Executive Column: Terry Boston – President and CEO

Facing uncertainty and finding solutions

As we begin 2015, two things are certain. The first is that 2014 left us with a lot of uncertainty.

This time last year we were plunged into a Polar Vortex – one that left a lasting impression and triggered much analysis here at PJM. Indeed, the weather’s effect on generation availability was one of the drivers for our Capacity Performance proposal, a market change that will assure that no matter how uncertain the weather is, we can count on generating resources to perform.

Capacity Performance is the model we proposed to the Federal Energy Regulatory Commission. It is a new approach to how we define and pay for capacity and will work like an insurance policy for reliability. For a modest additional cost, consumers will receive significantly improved protection from interruptions during extreme weather and peak demand periods and from extreme fluctuations in prices.

Capacity Performance also helps address other uncertainties that have developed in recent years. The shift in generation dominance from coal to natural gas has created uncertainty about how the system will adapt to greater dependency on gas. Capacity Performance addresses this by requiring generators to assure their fuel supply.

Why do we need more certain gas delivery? The Mercury and Air Toxics Rule and the growing competitiveness of natural gas have already contributed to a large number of generator retirements. The EPA’s proposed carbon rule is expected to result in still more retirements. We need to know that the generators that are replacing these coal units are reliable and not subject to the fuel-related problems we saw last January.

If that’s not enough uncertainty, consider the future of demand response participation in capacity auctions due to a challenge of FERC’s authority to set compensation for demand response. At the time of this writing, the U.S. Solicitor General is still planning to appeal to the U.S. Supreme Court a lower court’s decision limiting demand response. PJM and its stakeholders cannot afford to wait for the Supreme Court to decide whether it will take up the case. We need to know that demand response will be available as a reliability tool and how it will be managed in next May’s capacity auction. Therefore, PJM this week will file a stop-gap proposal with the FERC that asks that demand response be allowed to continue to participate in PJM’s markets in a way that’s consistent with the lower court’s ruling. The stop gap will help offset some of the uncertainty about demand response if the Supreme Court declines to take up the case and the earlier ruling stands.

Finally, we are continuing our analysis of the EPA’s proposed carbon rule. To be sure, we won’t be certain of the impacts until the states determine how they will comply with the rule, should it go into effect. While PJM remains neutral on pending laws and regulations, it is our job to provide expert analysis to enable stakeholders, including the PJM states, to make informed decisions.

I mentioned earlier that two things are certain. The second is that we are working on solutions while facing all this uncertainty. It is our fundamental responsibility to assure that the grid stays reliable, the markets remain fair and competitive and – most importantly – that consumers can be certain that, when they flip a switch, the lights come on.