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Christi --
Some interesting language for the ICAP team. Please forward along. Jim -----Original Message----- From: =09"PennFuture" <pennfuture@pennfuture.org<@ENRON =20 Sent:=09Monday, October 15, 2001 11:31 AM To:=09Friends of PennFuture Subject:=09PennFuture's E-Cubed - The $45 Million Rip Off For over two years, PennFuture Facts has been informing you, and maybe even= entertaining you, about important energy and environment issues in Pennsyl= vania. But PennFuture works hard not only to inform you about our state's energy a= nd environment issues and problems, we work to solve them. If you haven't a= lready, please visit our website at www.pennfuture.org to learn more about = PennFuture, and support our work by becoming a member online. $25 a year is= all it takes to help us make Pennsylvania a better place to live, work and= visit! PennFuture's E-cubed is a commentary biweekly email publication concerning = the current themes and trends in the energy market. --------------------------------- 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. 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. 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. 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. 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. 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. 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. 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. 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. --------------------------------- E-cubed is available for reprint in newspapers and other publications. Auth= ors are available for print or broadcast. PennFuture (www.pennfuture.org), with offices in Harrisburg, Philadelphia a= nd Pittsburgh, is a statewide public interest membership organization, whic= h advances policies to protect and improve the state's environment and econ= omy. PennFuture's activities include litigating cases before regulatory bod= ies and in local, state and federal courts, advocating and advancing legisl= ative action on a state and federal level, public education and assisting c= itizens in public advocacy. To unsubscribe, simply reply to this email with "unsubscribe" in the subjec= t. - vol3no19_101501.doc
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