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PennFuture's E-cubed is a commentary biweekly email publication concerning the current themes and trends in the energy market.
              
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October 15, 2001
Vol. 3, No. 19

The $45 Million Rip Off

Running back Ricky Walters, a native of Harrisburg, once responded to a question about why he did not lay his body on the line to catch a ball over the middle by saying, "For who? For what?" Residential and business customers in the Duquesne Light service territory should also cry, "For who? For what?" to the news that, starting in January 2002 when Duquesne Light joins PJM West, they will be charged $45 million per year to meet PJM West's new capacity requirement called ACAP, the close relative of the rogue PJM ICAP rule. 

Actually, in this instance, "for who" is clear. PJM and Orion are the parties for whom customers will pony up $45 million, or $32.40 per year for a 600 kWh monthly customer. Orion is charging $44 per MW-day for capacity, the equivalent of 0.45 cents per kWh. The cash goes into Orion's pocket and is a windfall for a "product" that typically has a marginal cost of zero (see the affidavit of Professor Peter Cramton, filed with FERC on behalf of the New England Independent System Operator, who properly concluded that ICAP should be scrapped). But the windfall to Orion is delivered courtesy of the PJM Independent System Operator that stubbornly clings to its failed ICAP market and won't  replace it with forward operating reserve markets and requirements. 

The real mystery is, "for what" will customers be paying $45 million? Has anyone shown that Duquesne's reliability record has been unsatisfactory? Has PJM demonstrated that the $45 million would reduce Duquesne's loss of load probability? There are no good answers to those questions. ICAP/ACAP remain the biggest consumer rip-off in the wholesale market. It's past time for FERC, public utility commissions, and especially the offices of consumer advocate to insist on their abolition and replacement. 

A few things must be remembered about ICAP:

Along with the huge ECAR region, an area twice the size of PJM, the Duquesne Light Control Area prior to January 2002 had no ACAP or ICAP rules. And yet for the last 30 years the lights have stayed on in Pittsburgh as well as or better than in PJM. Even when PJM had rolling blackouts on January 19, 1994, the Duquesne control area continued to provide reliable power. 

So what will the $45 million buy consumers? More reliability? No. ACAP won't increase the Duquesne control area's historic level of reliability. And even if it would, why is it necessary? Reliability in the Duquesne control area has been excellent. In fact, Duquesne and the rest of the ECAR area ensure reliability through different, equally effective but lower-cost reliability rules. 

The Current ECAR Model
The ECAR model could be summarized by the phrase "pay only for what you need." The current reliability mechanism is met through purchasing 4 percent operating reserves. These are made up of Load and Frequency Regulating (Spinning) Reserves (1 percent) and Contingency Reserves of 3 percent divided into 1.5 percent of contingency Spinning Reserves and 1.5 percent of Contingency Supplemental Reserves. These reserves margins have served western Pennsylvanians well, resulting in reliable service equal to - and in some cases exceeding - PJM. 

Reserve payments compensate only those units that are not operating at the time but have the capability of generating in less than 10 minutes. The cost for these reserves is not easily calculated due to lack of a transparent market. Yet they appear to be approximately less than $2/MW-day during on-peak periods and often less than $1/MW-day. This would result in costs of less than $1.15/MW-day based on the Allegheny Power peak load. The cost for a typical residential customer would be .012 cents per kWh. 

The Current PJM Model
The PJM model could similarly be described as, "pay for everything and still pay extra for what you need." Generators receive three payments, the reserve payments mentioned above, a capacity payment, and an energy payment. PJM, like ECAR, has a need for operating reserves and purchases these in order to maintain reliability. Additionally, the PJM model provides an Unforced Capacity payment to all generators based on their historical performance. Generators receive this payment whether or not they are able to operate on a particular day or are already being compensated for providing electricity. PJM currently compensates generators based on a 19 percent reserve margin. The overall cost of ICAP has varied considerably over the three years of competition. The average since 1999 has been $78.74/MW-day. This results in overall costs of over $1.6 billion per year. Residential customers have experienced ICAP costs ranging from about 0.4 to 1.8 cents per kWh. Moreover, on top of ICAP, a PJM customer must purchase additional spinning reserves costing approximately the same as the reserves in ECAR. 

Ending the Rip-off
PJM should move to a reserve-based reliability methodology similar to ECAR. An Operating Reserve-based methodology used in tandem with PJM's competitive electricity market will furnish the same level of reliability but at greatly reduced prices. This methodology should pay for those products that are really needed - excess reserves to be used during peak demand periods. A strong forward energy and operating reserve market can send the right price signals to build new generation - a fact that is readily apparent as we look to the Mid-west where thousands of megawatts of new generation have been built in response to clear price signals over the past few years.

All this tells us that ICAP has its self-interested defenders but no justification for raiding consumers' wallets.

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E-cubed is available for reprint in newspapers and other publications. Authors are available for print or broadcast.

PennFuture (www.pennfuture.org), with offices in Harrisburg, Philadelphia and Pittsburgh, is a statewide public interest membership organization, which advances policies to protect and improve the state's environment and economy. PennFuture's activities include litigating cases before regulatory bodies and in local, state and federal courts, advocating and advancing legislative action on a state and federal level, public education and assisting citizens in public advocacy.

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