Capacity Market FERC Reliability and Resilience

Highlights from FERC’s November Meeting

December 3, 2014

By Jennifer Chen, NRDC Alum

At its latest monthly meeting on November 20, FERC issued a number of significant orders: it approved the Exelon-Pepco merger, endorsed a utility’s request to EPA to extend the utility’s MATS compliance deadline (the first such request), and required that grid operators report on their ability to access fuel to ensure reliability within their footprints. Other notable FERC orders announced at the November meeting: FERC approved NERC’s physical security reliability standard (RM14-15) and accepted NERC’s second performance assessment (RR14-5), finding that NERC continues to satisfy the statutory and regulatory criteria for certification as the nation’s Electric Reliability Organization under the Federal Power Act.

Exelon-Pepco merger approval

FERC approved Exelon Corp.’s proposed $6.8 billion purchase of Pepco Holdings Inc. without imposing any conditions (other than to require informational filings on state commission approval updates) (EC14-96). The merger would strengthen Exelon’s position as the nation’s largest utility owner with 10 million customers across the Midwest and Mid-Atlantic and a rate base of $26 billion in six states.  Pepco shareholders and the Virginia State Corporation Commission approved the merger last month. The merger still requires approval in D.C., Maryland, Delaware and New Jersey, as well as federal antitrust reviews.

The Federal Power Act requires FERC to approve the merger if the merger will be consistent with the public interest and will not result in cross-subsidization (among other things). FERC determines whether a transaction will be consistent with the public interest by looking at its effect on competition, rates, and the government’s ability to regulate. State regulators, consumer protection agencies, environmental organizations, and PJM’s independent market monitor protested the merger on these grounds as well as on environmental risks.

In its determination, FERC sided with the merger applicants on essentially all issues. For example, FERC found that adding Pepco’s 32 MW of generation to Exelon will insignificantly affect Exelon’s market share, as will Pepco’s 700 MW of demand-side resources because these have been so infrequently called on. FERC also found that the merger’s combination of generation and transmission will not have an adverse impact on competition, despite concerns raised by PJM’s independent market monitor that the merged company would have substantially more influence over transmission project development decisions. FERC also found to be speculative and beyond scope of the proceeding the issues of whether the merged company would have too large of a political or economic presence, enabling it to disregard environmental concerns or advocate for policies favoring its nuclear generation fleet at the expense of solar and wind development.

MATS Extension

FERC issued its first comment to EPA regarding MATS compliance extensions beyond the 4th year (ending April 16, 2016). In a short document light on analysis, FERC supported the extension (AD14-16).

The Kansas City Board of Public Utilities (BPU) submitted a request to EPA to extend the MATS compliance deadline for its Nearman 1 coal and oil-fired EGU to October 15, 2016. Extensions beyond April 16, 2016, require a CAA Section 113(a) Administrative Order designating the unit as a “reliability critical unit.” In deciding whether to grant these requests, EPA seeks advice from FERC.

FERC today expressed to EPA that BPU’s Nearman 1 unit is needed to maintain electric reliability. FERC made this recommendation while noting BPU’s acknowledgment that “Nearman 1 is a minor [unit] whose operation or non-operation is unlikely to cause transmission reliability or capacity reserve problems on the SPP system.” BPU also notes that “SPP has not found any system-wide reliability risk under the NERC criteria standards should Nearman 1 not operate during the 2016 summer peak season.”

But the loss of the Nearman 1 unit would result in BPU not meeting the 12% capacity reserve requirement (SPP Criteria 2.1.9) that every load serving member in SPP must maintain. According to FERC, that reason alone was sufficient to merit the extension.

Of course, it’s up to EPA to decide whether to grant the extension based on the requirements set out in its policy memorandum.

Staff indicated that at least two more extension requests are in process, but couldn’t predict how many more there will be.

While Chairman LaFleur indicated that she didn’t want to see too many of these extension requests, Commissioner Moeller said he was glad that FERC stepped up, as utilities were facing a “Hobson’s choice” as to which federal law to violate in the 5th year.

Fuel Assurance

Responding to issues raised at its technical conferences on the polar vortex and capacity markets, FERC issued an order requiring PJM, MISO, NYISO, CAISO, SPP, and ISO-NE to report within 90 days on their efforts to ensure adequate fuel supplies, especially during peak demand (AD13-7 and AD14-8). Fuel assurance broadly includes issues associated with generator access to sufficient coal, gas, and other fuel supplies. If left unaddressed, these issues could lead to volatile and high fuel prices or costly actions to ensure reliability. As an example, FERC cited fuel inadequacy as the main cause of PJM’s high forced outage rate during the polar vortex.

FERC noted a number of potential approaches RTOs/ISOs could consider to address fuel assurance concerns: they could reform capacity markets to provide greater price incentives for capacity resource availability and impose stiff penalties for failure to perform (as proposed by ISO-NE); encourage capacity resources to enter into firmer fuel arrangements; require capacity resources to have certain fuel arrangements to be eligible to provide resource adequacy; adjust capacity market offer caps; and/or discount the value of capacity resources (e.g., by lowering their capacity ratings) based on their fuel arrangements. Energy and ancillary services market reforms could help as well; for example, shortage pricing measures reflecting the value to consumers of avoiding involuntary curtailment could provide incentives for resources to pursue firmer fuel arrangements. FERC also asked grid operators to consider tradeoffs between approaches, such as increased costs to consumers and a high level of fuel assurance.

ISO/RTO comments are due on February 18, 2015, and public comments will be accepted through March 20, 2015, 30 days after the ISO/RTO reports are received.