Public Power Magazine

Coming of Age


From the May 2013 issue (Vol. 71, No. 3) of Public Power

Originally published March 27, 2013

By Jeanne LaBella
Senior Vice President, Publishing
March 27, 2013

DEMEC’s small staff serves its nine member municipal electric utilities.  From left are Scott Lynch, energy services manager, Patrick McCullar, president & CEO, Kimberly Schlichting, vice president, administration, and Daniel Corrigan, vice president engineering.Not shown, Stephanie Dove, accounting manager. Photo by Melissa Grimes-Guy.

The 1970s and early 1980s were formative years for municipal joint action agencies. The American Public Power Association promoted the concept to its member utilities during the 1960s and early 1970s. But forming an agency that could issue tax-exempt bonds to finance power supply projects for a group of municipal entities required enactment of enabling legislation. Municipal electric utilities in Delaware worked together to secure legislation in 1978 and formed the Delaware Municipal Electric Corp.(DEMEC) in 1979.

Sam Beasley, who chaired the utility commission in New Castle, Del., led efforts to form the agency.

“He was a retired senior executive from Hercules Corp.,” said Patrick McCullar, who has worked with DEMEC since 1992 and has been CEO since 1997. Beasley saw the need to work together to challenge neighboring investor-owned utilities, McCullar said.  “No single municipality had the funding or the expertise necessary to challenge them at the Federal Energy Regulatory Commission.  He was really the driving force of putting together this group – of getting the legislation passed at the state level so they could form the electric company.”

The agency did not immediately assume responsibility for power supply for its members. Throughout the ‘80s, it functioned with volunteer staff from member communities and outside legal counsel. The members worked together on advocacy before the state Legislature and joined forces to challenge wholesale transmission rate filings before FERC. In the early 1990s, members needed to bolster their power supply. It was then that the foresight of New Castle's Sam Beasley and other founders of DEMEC paid off. The agency was in place and could scale up its activity on behalf of its members.

The dividend of that thoughtful planning paid off handsomely in the early 1990s, when Congress passed the Energy Policy Act of 1992, the legislation that mandated open access to transmission, a long-sought goal for public power utilities. The 1992 energy legislation set in motion the regulations and industry changes that would transform economy-energy power pools into market-making, federally chartered regional transmission organizations—known in utility parlance as “RTOs.” The Pennsylvania-New Jersey-Maryland power pool was the first entity to make the transformation. FERC certified PJM as an RTO in 1997. PJM now manages transmission and generation in 13 states and the District of Columbia, affecting 60 million people.

Thus began a dramatic chapter in the evolution of the electric utility industry that left many in the public power sector thinking, “be careful what you wish for.” The “T” in RTO evolved to represent much more than just transmission. PJM and other RTOs today have moved to the head of the parade, taking charge of regional planning, not just for transmission, but also for construction of new generation, deployment of demand response programs and operation of the wholesale electric markets.

DEMEC, the joint action power supply agency serving all nine municipal electric utilities in Delaware, was at the table in 1997, when stakeholders began hammering out PJM’s role in the industry.

McCullar remembers well the greeting directed at him by an executive of an investor-owned utility that had supplied power to DEMEC:  “What the hell are you doing here?”

McCullar and others from transmission-dependent utilities stood their ground and made sure they had a voice in the RTO’s development. From 1997 to 2000, McCullar and Ed Tatum of Old Dominion Electric Cooperative spent practically every workday at PJM, serving as the voice for consumer-owned utilities. The schedule was untenable.  Eventually, DEMEC, 16 other consumer-owned utilities and one small investor-owned utility formed the PJM Public Power Coalition and hired a small start-up consulting firm, Customized Energy Solutions, to represent their interests before PJM.

“We hired them and pay them to have people at every committee meeting, every task force, every working group at PJM. That amounts to hundreds of meetings each year,” said McCullar.  “We want to know what’s going on and we want to influence what’s going on to make sure each and every structure, rule, regulation, whatever that is created is not unfair to the public power business model.  It’s been extremely effective.”

Customized Energy Solutions, based in Philadelphia, today has 65 employees and provides similar services for stakeholders in every RTO in the United States and in emerging markets in India, said McCullar.

“The intelligence we bring out of this group is amazing,” he said.  “We get daily emails—we may get seven or eight emails a day [telling us] what’s going on at PJM.  I think it’s the smartest thing we ever did.”

As PJM and other RTOs evolved, utilities in the Pacific Northwest and the Southeastern United States pushed hard to resist formation of these market-making entities in their regions. In 2006, the American Public Power Association launched its Electric Market Reform Initiative, a focused research and lobbying effort to call attention to the problems in FERC-approved RTOs and to push for reason.  DEMEC has been the poster child for what’s good and bad about RTOs. In fact, McCullar traveled to other regions of the country to talk with consumer-owned utilities about his experiences in PJM. He presented his talk, titled, “The Good, the Bad and the Ugly” to several groups.

“We loved the fact that we had an energy-balancing network that we could go to and have network transmission service, without any challenges, access to all the ancillary [voltage control and firming] services. We didn’t have to provide them on our own. Those were all the goods,” he said.

The “bads” of PJM related to the enormous organizational structure that required constant attention and some of the rate tariffs, which led to constant legal battles, McCullar said.

“The ‘ugly’ comes along when you have things like this PJM capacity market, which is not a market at all, but just a construct that administratively sets a price for capacity,” he said.

“When we originally agreed to the capacity market, it was with the condition that self-supply could bid in at $0 and not be forced to take the risk of not clearing,” said McCullar.  “We wanted assurance that our resources would qualify as capacity and we wouldn’t be in the position of having to pay for it twice.

As the PJM-managed market evolved, DEMEC recognized the need to build its own generating resources to self-supply a portion of its power needs. The agency’s peak load is 450 MW. Building a power plant, of course, entails taking on debt. If the agency bid its plant into the market and the resource was not accepted for dispatch in PJM, DEMEC would have to meet its debt service and pay for capacity in the wholesale market.

“We never wanted to be in that position,” McCullar said. “So when the capacity market started in 2007, we negotiated the right as self-supply to bid in at $0 and be assured clearance. That was good for quite awhile, until we ran into the situation where the states, rightly so, were fed up with the capacity markets and the prices imposed on ratepayers and decided to incentivize new assets to be built.”

New Jersey and Maryland both took steps to bid into the PJM capacity market at $0. “The legacy generation owners who depend on that capacity market to get revenues for their plants saw that as a buyer-side market power move to depress future capacity prices,” he said. “And, of course, that’s what it was because the states did not believe the capacity construct was doing what it was designed to do, and that is to attract new generation assets where they’re needed.”

Once it was clear that New Jersey intended to enter its own generating resources into the auction, the old-line generation owners filed a complaint at PJM, which then filed a new Minimum Offer Price Rule (“MOPR”) with the Federal Energy Regulatory Commission. The commission immediately approved the revised MOPR, which, among other things, eliminated the right for load-serving utilities like DEMEC to bid self-supply generating plants in at $0.

Jerry Wiegand is manager of DEMEC’s 100-MW Beasley Power Station in Smyrna. The natural gas-fired peaking plant is named for Sam Beasley, a former New Castle City Commission president who was instrumental in formation of DEMEC in 1978. Photo by Melissa Grimes-Guy.

All of this transpired as DEMEC was completing construction on unit 2 of its Beasley generating plant in Smyrna, Del. The agency wanted to bid that new capacity into PJM’s 2014 capacity market. What followed can only be described as Orwellian.

Under the new MOPR, DEMEC had to bid its plant into the market based on its actual costs, rather than $0. That wasn’t hard. PJM has a model called “CONE” – for “cost of new entry.”  DEMEC took that model, plugged in all of its line item costs and offered the unit in at its cost-based number.  However, PJM’s market monitor objected to DEMEC’s model CONE number because it was substantially lower than PJM’s model CONE. The market monitor for PJM asserted that DEMEC’s bid should be several hundred dollars higher.

“No platinum-plated power plant will ever be built at that number,” said McCullar.

Negotiations ensued. The market monitor said the joint action agency’s cost of capital was too low and said the contracts DEMEC has with its members amount to “out-of-market revenues.” He insisted that DEMEC increase its bid to $200 or higher. McCullar resisted because DEMEC’s bid represented actual costs.  He told the market monitor the agency would not bid above $100.  PJM sent an engineer to Smyrna to inspect the Beasley plant.

The out-of-market revenues assertion was baffling. Any power plant in the PJM territory has “out-of-market” revenues, McCullar said.  After extensive wrangling, DEMEC submitted its bid, for $99.

“We put it in and nervously waited,” said McCullar.  The auction ran the next day and cleared at $136.

Relief. But the MOPR rule still stood as a future threat to utilities taking steps to meet their own power supply needs.  McCullar testified before FERC about the agency’s experience. “I think I really made the commissioners unhappy because I finished my testimony by saying ‘If your intent is to stop any development of any new assets in PJM, you have successfully accomplished your mission because nobody will take the risk to build a new asset if they must depend and bid based on PJM’s rules.’”

DEMEC and other self-supply entities have since worked out a settlement with other generation owners in the RTO’s territory and agreed to a modified rule that would restore the agency’s self-exemption. The plan has been approved by PJM stakeholders and awaits FERC approval.

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