UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION. ) PJM Interconnection, L.L.C. ) Docket No.

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) PJM Interconnection, L.L.C. ) Docket No. ER ) MOTION FOR LEAVE TO ANSWER AND ANSWER OF PJM INTERCONNECTION, L.L.C. PJM Interconnection, L.L.C. ( PJM ), pursuant to Rule 213 of the Federal Energy Regulatory Commission ( Commission ), 1 submits this Motion for Leave to Answer ( Motion ) and Answer ( Answer ) to respond to Protests filed by FirstEnergy Service Company, on behalf of its affected affiliates, Dominion Energy Services, Inc., on behalf of Virginia Electric and Power Company ( FirstEnergy and Dominion ), and Direct Energy on behalf of itself and its affiliates Direct Energy Business Marketing, LLC and Direct Energy Business, LLC (collectively, Direct Energy ) on March 30, I. MOTION FOR LEAVE TO ANSWER The Commission s rules provide that a party may answer protests where the decisional authority permits the answer for good cause shown. The Commission has accepted responses to protests when doing so will ensure a more accurate and complete record or will assist the Commission in its deliberative process by clarifying the issues. 3 All of these criteria are met C.F.R Limited Protest of FirstEnergy Service Company and Dominion Energy Services, Docket No. ER (filed March 30, 2018) ( Dominion and First Energy Protest ); Protest of Direct Energy, Docket No. ER (filed March 30, 2018) ( Direct Energy Protest ). 3 The Commission regularly allows answers in such cases. See, e.g., PJM Interconnection, L.L.C., 139 FERC 61,165, at P 24 (2012) (accepting answers to a protest because they have provided information that assisted [the Commission] in [its] decision-making process ); Cal. Indep. Sys. Operator Corp., 129 FERC 61,241 at P 16 (2009) ( [w]e will accept the answers and responses to the requests for rehearing because they provide information that assisted us in our decision-making process ); PJM Interconnection, L.L.C., 104 FERC 61,031, at P 10 (2003) (accepting answer because it will not delay the proceeding, will assist the Commission in understanding the issues

2 Therefore, PJM respectfully requests that the Commission grant its Motion because the Answer will help clarify the record and contribute to an understanding of the issues. II. ANSWER A. Releasing Excess Capacity Commitments Using a Sell Offer Price at the Base Residual Auction Clearing Price is Just and Reasonable. Direct Energy asserts that PJM s proposal undermines its ability to sell excess capacity on behalf of load by establishing an irrational fixed sell offer price that is known to all market participants prior to the auction. 4 Direct Energy s concern with PJM s proposal to release excess capacity at the Base Residual Auction ( BRA ) 5 clearing price appears to be two-fold: (1) while Direct Energy seeks a reasonable return for load from PJM s Incremental Auction ( IA ) sales, releasing capacity at the BRA clearing price is inappropriate, and (2) rational Capacity Market Sellers will undercut the BRA clearing price of the PJM Sell Offer to ensure that their Sell Offer clear ahead of and instead of the PJM Sell Offer. To the first point, in determining the appropriate price at which to release excess capacity commitments on behalf of load, the PJM proposal appropriately considers the cost incurred by load of the committed capacity (i.e., the value that load was willing to pay for the capacity), as well as the costs avoided by a Capacity Market Seller that replaces a BRA commitment by buying replacement capacity (including the avoided non-performance assessment charges). raised, and will [e]nsure a complete record upon which the Commission may act ); KN Wattenberg Transmission LLC, 94 FERC 61,189 at 61,671 (2001) (finding good cause to accept an answer to a request for rehearing in order to insure a complete record in this proceeding ); Tex. E. Transmission, LP, 131 FERC 61,164 at P 1, n.3 (2010) (accepting answer to a request for rehearing that aided the Commission s decision-making); Southwest Power Pool, Inc., 126 FERC 61,153, at P 18 (2009) (accepting answers that aided the Commission s decisionmaking). 4 Direct Energy Protest at 2. 5 For the purpose of this answer, capitalized terms not defined herein shall have the meaning as contained in the PJM Open Access Transmission Tariff ( Tariff ), the Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., ( Operating Agreement ) or the Reliability Assurance Agreement Among Load Serving Entities in the PJM Region ( RAA ). 2

3 When considering these costs, the price of the excess capacity commitments should exceed the BRA clearing price. Therefore, it is only appropriate that the sale by PJM of any excess capacity should at least offset the cost incurred by load when the capacity was initially procured. Releasing excess capacity commitments at the BRA clearing price leads to the just and reasonable outcome of equally excusing both PJM load from having to pay for capacity that it is not receiving and the Capacity Market Sellers from the obligations of the capacity commitment. Direct Energy s second point that the proposed revisions would harm load because other Capacity Market Sellers will know PJM s Sell Offer price and undercut PJM s offer is also unavailing. It is contrary to the economic interests of a rational Capacity Market Seller that is seeking to offer capacity in the IAs to offer below the known PJM Sell Offer price without regard to its own costs. Specifically, a rational Capacity Market Seller is expected to base its Sell Offer on the going-forward cost of their resource, including the cost associated with the nonperformance risk associated with taking on a capacity commitment. This is because a Capacity Market Seller s incentive is not to undercut PJM s Sell Offer price, but rather to clear the IA only if the clearing price covers its own cost. If a Capacity Market Seller offers above its necessary going-forward costs, it risks not clearing in the IA and not receiving any capacity payments. Therefore, PJM s Sell Offer price should make no difference to rational Capacity Market Sellers submission of Sell Offers in the IA. In any event, under the current rules, the quantity and price of a PJM Sell Offer is established and published prior to any IA. Therefore, PJM already shows it hand regardless of whether the sell-back quantity is sold at a fixed price or at a price that is defined by an upward sloping sell offer curve as Direct Energy proposes. 6 6 Direct Energy s own alternative to use sloped offer curve is inconsistent with its argument that Capacity Market Sellers should not know the Sell Offer price prior to the IA. Specifically, establishing an offer curve also provides 3

4 Also, Direct Energy wrongly claims that the sloped offer curve used for the Third Incremental Auction for the 2017/2018 Delivery Year was a resounding success for load in terms of its generation of value that would not have otherwise been realized and proposes that PJM utilize a similar sloped offer curve instead of releasing at the relevant BRA clearing price. 7 Specifically, for the 2017/2018 Delivery Year, PJM procured new Capacity Performance commitments of 10,017 MW in the CP transitional auction conducted for that year. These new Capacity Performance commitments yielded a total net quantity of 8,586.6 MWs that PJM sought to release in the Third Incremental Auction for the 2017/2018 Delivery Year. In the Third Incremental Auction for Delivery Year 2017/2018, PJM utilized a Sell Offer curve that originated at a point of zero MW and a price of $0/MW-day. 8 The Sell Offer curve then sloped upward to connect to a second point at 8,568.6 MW and at a price equal to the BRA clearing price. In that IA, a total Buy Bid quantity of 4,019.1 MW cleared against 1,452.1 MW of Capacity Market Seller Sell Offers and 2,567.0 MW of the PJM Sell Offer (2,567 MW of the total 8,568.1 MW PJM offer cleared). Notably, the 4,019.1 MW of cleared Buy Bids were purchased as replacement capacity in the IA at a weighted average cost of 33.1% of the BRA value of the capacity commitment, a lower percentage return compared with the average percent value of 40.7% for all IAs since the 2012/2013 Delivery Year. 9 Thus, the use of the sloped Sell Offer curve in this IA yielded a return to load that was significantly below the historical average. Capacity Market Sellers with knowledge of the PJM s Sell Offer because the curve will indicate the price based on the quantity of commitments that will be released. Because PJM releases auction parameters, including the quantity of megawatts that will be released in the IA, in advance of the relevant auctions, all Capacity Market Sellers will effectively know the price of PJM s Sell Offer in advance of the IA. 7 Direct Energy Protest, at See PJM Interconnection, L.L.C., 158 FERC 61,010 (Jan. 6, 2017). 9 See PJM Interconnection, L.L.C., at 7 (Table 1), Docket No. ER (filed March 9, 2018) ( March 9 Filing ); see also Historical IA Results vs BRA Value, available at: 4

5 Such an outcome can hardly be characterized as a resounding success. Consequently, such an approach would not be successful at meeting Direct Energy s goal of obtaining a more reasonable return to load from PJM s IA sales. B. Elimination of Excess Commitment Credits is Just and Reasonable. FirstEnergy and Dominion oppose PJM s proposal to eliminate the allocation of Excess Commitment Credits ( ECCs ) to Load Serving Entities ( LSEs ) for uncleared megawatts from PJM capacity Sell Offers in the Final IA because the ECCs provide a valuable benefit. 10 Notably, both companies neglect to address PJM s rationale set forth in the original filing in support of eliminating the allocation of ECCs. Specifically, as originally explained in PJM s transmittal letter, the current ECC allocation process (1) creates unequal access to ECCs for Capacity Market Sellers seeking to replace a BRA commitment, (2) disproportionately credits to PJM load when ECCs are used as replacement capacity, and (3) undermines the intent of other revisions proposed in this filing by providing an alternative means to access ECCs at a price below the BRA clearing price. 11 PJM refers the Commission to its transmittal letter that provides the justification for the elimination of ECCs and that expands on the points noted above. Notwithstanding, under the proposed IA rules, any LSE that owns Capacity Resources, including FirstEnergy and Dominion, is free to volunteer to relinquish capacity commitments prior to the relevant Delivery Year to the extent there may be excess capacity commitments remaining after the Final IA. Therefore, under both the existing and proposed rules, LSEs that own Capacity Resources may elect to avoid the need to physically deliver capacity commitments 10 Dominion and First Energy Protest at March 9 Filing at 19. 5

6 and the need to meet the performance requirements of such capacity commitments after the Third or Final Incremental Auction. Thus, the proposed excusal process can provide the same relief as the current ECC allocation for LSEs that own Capacity Resources with a capacity commitment. Importantly, however, the proposed excusal process will be available to any Capacity Resource that has a capacity commitment. Further, under the proposed IA rules, all LSEs including those that make use of the excusal process for their own or affiliated Capacity Resources will share in the allocation of the monetary value derived from the excusal process. In contrast, the current rules effectively only provide excess capacity commitments to Capacity Resources that are affiliated with, have contractual relationships with, or are owned by LSEs subsequent to the Third Incremental Auction via ECCs. This is because only LSEs that own, contract for, or are affiliated with Capacity Resources are able to benefit by continuing to receive capacity payments for clearing a BRA and subsequently retain that capacity payment even if the resource is relieved of all obligations to perform via ECCs. PJM s proposal eliminates this unduly discriminatory treatment. While excess capacity commitments may remain upon the completion of the Final Incremental Auction and voluntary excusal process prior to the Delivery Year, this excess should be retained on behalf of PJM load because the economic value to load is greater than the amount that any Capacity Market Seller was willing to pay. If PJM s collective load has a choice of retaining the economic value of the capacity commitment, or losing money on the sale of excess capacity, it should retain it. The current ECC allocation does not appropriately recognize this economic value and is inconsistent with the rationale for releasing excess capacity commitment at the BRA clearing price. C. Direct Energy s Proposal to Require Mandatory Capacity Commitment Excusal is Unworkable 6

7 As an alternative to PJM s proposed voluntary capacity commitment for any excess capacity that remain uncleared after the Final IA, Direct Energy proposes to require a mandatory relinquishment process for any excess capacity that remains uncleared after the Final IA. 12 Direct Energy fails to explain how such a concept would work. A rule that allows PJM to unilaterally revoke a Capacity Market Seller s capacity commitment is not only contrary to the basic principles of contract law, but it would also be inequitable for Capacity Market Sellers that invest funds to develop Capacity Resources in anticipation of meeting capacity performance requirements for the relevant Delivery Year. Furthermore, it would be difficult to determine which Capacity Market Seller s capacity commitments should be revoked in the event there are excess capacity commitments that remain after the Final IA. Arbitrarily determining which Capacity Market Sellers capacity commitment will be revoked and which ones to leave untouched would create various issues of fairness. In any event, as PJM s proposal was submitted under section 205 of the Federal Power Act, PJM needs only to show its proposal is just and reasonable, which it has done. 13 As such, the Commission need not consider this alternative. 12 Direct Energy Protest at U.S.C. 824d. 7

8 D. The Proposed Changes Will Discourage Sell Offers that Have No Reasonable Expectation of Delivery FirstEnergy and Dominion claim that the proposed revisions will have a limited impact on converging capacity prices between the Base Residual Auction ( BRA ) and subsequent IAs because the minimum Sell Offer price only applies to excess capacity commitments released by PJM and not Sell Offers submitted by other Capacity Market Sellers. 14 Under the basic economic principle of supply and demand, prices rise when supply is low. By limiting the sale of excess capacity in the IAs unless the price is at or above the relevant BRA clearing price, the supply of capacity in the IAs is effectively diminished at prices below the BRA. As a result, a reduction in the supply of capacity in the IAs necessarily would mean a higher equilibrium price to meet the demand for replacement capacity in the IAs. In fact, Table 3 of PJM March 9 transmittal letter provides statistics that demonstrate PJM s release of excess capacity commitment has a strong influence on IA clearing prices, which has significantly contributed to the persistent disparity between the BRA and IA clearing prices. 15 PJM s proposal to release excess capacity commitment in each IA at the BRA clearing price is intended to more appropriately compensate load for reducing capacity commitments in the IA. While this change will not ensure, nor was it intended to ensure, that IAs will clear at the relevant BRA clearing price, the significant impact of PJM s release of capacity in the persistently low IA prices will be removed. As a result, the proposed revision will provide significant mitigation of the historical persistent pattern of IA prices being significantly lower than the relevant BRA prices and address the concern that BRA Sell Offers having little or no reasonable expectation of physical delivery have taken advantage of this pattern. 14 FirstEnergy and Dominion Protest at March 9 Filing at 10. 8

9 E. Reducing the Number of Incremental Auctions will Reduce the Opportunities for Unnaturally Suppressing the IA Clearing Price While Still Providing Ample Opportunity to Procure Replacement Capacity. FirstEnergy and Dominion claim that reducing the number of IAs offered for a Delivery Year from three to two will limit the ability of Capacity Market Sellers to effectively manage risks surrounding their capacity obligations. 16 To the contrary, the proposed IA revisions recognize that some Capacity Market Sellers may have several legitimate reasons for replacing their capacity commitments. As such, the proposed First and Final IAs, which will be conducted twenty months and three months prior to the start of the associated Delivery Year, respectively, will continue to allow Capacity Market Sellers to purchase replacement capacity if needed. Incidentally, Capacity Market Sellers will know with more certainty three months prior to the start of the Delivery Year whether their committed resource will be available for the relevant Delivery Year. Thus, the Final IA will continue to allow all Capacity Market Sellers to effectively manage risks without the need for a Second Incremental Auction. Notably, the proposed IA revision is a product of a vigorous stakeholder discussion which required compromise by all parties. In fact, during the discussions, stakeholders even considered the possible elimination of two IAs, rather than one as currently proposed. F. Capacity Market Sellers Have Been Provided Ample Notice of the Proposed Changes to Adequately Prepare for the Upcoming Capacity Auction Finally, FirstEnergy and Dominion s argument that Capacity Market Sellers will not have sufficient time to evaluate the overall impact of the proposed IA revisions 17 simply is disingenuous. As described in the problem statement, the PJM stakeholder process for the 16 FirstEnergy and Dominion Protest at FirstEnergy and Dominion Protest at

10 proposed IA revisions initiated in January of Thereafter, PJM and its stakeholders reviewed and discussed solutions for approximately one year. The proposed IA revisions were vetted through the Incremental Auction Senior Task Force for approximately one year. Ultimately, the proposed IA revisions received the requisite majority support at the December 21, 2017 Markets and Reliability Committee and on January 25, 2018 at the Members Committee. Thus, all interested parties have been aware of the proposed IA revisions months before PJM even filed the changes for approval with the Commission. Postponing the effective date of these revisions is unmerited as Capacity Market Sellers have had ample time to prepare their respective strategies for the upcoming BRA. Because there is no just cause for postponing the proposed IA revisions, the Commission should avoid creating precedent here that may be used in future unrelated proceedings. 18 See Incremental Auction problem statement, available at: 10

11 III. CONCLUSION Wherefore, PJM asks the Commission to grant PJM s Motion and Answer for consideration in this proceeding. Respectfully submitted, Craig Glazer Vice President Federal Government Policy PJM Interconnection, L.L.C G Street, N.W., Suite 600 Washington, D.C (202) (phone) (202) (fax) Craig.Glazer@pjm.com Chenchao Lu Counsel PJM Interconnection, L.L.C Monroe Blvd. Audubon, PA (610) (phone) (610) (fax) Chenchao.Lu@pjm.com Jennifer Tribulski Associate General Counsel PJM Interconnection, L.L.C Monroe Blvd. Audubon, PA (610) (phone) (610) (fax) Jennifer.Tribulski@pjm.com Dated April 16,

12 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 these proceedings. Dated at Audubon, PA, 16th day of April, /s/ Chen Lu Chenchao Lu Counsel PJM Interconnection, LLC 2750 Monroe Boulevard Audubon, PA (610) Chenchao.Lu@pjm.com 12