PennFuture's E-Cubed - The $45 Million Rip Off ,
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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 que=
stion about why he did not lay his body on the line to catch a ball over th=
e middle by saying, "For who? For what?" Residential and business customers=
 in the Duquesne Light service territory should also cry, "For who? For wha=
t?" to the news that, starting in January 2002 when Duquesne Light joins PJ=
M West, they will be charged $45 million per year to meet PJM West's new ca=
pacity requirement called ACAP, the close relative of the rogue PJM ICAP ru=
le.=20

Actually, in this instance, "for who" is clear. PJM and Orion are the parti=
es for whom customers will pony up $45 million, or $32.40 per year for a 60=
0 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 s=
hould be scrapped). But the windfall to Orion is delivered courtesy of the =
PJM Independent System Operator that stubbornly clings to its failed ICAP m=
arket and won't  replace it with forward operating reserve markets and requ=
irements.=20

The real mystery is, "for what" will customers be paying $45 million? Has a=
nyone 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 remai=
n the biggest consumer rip-off in the wholesale market. It's past time for =
FERC, public utility commissions, and especially the offices of consumer ad=
vocate to insist on their abolition and replacement.=20

A few things must be remembered about ICAP:

Along with the huge ECAR region, an area twice the size of PJM, the Duquesn=
e Light Control Area prior to January 2002 had no ACAP or ICAP rules. And y=
et 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.=20

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 e=
ven if it would, why is it necessary? Reliability in the Duquesne control a=
rea has been excellent. In fact, Duquesne and the rest of the ECAR area ens=
ure reliability through different, equally effective but lower-cost reliabi=
lity rules.=20

The Current ECAR Model
The ECAR model could be summarized by the phrase "pay only for what you nee=
d." The current reliability mechanism is met through purchasing 4 percent o=
perating reserves. These are made up of Load and Frequency Regulating (Spin=
ning) Reserves (1 percent) and Contingency Reserves of 3 percent divided in=
to 1.5 percent of contingency Spinning Reserves and 1.5 percent of Continge=
ncy Supplemental Reserves. These reserves margins have served western Penns=
ylvanians well, resulting in reliable service equal to - and in some cases =
exceeding - PJM.=20

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 cos=
t 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-p=
eak periods and often less than $1/MW-day. This would result in costs of le=
ss 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.=20

The Current PJM Model
The PJM model could similarly be described as, "pay for everything and stil=
l pay extra for what you need." Generators receive three payments, the rese=
rve payments mentioned above, a capacity payment, and an energy payment. PJ=
M, like ECAR, has a need for operating reserves and purchases these in orde=
r 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 ex=
perienced 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.=20

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 competiti=
ve electricity market will furnish the same level of reliability but at gre=
atly reduced prices. This methodology should pay for those products that ar=
e 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 lo=
ok 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 justif=
ication for raiding consumers' wallets.

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E-cubed is available for reprint in newspapers and other publications. Auth=
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nd Pittsburgh, is a statewide public interest membership organization, whic=
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