Rep30 From: Stroup, Kerry M. Sent: Thursday, June 29, 2017 1:50 PM To: Rep30; Rep36; Frank LaRose (DST) Co: Phillips, Darlene Jonhenry, Nathanael J. Subject: Response to your letter Representative Seitz, Representative DeVitis, and Senator LaRose, in my haste to respond yesterday to the letter I received on June 26 from you and Senator Eklund posing a series of questions to PJM my receipt of the ietter having been delayed to this past Monday due to reiiance on an outdated email address -i failed to include you along with Senator Eklund among the recipients, and offer my apologies. In my response to Senator Eklund stated that PJM would be able to provide a response by July 21 to the questions you posed regarding PiM?s approach to squaring state energy policies with core mission of maintaining buik'power system reliability. Best wishes for an enjoyable independence Day holiday. Sincerely, Kerry Straw/up Kerry Stroup Manager, State Government Poiicy r- PJM interconnection i Mobile 484-919-5554 kerry.stroup@pim.com 7 2 i "context for th?eir implementation white addressmg your questIons Senators Ekiund and LaRose Ohio Senate One Statehouse Columbus, Ohio 43215 ff Representatives Seitz and DeVitis Ohio House of Representatives 77 South High Street Columbus, Ohio 43215 Senator Eklund, Senator LaRose, Representative Seitz, and Representative Dei/itis, Thank you for the opportunity to clarify the scope of our authority and responsibilities, and to explain the critical rote that wholesaie markets play in maintaining buik electric system (BES) reliability. Many questions you've asked focus on the initiatives PJM has underway to harmonize its wholesale markets with state public policy initiatives and on 5 Energy Market price formation and resilience initiatives The following describes these efforts and offers a PJM and the Scope of Its Authority and Responsibilities PM is the Regionai Transmission Organization for a 243,417-square-mile area that covers all of Ohio, and all or parts of Delaware, Illinois, indiana, Kentucky, Maryiand, Michigan, New Jersey, North Caroiina, Tennessee, Virginia, West Virginia and the District of Columbia. PJM ensures the reliability of the high?voltage eiectric power system by coordinating and directing the movement of electricity over the BES in its region. The BES comprises all transmission facilities rated about 100 kV. competitive wholesaie electricity market plays a vital role in maintaining BES reiia'oility at the most ef?cient cost while appropriateiy signaling resource entry and exit decisions. Operating independently and consistent with its reliability mission, PJM also operates the BES in real time, and pians for generation and transmission expansion Under the Energy Policy Act of 2005 the Federal Energy Regulatory Commission (FERC), regulator, designated the North American Electric Reliability Corporation (NERO) as the electric reiiability organization empowered to enforce mandatory reliability standards for all participants in the North American BES. NERC subsequently designated PJM as the Reliability Coordinator for the entire the PJM Balancing Authority Area (BAA). As a resuit, PJM is the entity responsible for the reliable operation of the transmission system throughout the state of Ohio and the rest of the PJM BAA. PJM has ciear decision-making authority to act and to direct actions to be taken to ensure that customers across its region are served reliably. Market Design Remains Consistent With its Mission: Reliability Supported by Fair and Efficient Markets Since the inception of its wholesale markets, the economics of eiectricity suppiy have been aitered by technological innovation, access to natural gas reserves, energy ef?ciency, environmental regulations and the increased penetration ot renewable, distributed and demand side resources. Due in part to this economic shift, public policies that seek to recognize value associated with generation plants beyond their cost effectiveness and reliability attributes are an emerging trend that has the potential to undermine the wholesale market?s role in establishing clearing prices that incentivize market participant decisions consistent with maintaining BES reliability. To address these developments and further enhance its market design PJM has proposed several initiatives to maintain BES reliability, two of which are intended to maintain BES reliability with the existence of state policies that subsidize . generation resources and therefore enable belowwcost bidding behavior in the wholesale markets. This below-cost bidding behavior can resuit in price suppression and a distortion of efficient prices which ultimately negatively affects efficient resource entry and exit decisions for resources in all states within PJM. PJM Proposals: A fundamental principle that PJM relies upon in designing its market rules is to assure that clearing prices reflect the cost characteristics of the resources participating in the wholesate market. Consistent with this principle, PJM focused on three areas re?ected in the working papers ?Advancing Zero Emissions Objectives ?with?rough Energy Markets" ?Capacity Market Repricing Proposal? and ?Energy Price Formation and Valuing Flexibility" The ?rst two papers seek to accommodate state policies and help further state objectives while mitigating the impacts of materiai subsidies on PJM markets. The third paper addresses PdM?s concern that there are rules in the Energy Market regarding price-setting eligibility that do not comport with the fundamental market design principle referenced above. Therefore, PJM is pursuing market design changes intended to result in more ef?cient pricing outcomes as well as establishing a market mechanism to promote and explicitiy compensate resource flexibility. These proposals are works in progress. In August, PJM intends to issue a further description of the proposed carbon pricing framework that provides more details behind the mechanics oi the proposal and how such a framework could be impiemented in PJM. Additionally, PJM is working on simulations for the proposal put forward in the Energy Market price formation paper that should be available in the coming months. Market impacts: From perspective, pubiic policies providing out~of~market subsidies to market participants raise a degree of concern that varies depending on the magnitude of the impact on markets. concerns regarding the subsidies extend beyond the pending Zero Emission Nuclear Resource (ZEN) legislation and more generally apply to any out-oi-rnarket subsidies that would create the incentive to underbid the cost of a suppiy asset. As stated previously, without additional market rules that address this behavior, the result will be price suppression that negatively affects all market participants regardless of the state in which they are located. Other considerations come into play as well that mitigate or obviate concern, including a resource owner's status as a vertically integrated utility that demonstrates to its state commission that it has procured sufficient capacity to cover load and thereby receives rate?based recovery for its resources; federal subsidization programs authorized by Congress; and the specific arrangements associated with gas plant tax abatements and other economic incentives that are made available to economic development projects. Included in the Capacity Market Repricing Proposal referenced earlier is a proposed flow chart that PJM has developed to reflect the criteria by which resources receiving out-ofmarket revenues would trigger repricing under Capacity Market Repricing Proposal. Carbon Preposal: Your letter reflects concerns over carbon pricing framework. PJ stands ready to implement a carbon pricing framework consistent with fundamental market design principles should states desire such a solution. However, incorporating a carbon pricing framework into PJM market design is entirely dependent on the willingness of PM states, or a subset thereof, to take action in this regard. PJM has no authority to unilateraily incorporate carbon pricing in its market design; it can however provide a vehicie to implement a state~driven proposai. ldeaily, incorporation of carbon pricing in Energy Market would be system?wide, eliminating the need to ensure that states not electing to implement the scheme are protected from its price effects. However, a subset of states can aiso decide to move forward with this option. in fact, the California ESO has established carbon pricing for a subset of its Energy Imbalance Market footprint. As noted earlier, in August PJM wiil release a more detailed description of a proposal that states can consider. With respect to what approvals might be required to incorporate a carbon pricing regime in Energy Market, such a change wiil likely need a combination of FERC and state approvals. Certain aspects of a carbon pricing regime would manifest in the subject and may require modifications to Deveiopment Guidelines in PJM Manual 15. To the extent not all states participate in a carbon pricing regime, PJM anticipates the rules wouid include some form of border adjustment to address concerns about import and export price impacts due to onty a subset of resources in PM that would be subject to a carbon tax. Any border adjustment rules iikely will affect whoiesale prices and would be captured in Tariff and/or Operating Agreement, requiring stakeholder discussions and a tiling with the FERC. Capacity Market Proposal: proposal seeks to accommodate state policy decisions to subsidize resources white preserving the competitive nature of the Capacity Market and insulating other states from another?s policy decision, including policy decisions by Ohio. Without such a change, the proposed ZEN legislation as well as the Zero Emission Credit (ZEC) legislation in could result in resources in other states being compensated at suppressed prices and conceivably forced into premature retirement. PJM Capacity Repricing Proposal, referenced earlier, provides some examples of out-of?market subsidies that may incentivize below-cost bidding. Price Formation: Regarding Energy Price Formation initiative, PJM will continue to work to develop a complete proposal that would aliow both ?exibie and non-?exible resources to set energy prices. Generally speaking, such a proposal could separately price ??exibility? as an ancillary resource; thereby enabling marginal resources, regardless of their ?exibility, to set energy prices. This would result in energy prices that better reflect the cost to serve toad and manage transmission constraints in the PJM Energy Market, and result in a discrete payment for resource ?exibility which would more accurately reflect the value ?exibility provides in maintaining reliability. Finally with respect to market design issues, PJM continually reviews the effectiveness of the markets and is addressing concerns on a number of market-related matters. Each of these topics has been addressed or is currently being addressed in PM stakeholder meetings or by the FERC, as the following chart displays: - incremental Auction Senior Task Force Arbitra in incremental Auctions . . . . Capacity Construct/Public Policy Senior Task Force i Ca i . . Pme Certainty pacrty uctons Operating Committee Planning Committee Resilience Fuel Security in the Capacity Market to Capacity Performance initiative {Addressed through consideration of negative prices, pricing the value of File} Security in the Energy Market resource diversity, and resilience.) Capacity Performance initiative Fuei Price Formation in the Capacity Under further consideration in: Market 0 Incremental Auction Senior Task Force 0 Capacity Construct/Public Policy Senior Task Force 0 Energy Price Formation initiative "Energy" on the price romance proceeding, that?W Market all generation units needed to serve load set Energy Market prices, rather than being relegated to recovering their costs through uplift.) Proceedings awaiting a quorum of FERC Commissioners: tiling under Section 205 of the Federal Power Act. 0 Compiaint ?ling by Potomac Economics, the Midcontinent lSO?s and other Independent Market Monitor. Externai Capacity Rules Resilience With respect to resilience, PJM has recently developed a Resilience Roadmap that iays out short? term (through December 2017, medium-term (through December 2017), and longterm (beyond 2018) actions PJM wilt take in its operations and planning domains, in the cybersecurity and physical security domain and in the Energy Market to increase BES resilience. As the roadmap displays, PM is addressing resilience with three goals in mind: to prepare, operate, and recover. PM will seek to mitigate resilience risks, including those stemming from increased dependence on the nation's naturai gas delivery infrastructure, by enhancing the BES to be more responsive to potential high risk and ?black sky? events through the pianning process. Additionally, PJM is considering implementation of a set of operationai reforms whereby, under certain circumstances, PJM would commit additional reserves or-otherwise operate the BES more conservatively. Conclusion PJM reiterates its desire to coliaborate with Ohio policymakers to accommodate pubiic policy goals while maintaining efficient, competitive markets that support reliability -- and in so doing, protect a fundamental interest of all Ohioans: the reliability of the BES. PM is focused on addressing the issues you have raised in a deliberate and proactive manner. While PJM cannot guarantee the ultimate outcomes, the achievements to date, the deliberations underway in the PJM stakeholder process and the proceedings to come before the FERC will provide answers to what may currently seem to be ?unknowns.? We sincerely appreciate your engagement in these matters, and assure you that the principles driving all of initiatives are consistent with our core mission assuring the reliability of the BES, supported by the operation of fair and efficient markets. Reapecttully, Kerry Show