The PJM Interconnection LLC's capacity and transmission markets may undergo some significant changes if the independent system operator's Members Committee approves manual changes at its Jan. 26 meeting that were advanced Dec. 22 by the Markets and Reliability Committee.

The Markets and Reliability Committee (MRC) approved by a vote of about 88% to 12% a manual revision that would allow any generation capacity resource, demand resource or energy efficiency resource to replace their capacity market commitment "any time prior to the conduct of the Third Incremental Auction for that Delivery year" if the owner of the resource being replaced provides "transparent and verifiable evidence" regarding the previously committed resource.

Reasons for replacing committed capacity include generator deactivation, cancellation of a generation project, delayed in-service date or "permanent departure of load" listed as a demand-response or EE resource at the time of commitment.

The MRC amended the manual revision proposal to include language that PJM would "approve or deny a request for early Replacement Capacity, with input from the Market Monitor, within 15 days of receiving a completed Replacement Capacity request."

External capacity resource seams issues on tap

Another set of capacity market revisions was presented by Rebecca Carroll, PJM Knowledge Management Center manager, on behalf of the Underperformance Risk Management Senior Task Force (URMSTF) as preparation for the Task Force's hope that the changes would receive endorsement by both the MRC and the PJM Members Committee on Jan. 26, when they meet at different times of the day.

When PJM implemented in 2015 its capacity performance market construct, which provides penalties for committed resources that do not meet their obligations when called upon, certain stakeholders expressed concern that some external resources might be unable to serve load because of seams issues.

The package of changes approved by the URMSTF to address this issue includes the following: PJM must notify existing, external committed resources by Oct. 1 of the year preceding the delivery year whether their pseudo-tie is operationally feasible; if the relevant pseudo-tie is not operationally feasible, the pseudo-tie owner can either upgrade the link or declare the pseudo-tie non-viable for the committed energy; and external resource owners with long-term contracts with PJM load can participate for the life of the asset.

One stakeholder at the Dec. 22 meeting expressed support for the rule for future capacity performance auctions, but said the idea of designating resources committed under the existing capacity performance market rules as "nonviable" under the new package of changes "just seems totally wrong to me ... as a policy precedent."

"To maintain an ex-post disqualification is really bad policy," he said. "It introduces a tremendous amount of risk to anyone moving into the market. ...It seems really unfair to me and likely to result in significant legal issues."

But Joseph Bowring, president of Monitoring Analytics, PJM's independent market monitor, expressed support for the package, as it would be wrong "to allow a bad, inappropriate pseudo-tie to continue" for two more incremental auctions before the new rules go into effect.

Negative residual auction revenue rights at issue

The MRC also approved manual changes regarding transmission auction revenue rights (ARRs), specifically those that represent new transmission upgrades or transmission lines that were returned to service from outages. Based on monthly financial transmission rights (FTR) auctions, residual ARRs can receive negative values. Therefore, the changes approved by MRC Dec. 22 were designed to eliminate the allocation of negative residual ARR values.

In essence, the changes require a rerun of the FTR monthly auction with all negatively valued bids removed, and running the monthly residual ARR clearing process without any negatively valued transmission paths which may result in a delay in the settlement process for residual ARRs.

One proposal that the MRC rejected on Thursday would have lightened collateral obligations for financial transmission rights participants to eliminate the "undiversified credit adder" applied to net counterflow portfolios during the financial transmission rights auction clearing process.

Defaults 'low-probability, high-consequence'

Implementing the undiversified credit adder during clearing delays the process and causes "credit uncertainty for members," said PJM credit manager Harold Loomis, who presented the proposal, which had been approved by the PJM Credit Subcommittee on Nov. 4 and endorsed by the PJM Market Implementation Committee on Dec. 14.

The undiversified credit adder came in handy when in December 2007, Tower Research Capital affiliate Power Edge defaulted on its FTR position at a value of what PJM initially estimated as $80 million. When the FTRs finally settled, the amount dropped to about $51 million. All of that would have been covered by collateral requirements under current rules, Loomis said, but only about 16% would have been covered under the proposal submitted to the MRC last week.

In an FTR market analysis for the period January 2014 through February 2016, market participants would have benefited by saving $2 million if the cost of capital was 5% for market participants, but that benefit would have accrued only to market participants with net counterflow portfolios.

Monitoring Analytics' Bowring said, "We don't see any evidence of damage to the market of existing policy."

"We do believe this is a low-probability, high-consequence event, but that's why we have collateral," Bowring said. "We think this is also about assigning savings to a small group, whereas the cost of that [rare] event would be borne by all the members."

Mark Watson is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is a division of S&P Global Inc.