© 2015 McNees Wallace & Nurick LLC OPSI Annual Meeting October 13, 2015 Session 6 – Reliability Pricing Model: Are Further Changes Necessary? Robert A. Weishaar, Jr. McNees Wallace & Nurick LLC 777 N. Capitol St., NE – Suite 401, Washington, DC Direct Dial: –

© 2015 McNees Wallace & Nurick LLC Changes To Be Considered  Short-Term:  Capacity Performance (CP) implementation was "rushed"  Fair to say that CP proposals were reaction to: (1) Polar Vortex; and (2) Generators' claims of revenue insufficiency  Are we ever finished changing capacity rules? o FERC June 9 CP Order at P 15: "Therefore, while we accept PJM’s proposal (as modified), the Commission can and will actively monitor its implementation, and we will act where necessary to modify it to ensure the proper alignment of performance obligations, incentives, and penalties. "  Changes Are Needed: Market power/offer caps; keeping Demand Resources (DR) part of the reliability portfolio  Changes Are Not Needed: Cost Allocation; Portfolio netting; Force Majeure 2

© 2015 McNees Wallace & Nurick LLC Changes To Be Considered  Medium-Term and Long-Term:  Objective: Give customers and LSEs more control over HOW (but not WHETHER) they meet reliability objectives  Quite unlikely that RPM or CP will be the final answer for achieving reliability portfolio objectives 3

© 2015 McNees Wallace & Nurick LLC Change: Offer Caps  New CP rules create a wide gap between previous “Net ACR” offer cap and new “Net CONE x B” offer cap  For many units, offer cap increased from $0/MW-day to over $200/MW-day  Reality: In 2018/2019 BRA for EMAAC, SWMAAC, and MAAC, cleared MWs decreased while clearing prices increased more than 33% in each zone  In RTO, total costs increased by close to 50%  PJM and IMM Responsibility: Determine and advise stakeholders whether offer levels are reflective of costs or, instead, result from generation ownership concentration 4

© 2015 McNees Wallace & Nurick LLC Change: Keeping DR In Reliability Portfolio  Elimination of Base Capacity product will eliminate contributions from reliability portfolio  CP does not change the reality that PJM is summer-peaking  Resources available to meet summer peak are being phased out and eliminated  DR:  "Keep it in"  "Measure it properly"  "Pay it accordingly" 5

© 2015 McNees Wallace & Nurick LLC No Change: Proposals (By Suppliers) to Reduce Supplier Risk  Portfolio netting (over-performance of one resource may be used to offset under-performance by another resource in the same portfolio)  PJMICC members have the following concerns: o Reduction in operational requirements does not necessarily result in a direct 1:1 relationship with decreases in offers or RPM clearing prices o Consequently, no demonstrated and certain benefit to consumers o Trimming performance obligations for portfolio-based supply would reduce pool of penalty revenue, and reduce incentives for non-portfolio resources to over-perform during Performance Assessment Hours (PAH) o Proposal benefits owners of multiple generators (those best in position to forego corresponding decreases in offers) o Issue has been "asked and answered" by FERC o Requests for rehearing pending – let FERC decide 6

© 2015 McNees Wallace & Nurick LLC No Change: Proposals (By Suppliers) to Reduce Supplier Risk  Changing “Force Majeure” provision in CP Rules  Concerns are similar to those with Portfolio Netting o Decrease in performance obligations with no corresponding decrease in RPM clearing price o Issue currently pending at FERC in requests for rehearing 7

© 2015 McNees Wallace & Nurick LLC No Change: Capacity Cost Allocation  PJM proposed radical redesign of capacity cost allocation:  Peak hour usage during the four highest summer peak load days  Single highest winter peak hour  For each day with Performance Assessment Hours (PAH), the hour with highest PJM load level in that day  Proposal departed sharply from the current approach:  Allocation based on customer's usage during the 5 highest summer peak hours for the PJM region (the "5 CP" approach)  FERC’s Capacity Performance Order:  “In its answer, PJM proposes to withdraw one element of its proposal in Schedule 8 of the RAA addressing load serving entity capacity obligation allocations. We therefore condition acceptance of PJM’s proposal on removal of this element. PJM may, at its election, make a separate filing with the Commission addressing this matter.” (emphasis added) 8

© 2015 McNees Wallace & Nurick LLC No Change: Capacity Cost Allocation  PJMICC view:  PJM has no “compliance obligation” relative to capacity cost allocation  Historical data show that winter peak loads are NOT driving the Reliability Requirement o Reliability Requirement is still driven by summer peak loads  Customers that are capable of managing their loads have planned around the current 5 CP approach o Some have made substantial investments in capital and operational changes  Current approach consistent with cost-causation principles  NO FURTHER CHANGES NEEDED UNLESS AND UNTIL NON-SUMMER PEAK LOADS CONSISTENTLY DRIVE RELIABILITY REQUIREMENT 9

© 2015 McNees Wallace & Nurick LLC Change: Medium-Term Outlook  Current approach undervalues the ability of LSEs and customers to be proactive in meeting reliability objectives flexibly and cost-effectively  Must find a way to give customers and LSEs more control over HOW (but not WHETHER) they meet reliability objectives  Principles and concepts outlined by APPA and others must be explored further  Given our legal construct, FERC and PJM must take a leading role to transition from the status quo 10