Regulatory Changes to Impact Electricity Generation Costs for Businesses in PJM Region

PJM Interconnection (“PJM”), the regional grid operator for significant parts of the Midwest and mid-Atlantic, has recently identified that nearly 12,000 MW of electricity capacity provided primarily by smaller, old coal units is “at-risk” of imminent retirement. Aging units are becoming less economic due to high maintenance costs, high coal costs, relatively low natural gas prices (natural gas is the fuel of choice for many competing generators) and the threat of climate legislation that would require massive upgrades to contain pollutants emitted by these plants.

All of these impediments come at a time when demand for electricity has substantially decreased as a result of the economic downturn and an increased focus on energy efficiency. Despite the drop off in demand, the transmission grid is often strained to deliver reliable, low-cost supplies of electricity.

A harbinger of these circumstances is in Exelon Generating Company’s (Exelon) announcement that it will retire four generating units at its Cromby and Eddystone generating stations in suburban Philadelphia effective May 31, 2011. In its December 2009 announcement, Exelon stated that the various coal-fired units, constructed between 1954 and 1960, had become too costly to run in light of declining demand for power and substantially increased costs to run coal units.

PJM studied the effects of the retirements and determined that two of the units proposed for retirement – Eddystone 2 and Cromby 2 – would need to run beyond the proposed retirement date to ensure reliable electricity supply while transmission grid reinforcements are constructed. Without the units, the transmission grid in the Philadelphia area must be upgraded to ensure the reliable delivery of power to consumers in the region.

Following the studies, which were completed this summer, Exelon determined that it would be willing to run the needed units, but that it would need to be paid for the costs of maintaining and operating them beyond the proposed retirement date. To that end, according to processes established by PJM for such occasions, Exelon submitted to PJM and to the Federal Energy Regulatory Commission (“FERC”) a proposed “Reliability Must Run” (or “RMR”) contract for its Eddystone 2 and Cromby 2 generators. The proposed contract set forth the costs claimed by Exelon for keeping the units in service.

The FERC recently approved the proposed June 1, 2011 effective date for the contracts. The Cromby 2 contract will run through December 31, 2011; while the Eddystone 2 RMR contract will run through June 1, 2012. However, FERC did not yet approve the requested rates. Instead, the rates, to be paid by regional suppliers to Exelon between June 1, 2011 and the retirement date of the respective units, are the subject of an ongoing legal proceeding before FERC.

Upon completion of the settlement proceedings, electricity suppliers will know the rate to be paid for the RMR contracts. We do know that the costs for each unit will be assessed to electricity suppliers in the Eastern Pennsylvania and New Jersey region; with suppliers in the PECO service territory responsible for approximately 90 percent of the costs (see the cost allocation tables below under the June 9, 2010 event). It is important for consumers to understand how suppliers will reflect these costs in their rates.

We are following the issue closely. To provide our customers with as much information as possible, below please see the chronology of events leading up to the status of the matter today.

Order of Events

• February 2010: Exelon informed PJM that it planned to retire two southeastern Pennsylvania generating units effective May 31, 2011. Under the terms of the PJM tariff, PJM studied the reliability effects of the proposed retirements, determining that Exelon’s Eddystone 2 and Cromby 2 units are necessary beyond May 31, 2011 to maintain regional reliability. Exelon agreed to maintain the generators in service beyond the proposed retirement date.

• June 9, 2010: Exelon filed a RMR contract with the FERC, setting forth proposed terms and conditions for the extended service of the units. The RMR rates include a monthly fixed-cost charge for operating and maintaining the units, project investment costs related primarily to potential environmental upgrades, and variable fuel costs. A month before Exelon filed a RMR contract with the FERC, zonal allocations for both Eddystone 2 and Cromby 2 units were posted. The following electric distribution companies are expected to be impacted by the zonal cost allocations for Eddystone 2 for the period September 1, 2010 – August 31, 2011:

The following electric distribution companies are expected to be impacted by the zonal
cost allocations for Cromby 2 for the period September 1, 2010 – August 31, 2011:

• Today: Various parties protested the RMR rates proposed by Exelon,. FERC granted the RMR contracts, effective June 1, 2011, but set for hearing the terms of the RMR contracts. In other words, FERC determined that the units will be eligible for a cost of service rate on the proposed date, but left open for settlement the exact value that the units will recover.

Upon completion of the settlement proceedings, PJM will assess the annual costs to electric generation suppliers in the service territories listed above as set forth in the charts.

As mentioned earlier in this post, we are following this issue closely. Please check back for future updates.

SOURCES: Exelon Corporation, PJM Interconnection

Jason Barker is a Vice President of Energy Policy at Constellation Energy. This is his first post on the NewEnergy Blog.