we support other stakeholders requests for an evidentiary hearing to determine material facts needed to establish that the terms of the 205 Filing are indeed just and reasonable. Should the Commission conditionally approve the 205 Filing, we request the Commission require PJM to adopt at least the following recommendations (further detailed below): (i) preserve Base Capacity resources in the RPM beyond the transition period; (ii) raise the cap on Base Capacity; (iii) continue to allow subannual demand-side resource participation in the RPM; (iv) study how the Tariff changes in its 205 Filing affect renewable and demand-side resources in terms of penalties, payments and capacity cleared in the RPM; (v) and exempt non-fuel-based resources from the proposed Capacity Performance penalties or reduce the penalties for these resources. 5 By demand-side resources, we mean demand response and energy efficiency, and by renewable energy, we are referring to variable renewables, such as wind and solar. 6 PIOs, however, support other stakeholder comments that adding storage and resource aggregation are features of the 205 Filing that should be retained should the Commission reject the 205 Filing. 2

3 I. Background and Introduction A. Context of the 205 Filing PJM s 205 and 206 Filings stem from PJM s Capacity Performance Proposal, which was first released on August 20, 2014, and revised on October 7 as a means to address unusually high forced outage rates in early January As PJM recognizes, these outages were largely due to inadequately weatherized or maintained coal and natural gas plants, fuel delivery and other winter preparedness issues, and that most, if not all, of these issues can be addressed through investments in weatherization or increased operating budgets. 8 In its filings before the Commission, PJM has now expanded its explanation of the capacity market issues the proposal in the 205 and 206 Filings are meant to address. In particular, PJM is concerned about an apparent growing gap between capacity commitments and actual performance 9 and proposes to reform its capacity market by imposing on resources greater penalties for under-performance, paying them for over-performance, and permitting cost recovery of fuel-related upgrades to 7 Problem Statement on PJM Capacity Performance Definition (Problem Statement) (Aug. 1, 2014) PJM Capacity Performance Proposal (Aug. 20, 2014) PJM Capacity Performance Updated Proposal (October 7, 2014) 8 PJM recognizes that the main contributors to outages were natural gas interruptions, coal steam outages, cold weather start failures, issues with using back-up fuel related weatherization and maintenance issues. Analysis of Operational Events and Market Impacts of During the January 2014 Cold Weather Events, at 25-26, See also 205 Filing at The North American Electric Reliability Corporation (NERC) Polar Vortex Review confirms similar findings. NERC Polar Vortex Review (Sept. 2014), eview_29_sept_2014_final.pdf. 205 Filing at Filing at 6-9, 16. 3

4 ensure year-round availability. The objective of these reforms is to ensure that all resources will perform whenever called upon. The 205 Filing is only one component of PJM s Capacity Performance Proposal, and PJM has filed other components of it in separate dockets at the Commission. In addition to the requirements in the 205 Filing, PJM s earlier Capacity Performance Proposal also proposed to remove demand response and energy efficiency from the supply-side of the market and procure additional capacity from retiring units through reliability must run agreements to make up for any potential capacity shortfall in the upcoming delivery year. Relatedly, PJM made two separate filings intended to preserve or secure capacity resources for the 2015/2016 Delivery Year. PJM filed to revise its Tariff in order to secure capacity agreements without an auction for resource adequacy reasons (Docket No. ER15-739) and for a waiver to retain 2,000 MWs of capacity (Docket No. ER15-738). PJM has also filed proposed changes to demand-side resources (Docket No. ER15-852) to take effect should the U.S. Supreme Court deny petitions for certiorari in EPSA v. FERC. B. PIO involvement in PJM s Capacity Performance stakeholder process PIOs appreciate the opportunity for participation in the PJM stakeholder process. Because the Problem Statement and August 20 and October 7 versions of the Capacity Performance Proposal focused on the high winter forced outages, PIOs filed comments urging PJM to address these outages with measures targeted toward their underlying causes, specifically, through requiring that under-performing coal and natural gas plants take steps to improve maintenance, winterization, and fuel supply and delivery arrangements to improve winter performance. These recommendations were consistent with the North American Electric Reliability Corporation s 4

5 (NERC) assessment in its Polar Vortex Review, 10 and many of these efforts are already underway and have resulted in improvements (as detailed in Appendix B). C. Brief overview of PIO s position on PJM s RPM overhaul Unlike the broad RPM overhaul PJM is proposing, an approach tailored to problematic sources can reduce the forced outage rate to acceptable levels without imposing additional requirements or otherwise disadvantaging resources that did not contribute to the 2014 winter outage problem and in fact performed voluntarily or over their committed levels. These include demand-side and renewable energy resources. 11 Notably, PJM was able to avoid involuntary load curtailments during the Polar Vortex by deploying demand response, 12 and wind resources performed at much higher outputs than credited through their capacity factors during winter peak. 13 PIOs understand that PJM is seeking a market approach to encourage high performance, and that an approach targeting problematic resources is a prescriptive or administrative solution, not a market solution. But PJM s proposed market re-design favors certain resources and costly upgrades by valuing all-year-round availability above all else; it specifically does not value 10 NERC Polar Vortex Review (September 2014), eview_29_sept_2014_final.pdf. 11 PJM, Analysis of Operational Events and Market Impacts During the January 2014 Cold Weather Events (May 8, 2014) at 21, 12 About 25% of PJM s registered DR responded voluntarily during the worst of the January 2014 polar vortex, delivering maximum hourly load reductions of 2,379 MW and 1,179 MW on January 7th and 8th respectively. PJM Demand Response Activity January 7-8, (March 2014) at 2, 3, available at 13 PJM s Capacity Performance Action Item at p.37, 5

6 flexibility, cost effectiveness, or resources that perform particularly well during summer or winter peak at lower cost. 14 The requirement that all resources must perform whenever called upon is unnecessary and could incent building a generation fleet heavily focused on firm baseload generation to the detriment of more flexible generation, renewables, and demand-side resources. And imposing market rules that preference expensive firm resources with year-round availability will unduly discriminate against certain resources that were not part of the problem and increase prices to consumers by limiting competition from less costly resources. The proposal in the 205 Filing has not been sufficiently vetted for stakeholders to understand the magnitude of its effects and could result in unintended, adverse and costly consequences. PIOs continue to support focusing on addressing specific causes of coal and gas power plant failures (such as fuel supply and equipment weatherization) instead of erecting barriers to participation from resources that historically perform well during summer and/or winter peak, such as renewable and demand-side resources. These measures will help preserve reliability through future extreme winters at reasonable cost; in fact, outage rates improved over the course of 2014, and PJM has not reported high outage issues despite a recent cold spell. PIOs could support broader changes to the RPM, but only after having the opportunity to fully understand their implications. 14 PJM s proposal does offer seasonal resources a limited ability to pair up to offer into the market as annual resources; we discuss this below. 6

7 II. The Proposal Unduly Discriminates Against Certain Types of Resources and Will Result in Unjust and Unreasonable Rates PJM s proposed RPM overhaul will require all RPM resources to satisfy the new Capacity Performance (CP) requirements by the 2020/2021 Delivery Year. 15 CP resources must be capable of sustained, predictable operation and available to provide energy whenever PJM calls on them. 16 As part of the transition plan for the 2018/2019 and 2019/2020 Delivery Years, PJM proposes to allow resources that are physically incapable of meeting CP requirements to submit sell offers as Base Capacity (BC). 17 BC resources are essentially the existing annual RPM resources but with higher performance requirements during summer (BC demand-side resources only have summer obligations). BC resources will have reduced exposure to penalties under the Proposal but will likely clear at a lower price. 18 A. The problem PJM seek to solve with CP requirements was largely winter related and arose from fuel-based generator outages The 205 Filing is meant to address a perceived growing gap between capacity commitments and actual performance. However, evidence (discussed in Appendix A) indicates that the perceived growth was related to the 2014 Polar Vortex, and this gap has since decreased. PJM emphasizes the upward trend in forced outage rates in a graph on page 16 of the 205 Filing. This uptick in outages, however, appears to be a recent phenomenon due to the extreme but unusual cold weather during the Polar Vortex of January 2014 (a 1 in 10 year and maybe even rarer event). However, PJM s system-wide five-year weighted-average forced outage rate Filing at 27, Filing at 22, Filing at Filing at 26. 7

8 exhibits a stable trend (in the 6.1% to 6.9% range in recent years), according to its Reserve Requirements Study, 19 and the PJM Independent Market Monitor s State of the Market Report shows that the forced outage rate returned to normal levels over the course of Averaging over last winter s peak, there appears to be no upward trend. We discuss this further in Appendix A. PJM s 205 Filing, in discussing outages, largely identifies winter-related issues (some possibly in part due to under-maintained retiring plants). 21 PJM nevertheless does not explain why it is imposing a requirement that all RPM resources be available all year to address winter performance issues. PJM simply states that it does not think relaxing the 1 event in 10 year Loss of Load Expectation (1-in-10 LOLE) standard 22 is optimal and that there should be only one capacity product providing the highest assurance of performance Requiring an annual solution to a winter problem is not adequately justified PJM has not explained why it needs better annual resource performance instead of better seasonal peak resource performance, especially since a key assumption underlying the CP proposal is that 100% of BC is unavailable at winter peak, as illustrated by this graph is from PJM s October 7 Capacity Performance Proposal PJM Reserve Requirement Study, Analysis Performed by PJM Staff, October 9, 2014, 20 Monitoring Analytics, LLC, State of the Market Report for PJM, Q3 2014, November 13, 2014, p Filing at This is how PJM determines the limit on subannual resource participation in the RPM Filing at October 7 Proposal at 19. 8

9 This assumption that 100% of BC is not available at winter peak by itself is questionable, 25 but even accepting it as true, a more tailored solution would be to procure more reliable winter resources and reduce winter outages. 2. Extending CP requirements to non-fuel based resources that did not experience winter outages is unjustified PJM extends its proposed year-round CP requirements to renewable and demand resources, even though PJM s availability and performance concerns arise from fossil-fueled generation resource winter outages. (To be clear, these resources can participate in the RPM as BC, but only until BC is eliminated in favor of 100% CP in 2020.) PJM did not explain its reason for imposing the new CP requirement on renewables. For demand resources, PJM s logic is that demand response demonstrated significant value in meeting peak needs during the Polar Vortex, but these resources performed on a voluntary basis with no commitment to perform. Therefore, 25 See subsection 3 below. 9

10 according to PJM, demand resources must also become annual CP resources along with generation resources. 26 But this is unconvincing because there is no reason to apply the solution for problematic fuel-based generation resources (imposing the new year-round availability requirement) to demand resources that over-performed in such a way that would reduce or eliminate the type of resource that demonstrated significant value in meeting peak needs during the Polar Vortex (namely demand resources that are not necessarily available all year round, such programs related to as summer cooling efficiency or customer curtailment) Excluding all but CP resources from the RPM is unjustified During the transitional period up to 2020, BC resources can offer into the RPM but will be capped through a method described below. From this method, PJM estimates the cap on total resources clearing as BC to be no more than 18.9% RTO-wide for the 2018/2019 Delivery Year Base Residual Auction (BRA). This includes both demand-side resources and generation that can only qualify as BC and not CP. The other 81.1% must be CP. This cap is further subdivided into an 8.3% cap on BC demand response and energy efficiency and a 10.6% cap on BC generation See 205 Filing at 34. PJM is proposing to eliminate subannual demand-side resources and impose CP requirements on annual demand-side resources by the 2020/2021 Delivery Year. Until then, demand-side resources may offer into the RPM Auctions as BC if they satisfy BC criteria. 205 Filing at PJM claims that the Commission has recognized, RPM always has depended on the commitment of identifiable, unit-specific, firm, physical resources, but PJM s citation does not support this statement. 205 Filing at 6. In support, PJM cites to a DR Sell Offer Order (which appears to be undefined in the filing) at P 22, which states that PJM needs to have a reasonable assurance that resources offering into RPM auctions will actually be able to provide the offered demand response capability so that PJM can meet its resource adequacy requirements, and at P 27, which PJM asserts allows PJM to reasonably require RPM offers be submitted with the reasonable expectation that all megawatts that clear be delivered. 205 Filing at 7 n.11. We do not contest these principles, but do not see how they support that the RPM resource be identifiable, unit-specific, firm, or physical Filing Falin Aff. at 9. 10

11 The calculation for the cap on total BC is based on adopting a standard accepting a 10% increase in the Loss of Load Expectation (LOLE) such that the LOLE increases from a 1 event in 10 years to a 1.1 event in 10 year standard (1.1-in-10 LOLE). 29 As PJM acknowledges, the Commission has previously found PJM increasing the risk of LOLE by 10% to facilitate subannual resource commitment to be an acceptable level of risk, and the current Tariff allows for subannual demand-side resources 30 to commit up to a level maintaining a 1.1-in-10 LOLE. 31 Because the Commission has approved the 1.1-in-10 LOLE standard for PJM, and 100% CP is not needed to maintain 1.1-in-10 LOLE (as shown by PJM s calculations and our estimates), it is not clear why BC must be eliminated after the transition period. The proposed PJM cap on BC during the transitional period is overly restrictive because the cap calculation is based on assumptions that are too conservative. For example, PJM assumes a limit on outside transfers/assistance that is much lower than the capacity transfer limits and far below what was seen during the January 2014 events. 32 PJM also assumes that no BC generation or demand-side resources are available during the winter peak. But this is unrealistic, as PJM has never seen a winter peak where all generation and demand-side resources failed to deliver. Further, demand response and wind (essentially base capacity) performed well during January Filing at By subannual, we mean it is not available all year long. Subannual demand-side resources can include Limited Demand Response, Extended Summer Demand Response, or BC demand-side resources. (2011) Filing at 67 citing PJM Interconnection, L.L.C., 134 FERC 61,066, at P PJM limits imports from external capacity to 3,500 MWs. See 2014 PJM Reserve Requirement Study (October 9, 2014) at 10, However, PJM saw 8604 MWs of power imports (or external assistance) on January 7, See PJM, Analysis of Operational Events and Market Impacts During the January 2014 Cold Weather Events (May 8, 2014) at 23, 11

12 2014 and the outage rate for these resources during the 2014 Polar Vortex, at its worst, was 22%, not 100%. 33 If, instead of assuming 0% BC generation availability in its calculation of the cap on total BC, PJM more reasonably assumed 50% of BC generation was available (which is still a conservative assumption and BC demand-side resources are still assumed to be unavailable), the amount of CP needed to preserve 1.1-in-10 LOLE would be roughly 69.3%, and 31.7% of PJM s fleet could remain as BC. 34 Allowing more BC resources to clear in the auction would lower prices for consumers. B. Proposed requirements under the 205 Filing favor year-round availability over all other attributes and unduly discriminates against non-fuel-based resources that by themselves cannot upgrade to achieve this availability As recognized by PJM, the annual availability requirement imposes disparate burdens on different resources, 35 such as fuel and non-fuel based resources. Non-fuel resources by themselves are not typically available at all times all year round, but nevertheless are valuable for meeting summer and/or winter peak demand at lower cost than fuel-based generation. Further, the proposal allows costs related to securing adequate fuel needed for fuel-based generation to upgrade to CP to be passed along to consumers. Unlike fuel-based generation, renewable generation and non-fuel-based demand-side resources cannot become available all year round through upgrades, and cannot avail themselves to the benefits of being able to firm up fuel supply and pass associated costs to consumers accorded to fuel-based generation under this rule. Imposing CP penalties will not 33 Problem Statement at PJM s Capacity Performance Action Items at p.132, 35 See 205 Filing at

13 incent renewable and non-fuel demand-side resources to upgrade or do anything different other than adjust their capacity offering into the RPM. Since these penalties do not incent investment in upgrades, it makes little sense to impose them on renewable and demand-side resources. Thus, the proposal favors fuel-based generation resources to the detriment of categories of non-fuelbased resources that perform well under extreme and rare winter peak events. Because PJM s solution is not tailored to problematic resources and adversely affects certain classes of resources that were not part of the problem, its overbroad reach unduly discriminates against these resources. This is discrimination without justification, and will reduce competition in the RPM from non-fuel-based resources, which will drive up costs to consumers, and result in unjust and unreasonable rates. 1. Allowing resources to combine and offer in as CP does not alleviate the undue discrimination against non-fuel-based resources PJM acknowledges that transitioning to 100% CP resources could have an impact on resources such as Intermittent Resources or Capacity Storage Resources which may not be capable of sustained, predictable operation and be able to provide energy during both summer and winter emergency conditions. Recognizing that it is important to encourage such resources continued participation in the RPM, PJM proposed to allow Capacity Market Sellers which own one or more Capacity Storage Resources, Intermittent Resources, Demand Resources, or Energy Efficiency Resources that are located within the same Locational Deliverability Area (LDA) to submit an offer as a Capacity Performance Resource which represents the aggregated Unforced Capacity value of such resources. 36 Thus, a seller of wind capacity with strong winter Filing at

14 performance and summer energy efficiency capacity could in theory offer an annual resource the amount of capacity between the two that is available all year round. 37 PIOs appreciate PJM s efforts in preserving some of these resources ability to participate in the RPM, and the ability to offer coupled resources somewhat alleviates the adverse impact of the CP proposal on these resources. 38 However, a well-designed market would have better information and would be better equipped than individual businesses or generators to more efficiently procure an appropriate mix of resources. And, if true, the proposed Tariff language should clarify that different sellers may aggregate; as written, it appears that the resources to be paired must come from the same seller or be controlled by the same seller. 39 This could benefit sellers with large portfolios of sub-annual resources, who could aggregate and offer as CP a fraction of its portfolio that is guaranteed to be available every day in the same LDA, but smaller resource providers would be left out. More clarity on how this coupling would work in practice or what fraction of these resources may be preserved in this manner would be helpful. Because of the concerns expressed above, PJM should preserve BC resources in the RPM beyond the transition period, raise the cap on total BC to at least 31.7%, and continue to allow subannual resources to bid in as BC. PJM could adjust its requirements for BC 40 as needed to allow for a mix of products with enhanced performance in the winter and/or summer. This would Filing at We also appreciate PJMs willingness to preserve demand-side resources on the supply side for the time being and allow renewable resources to pair with them. 205 Filing at 28, 33. But if it is PJM s intention to eventually remove demand side resources from the supply side, this opportunity will not be available in the future Filing at 33; proposed Tariff, Attachment DD, section 5.6.1(h). 40 Under the current proposal, BC demand-side resources are expected to be available only during summer months, but other BC resources are expected year round but will only be subject to a Non-Performance Charge when they fail to perform under emergency conditions during summer months. 205 Filing at

15 at least allow room for seasonal resources to help meet seasonal needs at lower costs than CP resources. If PJM is concerned that retaining the BC product into the future would disincent fuelbased resources from making the necessary upgrades to reduce outages, PJM could phase out the ability for Generation Capacity Resources to offer in as BC. 41 This would be fair because as mentioned above, the fuel-based resources are able to upgrade by making physical changes at the plants or making more reliable fuel arrangements whereas renewable and non-fuel-based demand-side resources cannot make such upgrades. Another way to alleviate the unfavorable treatment of non-fuel-based resources that cannot physically upgrade like fuel-based generation is to exempt non-fuel-based resources from the proposed CP penalties or reduce their penalties. Indeed, this would be fair because no amount of penalty would be able to incent these resources to upgrade in ways they cannot. The Commission has previously recognized that renewable generators limits on precisely controlling generation levels can merit waiving punitive adders, and that this treatment is not unduly discriminatory PJM s current proposal allows the following to offer into the RPM as BC: internal and external Generation Capacity Resources, Intermittent Resources, Capacity Storage Resources, Annual Demand Resources, Base Capacity Demand Resources, and Base Capacity Energy Efficiency Resources. 205 Filing at 26. Capitalized terms not defined herein are defined in PJM s Tariff. 42 The Commission has determined that it is appropriate to account for the special circumstances presented by intermittent generators and their limited ability to precisely forecast or control generation levels, such as waiving the more punitive adders associated with higher deviations. Preventing Undue Discrimination and Preference in Transmission Service, Order No. 890, FERC Stats. & Regs. 31,241 at P 663; Id. at P 667 (concluding that the partial exemption from imbalance charges for intermittent resources appropriately reflects the special circumstances faced by such resources and, consequently, is not unduly discriminatory ). 15

16 III. Cost Increases Would Be Substantial Under the Proposal and Would Outweigh Benefits to Consumers, Resulting in Unjust and Unreasonable Rates A. Given improvements in outage rates, any reliability benefits from the CP proposal likely would be marginal PJM explains that its proposal is motivated by worsening forced outage rates and supports this claim with a plot using data from NERC. 43 However, the increase in forced outage rates appears to be largely a recent uptick from the January 2014 Polar Vortex. Indeed, according to the October 2014 PJM Reserve Requirements Study, 44 the historical average weighted forced outage rate appears to not have an upward trend, and the PJM Independent Market Monitor s State of the Market Report shows that forced outage rates have returned to normal levels (in the 6% range) over the course of 2014 (see figure below, from the third quarter 2014 report). 45 The trend in forced outages is discussed further in Appendix A Filing at PJM Reserve Requirement Study, Analysis Performed by PJM Staff, October 9, 2014, available at 45 Monitoring Analytics, LLC, State of the Market Report for PJM, Q3 2014, November 13, 2014, p

17 In addition, PJM has identified the main underlying causes of last winter s outages, and its 205 Filing points out that most, if not all, of these winter issues can be addressed through investments in weatherization or increased operating budgets. 46 PIOs agree that measures targeting specific causes of under-performance, such as winter testing requirements, maintenance and weatherization standards, and gas commitment and coordination improvements, will adequately decrease forced outage rates. These measures and any others underway are described in Appendix B. PJM also has other means of reducing outage rates it has yet to explore. In particular, PJM could survey generators who experienced performance problems last winter regarding steps taken to date to improve performance and expectations regarding performance under similar conditions should they recur, and evaluate generator performance under cold weather conditions during winter 2015/ Filing at

18 PJM has reason to be confident that measures currently underway to reduce winter forced outages are working to ensure winter performance. PJM s Winter Peak Study Update presented on December 4, 2014, tested an extreme polar vortex scenario in certain winter risk LDAs. 47 The extreme polar vortex scenario modeled used a 90/10 load forecast to mimic last winter s polar vortex peak event, turned off all chronically curtailed gas units, all gas curtailed at least once in the last 7 years, and all of the planned gas in the queue with a signed Interconnection Services Agreement for a total of 25,700 MW of gas outages (or 19% of PJM s installed capacity). 48 Despite the extreme cold weather modeled with 19% in forced outages and with fewer gas units available than during the actual Polar Vortex (i.e., 25,700 MWs in the modeling compared with the 19,000 MWs of outages during the actual Polar Vortex), PJM experienced no transmission violations or capacity shortfalls. 49 This is a good indication that PJM is prepared for future events like those seen in January Indeed, PJM's load reached a peak of approximately 136,668 MW on January 8, 2015, which was about a 1 in 7 year level winter peak event, and there have not been reports of unusually high forced outage rates at Id. at Id. at 64, 69, 73 and 74. See also PJM s CP filing at 17 ( On a megawatt basis, [during the polar vortex] natural gas interruptions accounted for 9,300 MW of outages other natural gas outages related to issues such as start failures due to cold weather or issues with using backup fuel accounted for another 9,700 MW and are related more to weatherization and maintenance issues than the inability to secure gas supplies and transportation. 50 Preliminary Hourly Load for hour ending 8 AM as reported by PJM. From the PJM 2015 Load Forecast Report, the forecast winter 50/50 peak load was 129,711 MW and the forecast winter 90/10 peak load was 138,165 MW (Tables B2 and D2, respectively), which makes 136,668 MW a 1-in-7 year winter peak load. 18

19 The benefit intended to be achieved through the 205 Filing and its all-year-round availability requirement is an extremely high degree of reliability. But more targeted measures are already improving reliability; after taking into account the improvements that have reduced outage rates to their normal levels last winter or will further reduce outages 51 and additional capacity procurement, the benefit of the CP overhaul is likely marginal. This is especially true since the rare events of last winter did not result in a loss of load. In moving forward with the CP proposal, PJM has indicated that it favors a market solution over a prescriptive or administrative one, 52 but the market solution PJM is advancing here is more costly than a tailored approach and the proposed market rule would favor certain types of fuel-based generation. Further, the Commission in its Fuel Assurance Order on Technical Conferences made clear that an administrative approach is one of the options RTOs/ISOs should consider in addressing fuel assurance issues, 53 and RTOs should weigh the 51 PJM has identified the issues contributing to forced outages during the Polar Vortex, and pointed out that most, if not all, of these issues could be addressed through investments in weatherization or increased operating budgets. 205 Filing at See, e.g., 205 Filing at ( Rather than establishing prescriptive eligibility requirements such as delineating acceptable fuel transportation arrangements, storage requirements for dual fuel capable units, or weatherization requirements, PJM proposes that an offer as a Capacity Performance Resource includes a representation (described in more detail below) that the Capacity Market Seller has made, or will make, the necessary investment to ensure the resource has the capability to provide energy when called upon by PJM. ). 53 Fuel Assurance Order on Technical Conferences (Fuel Assurance Order), 149 FERC 61,145 (Nov. 20, 2014) at P ( The options can range from those focused on providing incentives to encourage greater fuel assurance to approaches that are more administrative in nature. Tradeoffs exist between the different approaches that must be considered in determining what additional changes to capacity markets or resource adequacy constructs to address fuel assurance may be appropriate. For example, an administrative approach may offer RTOs/ISOs more certainty regarding the expected performance of resources but requires that the RTO/ISO correctly identify all future system needs and the best methods for meeting those needs. The ability of the RTO/ISO to do so correctly has cost consequences for consumers. ). 19

20 high costs to consumers against any incremental benefits obtained from high level of reliability. 54 In this case, an approach targeting winter issues is likely less expensive than implementing the full proposal, would likely yield similar reliability benefits, and with the solution tailored to the problem, would not have the undue discrimination concerns discussed above. B. The costs of procuring 100% CP likely would be high The Commission recognizes that the cost to consumers should be considered in relation to the reliability benefit obtained. 55 Despite this principle, PJM has not quantified the cost of the proposal in the 205 Filing. However, PJM did conduct a cost-benefit study of its October 7 capacity performance proposal, 56 and found that the net incremental cost of that October 7 proposal (taking into account the savings from load payment and uplift) for the next three delivery years would be in the range of $1.4 billion to $4.0 billion. For the longer term, the net incremental cost of the proposal was estimated be about $300 to $700 million per year, assuming average weather. Because the cost of the October 7 proposal was greater than the savings from uplift payments, the analysis shows that it is less costly to pay uplift during extreme weather conditions instead of overinvesting in year-round reliability that is really only needed during rare winter events. Further, an approach targeted to addressing the source of these uplift payments 54 See Fuel Assurance Order at P 18 ( We recognize that any solution involves a balance of interests, such as weighing the benefits of a particularly high level of fuel assurance with the associated costs, and encourage RTOs/ISOs to account for these trade-offs in their approaches to fuel assurance. ) 55 See Fuel Assurance Order on Technical Conferences at P18. The Commission encouraged RTOs/ISOs to weigh the benefits of a high level of fuel assurance with the associated costs. 56 PJM, Monitoring Analytics, Capacity Performance Initiative, (Oct. 23, 2014) 20

21 would likely reap a similar benefit at much lower cost and not discriminate against subannual or variable renewable resources. Intuitively, the costs of the Proposal are likely greater than its benefits because imposing year-round availability to address seasonal peak needs incents unnecessary investments. Essentially, the 205 Filing would allow generators to overinvest and recover the associated costs through rates, which would be unjust and unreasonable. Even though PJM has not quantified the costs of the 205 Filing, and we do not know the cost of upgrading the entire capacity fleet to CP, we can at least estimate that certain other aspects of the 205 Filing could increase costs to consumers by $3.4 billion per year. In particular, the 205 Filing eliminates subannual demand-side resources and the 2.5% Short-Term Resource Procurement Target Reduction, known as the Holdback. According to the PJM independent market monitor s 2017/2018 RPM BRA sensitivity analysis, eliminating subannual demand-side resources would increase costs to consumers by more than $2.2 billion per delivery year and eliminating the Holdback and subannual demandside resources will drive up costs by $3.4 billion per year. 57 The fact that eliminating subannual demand-side resources drives up costs lends support to the intuition that these resources help meet seasonal peaks at lower cost than annual resources. PJM should therefore retain these resources beyond the transitional period. The Holdback reserves 2.5% of the RPM from the BRA, allowing resources, such as demand response and energy efficiency to bid in during the incremental auctions closer to the delivery year. The Holdback helps mitigate load over-forecasting, which has been a consistent problem in recent years. Load over-forecast inflates the amount of capacity committed in the RPM compared with the actual need estimated closer to the delivery year and drives up costs. 57 IMM Analysis of the 2017/2018 RPM Base Residual Auction at

22 PJM explains in the 205 Filing that removing the Holdback will increase clearing prices in the RPM and that PJM is improving load forecasting through a separate stakeholder process. Neither of these reasons justify removing the Holdback at this time. First, load is consistently over-forecasted, and the Holdback has been partially correcting for that over-forecast by procuring 2.5% less capacity in the BRA. Removing this correction will not be an efficient adjustment of the market price. In other words, removing the Holdback to allow the RPM to even further over-procure (a negative benefit) to raise market prices (thus increasing costs) is not costbenefit justified. And although PJM is working to improve its load forecast, the load forecast developed at the time of the BRA continues to exceed that developed at the start of the delivery year. While PIOs appreciate that PJM is working to correct the load forecasting, the current stakeholder process has not yet determined how to correct the over-forecast and more accurately capture reductions in load through demand-side resources. Thus, it is premature to remove the Holdback until PJM has corrected its load forecast or at least until the stakeholder process improving load forecasting arrives at an acceptable solution. IV. PJM s Proposal is Not Just and Reasonable by Virtue of Any Similarities It Has With ISO-NE s Pay for Performance Proposal The Commission, in its Fuel Assurance Order, has pointed to ISO-NE s Pay for Performance proposal as an example of one way RTOs/ISOs can address fuel assurance issues while being careful to emphasize that it is not the only way. 58 PJM has adopted features similar to the ISO-NE proposal, 59 and cites to the Commission order approving ISO-NE s proposal to 58 Fuel Assurance Order at P 10, PJM proposal is more broad than ISO-NE s in various respects. For example, it proposes to assess performance during emergencies, rather than only during scarcity conditions. Specifically, PJM s proposed Performance Assessment Hours will be delineated by PJM s declaration of Emergency Actions, which are defined as locational or system-wide capacity 22

23 suggest that the CP proposal should also be approved. 60 But just because PJM s CP proposal bears some similarity to ISO-NE s proposal does not mean PJM s CP proposal is automatically just and reasonable. In fact, differences between the two RTOs suggest that PJM s adoption of ISO-NE s scheme produces unjust and unreasonable results. PJM recognizes various differences with ISO-NE, and notes that PJM is considerably larger than ISO-NE in both geography and peak demand, pointing to PJM s 2017/2018 BRA reliability requirement of 165,007.1 MW versus ISO-NE s Forward Capacity Auction installed capacity requirement of 33,855 MW for the same delivery year. PJM also pointed out that it benefits from a more diverse resource mix. 61 (ISO-NE has significant dependence on gas and suffers from more pipeline constraints. 62 ) From these facts, it seems that even if moving to a single capacity product in ISO-NE is appropriate for that RTO, it does not mean a similar system in PJM is automatically just and reasonable. Specifically, considering that ISO-NE s resource fleet is smaller and comparatively less diverse, having only one capacity product and imposing the same capacity requirements on all resources would not raise that same discrimination shortages that cause pre-emergency mandatory load management reductions or... a more severe action. 205 Filing at Filing at Filing at PJM further elaborated that ISO-NE s performance problems were more severe than PJM has experienced. While ISO-NE s forced outage rate nearly doubled, PJM s increased by about 60% from the 2006/2007 Delivery Year to the 2013/2014 Delivery Year. And while ISO-NE s average resource availability dropped to 71%, PJM s fell to 78% during the January 7, 2014 forced outages. 205 Filing at ISO-NE s capacity was 41% natural gas 2010, and this is projected to increase to 47% natural gas in ISO-NE, Percent of Total System Capacity by Fuel Type. Gas-fired resources represent more than 11,000 MW of ISO-NE s generating capacity, but ISO-NE s experience has shown that during cold periods, the pipelines are capable of supporting less than half this amount. 2014/2015 Winter Outlook: Sufficient Power Supplies Expected, but Natural Gas Pipeline Constraints an Ongoing Concern at 1, However, Id. at

24 concerns. Further, despite the fact that PJM is larger and has a more diverse resource mix, PJM afforded less than four months for its stakeholders to vet the CP proposal, where ISO-NE stakeholders had 18 months to review their Pay for Performance proposal. The language PJM points to from the Commission order approving ISO-NE s proposal strongly suggests that imposing an ISO-NE-like scheme on PJM s resource mix may not in fact result in just and reasonable rates and could unduly discriminate against certain resources. For example, PJM notes the Commission has found that a resource adequacy construct that fails to provide adequate incentives for resource performance, [can] forc[e] consumers to pay for capacity without receiving commensurate reliability benefits. 63 But if the Commission is concerned about consumers being forced to pay for capacity without receiving commensurate reliability benefits, the CP proposal seems to make that worse, not better. As discussed, the reliability benefits are marginal and likely come at great cost, and thus cannot be said to be commensurate. Further, if the RPM transitions to all CP, consumers would be paying for more capacity than they need, as there will be circumstances where subannual resources not eligible to sell as CP would meet consumer needs at lower cost. It seems therefore, that the CP proposal is not in danger of failing to provide adequate incentives (which was the concern expressed by the Commission above), but provides incentives to overinvest in capacity performance. PJM also points to the Commission s explanation that a resource adequacy construct that treats many resources as if they are fully available to operate during emergencies, and pays them accordingly, even when those resources are unable to deliver energy or reserves at that time will not only fail to incent resource performance, but also perversely select less reliable resources over more reliable resources because a capacity supplier s decision to forego Filing at 1 citing ISO New England Inc., 147 FERC 61,172, at P 23 (2014) (Pay for Performance), reh g pending. 24

25 investments that would improve resource performance allows it to offer into the [capacity auction] at a lower price. 64 This may be true for certain resources, such as fuel-based power plants in need of maintenance or physical upgrades, but for certain resources like renewables, the supplier is not making a decision to forego investment it may be that there are no such investments that can be made. For example, a unit of renewable wind generation, by itself cannot invest to be available every day of the year. The Commission s statement in this context is clearly not meant to apply to all resources in all situations, but to the ones where incentives can affect suppliers decisions to invest. In PJM s case, where PJM s more diverse resource mix includes suppliers who cannot make the decision to invest, imposing the same rule on all suppliers is likely unfair. Given PJM s diverse resource mix, the incentive under the CP proposal to invest in a single capacity product is not likely appropriate in PJM s situation. V. The Proposal is Too Large of a Change to Not Afford Stakeholders the Full Review Process Between the date the initial proposal was released (August 20, 2014) to the date of the 205 Filing at the Commission, stakeholders had less than four months to evaluate PJM s CP proposal. Moreover, the 205 Filing differs substantially from the last PJM proposal on CP that stakeholders considered. For a proposed change that aims to transform the entire fleet and would likely cost consumers billions, that is not a lot of time. Indeed, stakeholders are not sufficiently informed on the potential effects of the proposal on various resources (e.g., how much renewable and demand-side resource capacity can continue to participate in the RPM) and about how much net incremental costs the Proposal will impose on consumers. added) Filing at 1-2 citing ISO New England Inc., 147 FERC 61,172, at P 26 (emphasis 25

26 These are important questions to study, but PJM chose to pursue the proposed RPM overhaul through an accelerated process (known as the Enhanced Liaison Committee process) rather than go through the full stakeholder review because the proposed overhaul would be too contentious and result in too much delay. PJM explains that it wanted to avoid this delay and that because the RPM secures capacity commitments on a three-year forward basis, there is a threeyear lag before the new rules can fully take effect. Thus, according to PJM, implementing the new rules in the May 2015 RPM BRA will secure capacity commitments for the Delivery Year that starts on June 1, 2018 rather than deferring the changes to the following BRA for the Delivery Year starting on June 1, But postponing the proposal for another year for further consideration would only postpone its implementation one year regardless of how far forward the BRA looks. In the meantime, PJM is addressing last winter s outages directly and procuring additional capacity to insure against any potential shortfalls in upcoming delivery years. Thus, providing stakeholders with the full process and shifting reforms forward a year is likely to yield a more better, more carefully studied capacity market reform. VI. Conclusion Capacity markets, as mechanisms to invest in future resources, should anticipate future needs. Capacity rules that incent building a monolithic fleet to the detriment of resource diversity, as the CP proposal likely would do, requires a lot of confidence that we are investing in the right types of resources with the right attributes. Stakeholders, however, are not confident Filing at

27 the CP proposal is the right solution here and have not been afforded sufficient time to fully study the proposal s effects. 66 For the foregoing reasons, we respectfully request that the Commission reject the 205 Filing and direct PJM to implement the full stakeholder process before making a replacement filing. 67 As an alternative to rejection, we support other stakeholders requests for an evidentiary hearing to determine material facts needed to establish that the terms of the 205 Filing are indeed just and reasonable. Should the Commission partially approve the 205 Filing, we request the Commission at least condition approval on PJM adopting the following recommendations: Preserve Base Capacity resources in the RPM beyond the transition period; Raise the cap on Base Capacity to at least 31.7% to reflect the less conservative assumption that at least 50% of it is available during winter peak; Continue to allow subannual demand-side resources to bid in as Base Capacity; Model how the Capacity Performance proposal affects renewable and demand-side resources in terms of penalties, payments and capacity cleared in the RPM, whether as Capacity Performance or Base Capacity; Provide clarity on how resource coupling would work in practice; 66 The proposal may incent building a fleet focused on natural gas resources. An analysis done in collaboration with two national labs shows that simply switching to natural gas for electricity generation makes short-term carbon emissions reductions easy, but long-term reductions that we need by 2050, difficult (at least with current technologies). Energy and Environmental Economics, Inc., in collaboration with Lawrence Berkeley National Laboratory and Pacific Northwest National Laboratory, Pathways to Deep Decarbonization in the United States (Nov. 2014), Report.pdf 67 PIOs, however, support stakeholder comments that adding storage and resource aggregation are features of the 205 Filing that should be retained should the Commission reject the 205 Filing. 27

28 Allow or clarify that different sellers are allowed to aggregate their resources to offer into the RPM auction as Capacity Performance or Base Capacity; Exempt non-fuel-based resources from the proposed Capacity Performance penalties or reduce the penalties for these resources; and Wait until the stakeholder process improving load forecasting arrives at an acceptable solution in terms of how it will correct over-forecasting before eliminating the Holdback. Respectfully submitted on this 20th day of January On behalf of: /s/ Jennifer Chen Jennifer Chen, Advocate Sustainable FERC Project th St NW, Suite 300 Washington, DC Environmental Defense Fund Michael Panfil, Attorney US Climate and Energy Program 1875 Connecticut Ave., NW Washington, DC Sierra Club Environmental Law Program Casey Roberts, Staff Attorney 85 Second St., 2nd Floor San Francisco, CA Natural Resources Defense Council Jackson Morris, Director of Eastern Energy 40 W. 20th St. New York, NY Sustainable FERC Project John Moore, Senior Attorney Jennifer Chen, Advocate th St. NW, Suite 300 Washington, DC Union of Concerned Scientists Mike Jacobs, Senior Energy Analyst 2 Brattle Square Cambridge, MA mjacobs@ucsusa.org 28

29 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Washington, DC this 20th day of January, /s/ Jennifer Chen Jennifer Chen, Advocate Sustainable FERC Project th St NW, Suite 300 Washington, DC chen.fercproject@gmail.com 29

30 APPENDIX A The Forced Outage Rate in PJM Is Largely Steady After Accounting for the Uptick From the Polar Vortex The 205 Filing asserts (pp ) that generator equivalent forced outage rates (EFORd) have worsened over the last ten years, further claiming that it is beyond dispute that the current RPM rules have not prevented this progressive reduction in the availability of generation resources in PJM. But as evidence for the alleged unmistakable deterioration in EFORd the filing provides only a graph showing a distinct uptick for the 2013/14 delivery year, which included the extreme events of the January 2014 period. The facts, as developed by PJM staff in greater detail elsewhere, show that the system average EFORd has been, and is expected by PJM to remain, very steady over time; the facts do not support the claimed upward trend in EFORd. For the annual PJM Reserve Requirements Study ( RRS ), 68 PJM Staff evaluate trends in EFORds and develop a projection of system average EFORds for future delivery years, for the purpose of determining the future installed reserve margins needed to satisfy the one day in ten years resource adequacy criterion. PJM staff s projections are based on historical EFORds, and they also takes into account how the resource mix is expected to change over time due to retirements, mothballed resources, new resources, and expansions of the PJM footprint. 69 For new and recently-built resources, outage rates are estimated based on the available unit-specific performance blended with generator class-average values. 70 The 2014 RRS states that the system-wide five-year weighted-average EFORd exhibits a stable trend (within the 6.9% to 6.1% range) in recent RRS models. 71 The figure below is from the 2014 RRS, p PJM Reserve Requirement Study, Analysis Performed by PJM Staff, October 9, 2014, available at RRS, pp RRS, p RRS, p

31 The 2013 PJM RRS had projected a decrease in system-wide average EEFORds 72 for future years, from 7.35% for the 2014/15 delivery year to 6.95% for the 2017/18 delivery year (a 9% decrease). 73 The 2014 RRS projects a 6.86% EEFORd for the 2015/16 delivery year and a 7.02% EEFORd for the 2018/19 delivery year, a two percent increase. 74 The 2014 RRS also projects a 7.0% EEFORd for all future years through Thus, historical EFORds, and PJM s projections of future EFORds, have been flat and have not exhibited any upward trend; PJM s claim, supported only by a graphic, is based solely on the poor performance experienced in the first quarter of The PJM Independent Market Monitor s State of the Market Report shows that EFORds have returned to normal levels (in the 6% range) over the course of The RRS reports EEFORd values; EEFORd is EFORd plus a fraction of maintenance outages RRS, p RRS, p Monitoring Analytics, LLC, State of the Market Report for PJM, Q3 2014, November 13, 2014, p

32 APPENDIX B Efforts Underway to Reduce Forced Outages in Time for the Next Delivery Year and Into the Future As a result of the January 2014 winter events, numerous efforts are already underway to reduce forced outage rates in the summer and winter at generating plants, including the following: One of PJM s important efforts to avoid the high level of forced outages last January involves testing of certain generators and the use of a mandatory winter preparedness checklist. PJM s Operating Committee approved the changes to improve the performance of resources during extreme cold weather events by performance verification or testing of resources during and before cold weather, requiring a coldweather preparedness checklist to be completed, and testing dual-fuel capability. 76 PJM s Cold Weather Resource Performance Improvement changes focuses on enhancing unit performance during cold weather conditions and adequately scheduling units to meet systems conditions reliability and economically. 77 PJM began testing generators November 1, 2014, and 98% of PJM s installed capacity have started using the winter preparedness checklists; this should enhance unit performance during cold weather conditions starting this winter See January 1, 2015 Cold Weather Recommendation Status at 3, ( January 1, 2015 Cold Weather Recommendation Status ). The Operating Committee s two part proposal on Cold Weather Resource Performance Improvement requires, starting this winter: generators to use a Generation Resource Cold Weather Checklist. prior to the winter season to prepare generation resources for extreme cold weather operations. ; and requires certain generators to perform a Generation Resource Operational Exercise... The exercise will be conducted prior to the onset of cold weather with the purpose of identifying and correcting start-up, operational and fuel switching problems. See Operating Committee Special Cold Weather Resource Improvement Final Proposal Report September 4, 2014 at 2, PJM s Operating Committee approved the solution package and endorsed the manual language with no objections and no abstentions. See item-12c-oc-report.ashx (emphasis in original). 77 See Operating Committee Special Cold Weather Resource Improvement Final Proposal Report September 4, 2014 at 2, (emphasis added). 78 As of January 2, 2015, 156 units with a total installed capacity of 9350 MWs have been tested, with another 980 MWs scheduled for January 5. See Cold Weather Generation Resource Preparation Update dated January 6, 2015 at

33 After last winter s polar vortex, PJM s Planning Committee was asked to perform a Winter Peak Study Update, and the results of that study were presented to PJM members on December 4, Significantly, the test looked at 2019, stressed the winter risk load deliverability areas, targeted specific load deliverability areas based on feedback from PJM operations, and tested an extreme polar vortex scenario. Id. The extreme polar vortex scenario used a 90/10 load forecast, which is what PJM says they experienced during last winter s polar vortex, shut off all chronically curtailed gas units (7,100 MWs), and all gas curtailed at least once in the last 7 years (another 9,400 MWs), and, in addition, turned off all of the planned gas in the queue with a signed Interconnection Services Agreement (which is likely to be built) for a total of 25,700 MW of gas outages (or 19% of PJM s installed capacity). Id. at 68. Despite the extreme cold weather modeled, 19% of forced outages, and the loss of many more gas units than were out during the polar vortex (25,700 MWs in the modeling vs. 19,000 MWs during the polar vortex), PJM experienced no transmission violations and PJM also did not have any capacity shortfalls. 80 The Operating Committee has recommended significant changes to improve gas unit commitment, communication and coordination starting the winter of 2014/15 - to improve the clarity, transparency and standardization of handling long-lead gas unit commitment due to fuel restrictions and consider tools, processes, market construct, as well as communication and notification protocols. 81 PJM has already implemented a number of these items, which should help gas unit commitment and coordination immediately. 82 preparedness-update.ashx. The vast majority of units tested to date passed the test, and the ones that did not were able to identify issues so the generation owners could fix them before the units were needed. Id. This should help reduce forced outages as the purpose of the test is to identify and correct start-up, operational and fuel switching problems. In addition, 98% of PJM s installed capacity indicated that they completed their own checklist or the one provided in PJM s Manual 14D. Id. at at Id. at 64, 69, 73 and 74. See also PJM s CP filing at 17 ( On a megawatt basis, [during the polar vortex] natural gas interruptions accounted for 9,300 MW of outages other natural gas outages related to issues such as start failures due to cold weather or issues with using backup fuel accounted for another 9,700 MW and are related more to weatherization and maintenance issues than the inability to secure gas supplies and transportation. 81 See January 1, 2015 Cold Weather Recommendation Status at 1 supra. 82 Id. at 1 (Manual process in place as of January 1, 2015; automatic functionality available as of February 9, 2015). Other implemented items include extended cold notification/startup time parameters, notification/startup alerts and time parameter obligations for long lead time generators, peak and off peak periods and PJM operator actions. See Gas Unit Commitment Coordination 2012 Notification and Start Up Proposal Review at notification-and-start-up-proposal-review.ashx. and Gas Unit Commitment Coordination Intraday Cost Update ad New emkt Field Manual Process Update 33

34 Pursuant to a FERC Notice of Proposed Rulemaking, PJM and others are working on gas/electric industry coordination. 83 The Operating Committee worked with generation owners to identify fuel sources and limitations, emission limitations, as well as use and validation of outage types. 84 PJM has already obtained this information and completed an internal report that allows PJM to view the data, and fuel data will be mapped once fields are available on emkt. 85 On December 15, 2014, PJM filed in FERC Docket No. EL for relief during the winter of 2014/2015 from the $1,000/MWh energy offer cap should a rise in gas prices or other system conditions force generation resources to incur fuel costs that cause their marginal costs to exceed the offer cap. 86 PJM is improving data sharing with the gas industry; starting in November 2014 PJM initiated daily gas notification s, and has had weekly calls with pipeline companies since December As of October, 2014, PJM developed a tool to confirm external capacity resources availability, day-ahead and real-time market commitments, and actual performance. 88 PJM has reviewed and enhanced the tools and processes for accepting Emergency Energy Bids. 89 On September 25, 2014, PJM filed at FERC a request to alter the Variable Resource Requirement (VRR) curve, which will shift the VRR curve to the right and thus procure more capacity. 90 The Commission accepted that filing, with one non-relevant modification, by Order dated November 28, 2014, in Docket No. ER See January 1, 2015 Cold Weather Recommendation Status at 2 supra. 84 See January 1, 2015 Cold Weather Recommendation Status at 1 supra. 85 Id. emkt allows PJM members to submit information and obtain data needed to conduct business electronically in the Day-Ahead, Regulation and Synchronized Reserve Markets 000.ashx See January 1, 2015 Cold Weather Recommendation Status at 1 supra. 88 See January 1, 2015 Cold Weather Recommendation Status at 2 supra. 89 See January 1, 2015 Cold Weather Recommendation Status at 3, supra. 90 See PJM's September 25, 2014 filing at Docket No. ER to modify the PJM Open Access Transmission Tariff, filings/ er ashx. 91 On November 28, 2014, in Docket No. ER , the Commission issued an Order conditionally accepting PJM s proposed Tariff revisions of September 25, 2014 to the PJM Tariff, subject to a compliance filing. PJM proposed changes to its capacity market demand curve and the Variable Resource Requirement (VRR) Curve were accepted. The Commission 34

35 Other Cold Weather changes that PJM has implemented to decrease outages, or is in the process of implementing, are changes to energy and reserve pricing, increasing the synchronized reserve requirement, implementing an exchange volatility proposal, studying gas infrastructure adequacy, and improving communications, procedures, and interregional coordination. 92 With respect to Hot Weather performance improvements, PJM has made numerous changes in 2014 to improve performance including: creating a tool (the Dispatch Interactive Map Application or DIMA) to visualize the location and amount of DR available to provide relief from operational issues; revised Tier 1 calculations to reflect available synchronized reserves; improved communication and notification protocols; collected information on unit characteristics and limitations; updated PJM s system modeling; improved its emergency procedures tool; and is currently evaluating facility limits with MISO and NYISO. 93 granted PJM s requested effective date of December 1, See January 1, 2015 Cold Weather Recommendation Status at 1-3, supra. 93 See January 1, 2015 Hot Weather Recommendation Status at 1-2, ( January 1, 2015 Hot Weather Recommendation Status ) 35

36 APPENDIX C PIO Comments on PJM s October 7, 2014 Updated Capacity Performance Proposal Submitted to PJM on October 28, 2014 Briefing Paper of Public Interest Organizations on PJM s Revised Capacity Performance Proposal October 28, 2014 The undersigned Public Interest Organizations 94 (PIOs) appreciate this opportunity to comment on PJM s October 7, 2014 Capacity Performance Proposal (CP Proposal). PIOs agree that maintaining grid reliability is extremely important. However, the CP Proposal is a costly and unnecessary overhaul of the capacity market that will result in unjust and unreasonable rates and undue discrimination. PJM s revised proposal neither addresses most of the concerns raised in our September comments on PJM s initial proposal, nor explains why a less costly, tailored approach to reducing generator outages is insufficient to solve the reliability problems PJM stated it intended to target. Rather, the CP Proposal is based on unrealistic assumptions (including that 100% of Base Capacity (BC) is unavailable for one extreme weather peak week) and its own cost-benefit analysis shows that the proposal s costs outweigh its benefits. For these reasons, we continue to urge PJM to address specific causes of coal and gas power plant failures 95 and incent more participation from wind, solar, energy storage and demand-side resources. As part of a targeted approach, we recommend that PJM directly address performance and reliability concerns that decrease outages by: resolving fuel and fuel delivery issues; implementing unit maintenance and/or design changes, winter testing and weatherization; clarifying/modifying penalties for non-performance; continuing to rely on flexible demand-side resources; resolving seam-related issues among neighboring markets for efficient power transactions; and introducing a winter demand response product. Should PJM pursue its broader proposed overhaul of the capacity market, we recommend: Retaining the Base Capacity product (and increasing its cap); Appropriately valuing wind and solar energy to reflect their proven seasonal capacity values; Preserving demand response and energy efficiency (DR/EE) as supply-side resources in the capacity market; 94 Environmental Defense Fund, Natural Resources Defense Council, Piedmont Environmental Council, Sierra Club, Southern Environmental Law Center, Sustainable FERC Project, and Union of Concerned Scientists. 95 The North American Electric Reliability Corporation, in its recent report assessing the Polar Vortex in different regions, takes a similar position in recommending solutions in PJM tailored to problematic generation. 36

37 Allowing variable energy resources and DR/EE to participate in offsetting and joining with other non-capacity Performance resources to offer as Capacity Performance. I. PJM Has Not Demonstrated the Need for the CP Proposal PJM s CP Proposal is motivated in large part by the events occurring during the January 2014 Polar Vortex. On January 7, 2014, approximately 22% of PJM capacity was unavailable. The peak demand on January 7, 2014 was at approximately the 96th percentile that is, it was a once-in-24-year winter peak. 96 While last winter s record and prolonged cold was severe by any measure, it did not result in any load shedding, generators quickly adapted, and by the end of January, reduced forced outages from the 22% experienced on January 7 to levels that would ensure resource adequacy (15% and lower, which is lower than the 16.5% level that PJM does not want to exceed) according to PJM s LOLE analysis. 97 Thus, even if we experience another unusually cold winter, coupled with no available demand response and few imports (PJM assumptions used to craft the CP Proposal), generating resources should be available at acceptable forced outage rates. We question why PJM now believes there is a capacity shortfall, when the RPM continues to clear with excess capacity. Indeed, according to PJM testimony at a FERC Technical conference in April regarding the winter events of January 2014, PJM has or so of excess reserve capacity (above the target reserve numbers) for all of the delivery years for which auctions have taken place, and these results factor in expected coal plant retirements. 98 To 96 Based on the forecast 50/50 and 90/10 winter peak load levels, and employing the assumption, commonly used by PJM, that such peak loads are approximately normally distributed around the median value. 97 PJM s May 8, 2014Analysis of Operational Events and Market Impacts During the January 2014 Cold Weather Events ( PJM s Analysis of January 2014 Cold Weather Events ) at 24, Figure 15, available at See also Problem Statement at 17, Figure 8 and at See Mike Kormos Presentation at the FERC Technical Conference April 1, 2014 ( Kormos Presentation ) at 13 (indicating that the 22% of forced outages on January 7 th was 37