PJM Interconnection is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia. My colleage, Troutman Sanders attorney Peter Glaser, just sent around a memo on the impacts of EPA’s regulatory surge on electricity prices. The memo is based on PJM auction reports (here and here).

Peter’s memo is too juicy not to share with a wider audience. I reproduce it below with his permission. — Marlo 

Reality has interceded in EPA’s attempt to play down the impact of its train wreck regulations on the electric utility industry.  First came the widely reported news that Louisville Gas & Electric had filed for a 19% rate increase by 2016 to pay for the upgrades that the regulations will require.
 
Now, we have the results of the capacity auction that PJM just conducted for the 2014-15 capacity year.  The resulting capacity prices were about 4.5 to 8 times as high as prices paid in the last two auctions and 2.5 to 3 times as high as market analysts had predicted. 
 
According to PJM, most of this increase can be laid at the feet of EPA.  Based on PJM information, we calculate that the portion of the increase attributable to EPA will cost load (customers) in the PJM region $2-3 billion just in capacity costs and just for a one-year period (2014-15).  
 
Here are the details.

 
The PJM Capacity Auction
The PJM Interconnection is a FERC-approved regional transmission organization that manages the high-voltage electric grid and the wholesale electricity market that serves 13 states and the District of Columbia.  In PJM, the “Reliability Pricing Model” (or “RPM”) is a forward auction of electric generating capacity that occurs annually, three years ahead of the year for which capacity is procured.  PJM procures enough capacity to cover the anticipated demand for electricity in the region plus a reserve margin.  Generating units bid into the RPM auction based on their anticipated costs.  Every generating unit that clears the auction receives a capacity payment based on the market-clearing price, which is set by the marginal (i.e. most expensive) unit.  PJM then assesses the costs for those capacity payments on load (customers) in the PJM region. These capacity payments are in addition to payments that generators receive for the energy they sell from their generation.  
 
The May 2011 Capacity Auction
In May 2011, PJM conducted the capacity auction for the 2014/2015 capacity year.  Market analysts predicted the May 2011 auction would clear at moderately increased levels in comparison to the last two years (which cleared at $16 and $27 per megawatt/day, respectively).  Specifically, Macquarie Equities Research reportedly estimated that the RTO price would clear at $40.  Barclays Capital reportedly predicted the price would clear at $50.  Instead, PJM announced that the market clearing price skyrocketed to $125.   These results even surprised the analysts who watch these markets (See Platts Megawatt Daily, May 17, 2011, “PJM Capacity Market Stuns Market Analysts”).  In its report on auction results (see attached), PJM concluded that:
 
On March 16, 2011, the U.S. Environmental Protection Agency (EPA) issued a notice of proposed rulemaking in a proceeding to promulgate final maximum achievable control technology (MACT) emissions standards for hazardous air pollutants (HAP) from coal‐ and oil‐fired electric utility steam generating units, pursuant to section 12(d) of the Clean Air Act. A final rule is due by November 16, 2011.  Compliance from existing resources would be required approximately three years later, likely in early 2015, which implicates the 2014/2015 Delivery Year.
 
Compliance with increasingly stringent environmental regulations requires generation resources to install emission mitigation technology which increases the avoided cost offers of these resources. These increased costs were a significant contributor to the increase in clearing prices in the western part of the PJM RTO. The increasingly stringent environmental regulations had a two-fold impact on western PJM clearing prices: (1) generation resources affected by the increasingly stringent rules, the majority of which are located in the western part of the PJM RTO, could include the cost of investment needed to comply with the new regulations in their cost-based offer price and (2) the amount of offered MWs from generation resources decreased because the resource owners decided the resources were not viable to comply with future regulations and therefore will deactivate as opposed to installing equipment to comply with the new rules.
 
The Impact on the Clearing Price
• The May 2011 auction cleared over 142,000 MW of capacity for the unconstrained areas of PJM.
• The System Marginal Price (the basis for the market clearing price) was over $125 per MW/day.
• This represents an increase of over $97 dollars per MW/day over the clearing price from the last annual auction and a $75 increase from the price expected by Barclay’s. 
• PJM concluded that “60 to 80%” of the increase in generators bid costs in the May 2011 auction was due to environmental regulations.
• Even if one assumes that the market price would have cleared at higher levels than the last auction (e.g. the $50 price expected by Barclay’s), the proposed EPA Regulations just caused an increase in electric capacity prices of approximately $2-3 Billion for a one year period, in the PJM region alone. 
• Analysts have concluded that these prices are not “likely decline meaningfully anytime soon, and thus, we expect the clearing price levels to remain relatively elevated (versus the 2013/2014 auction) for the foreseeable future.”