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From the Summit to the Grid: PJM, States & What’s Next for Power Markets
In this episode of Energy Solutions, host Todd Snitchler discusses the future of power markets with experts following a recent Governor's Conference in Philadelphia. The panelists address rising ...
From the Summit to the Grid: PJM, States & What’s Next for Power Markets
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Music
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Governors across PJM are raising questions about the future of the grid, rising energy costs,
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and how well the system is working for consumers.
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Last week, they held a conference in Philadelphia to delve into these questions.
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You're listening to Energy Solutions, a podcast from the Electric Power Supply Association,
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where we unpack the stories and trends behind America's power grid.
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I'm your host, Todd Snitchler, President and CEO of EPSA.
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Headlines from the conference have focused on the Governor's remarks and debates about
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a crisis in confidence in how PJM is run and operated, as well as questions about
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whether states will leave the market or should turn to regulated utilities to once again
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own and operate power plants.
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But as today's discussion will show, the real story goes deeper, and there's a lot
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that consumers need to know about what really drives their electric bills.
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We're entering a period of unprecedented load growth from data centers, electrification,
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and a rapidly expanding economy.
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For years, PJM operated with excess supply, which allowed some to downplay the need for
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durable market constructs.
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That era is over.
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Now, capacity markets and PJM as a whole are being blamed for higher bills, even though
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they've actually helped keep total consumer costs relatively stable compared to other
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regions.
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In this episode, I sit down with four panelists who participated in the conference to unpack
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what they heard, as well as takeaways, and the pathway forward.
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We also break down why markets remain the best path forward and push back on some of
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the narratives around energy prices, utilities, and what's really needed to increase supply.
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My guests represent some of EPSA's member companies and are leading experts in competitive
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power generation market design, as well as PJM and its governance.
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Travis Kabula is vice president of regulatory affairs at NRG and a former chairman of the
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Montana Public Service Commission.
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Margie Phillips is the senior vice president of wholesale market power at LS Power.
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Arnie Quinn is the senior vice president of regulatory policy at VistorCorp and former
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director of the Office of Energy Policy and Innovation, the Division of Economic and
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Technical Analysis, and the Division of Energy Market Oversight at the Federal Energy
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Regulatory Commission.
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And finally, Glenn Thomas is president of PJM Power Providers Group and the former chairman
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of the Pennsylvania Public Utilities Commission.
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He also served on the staff of Pennsylvania Governor Tom Ridge and as an advisor to California
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Governor Arnold Schwarzenegger.
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LS, NRG, and Vistra are some of the largest competitive power companies in the United States,
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providing thousands of megawatts of electric power generation from resources of all kinds.
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The PJM Power Providers Group or P3 represents competitive power generators serving the
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PJM region.
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Together, they explore market governance, the role of capacity markets, and how to strike
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the right balance between state and federal roles.
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We also dig into the challenges of securing reliability, improving load forecasting, and
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the growing impact of AI-driven demand on the grid.
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Here's our conversation.
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Before we get started, I want to welcome our guests and give them each an opportunity
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to introduce themselves so that our listeners can connect voices to names.
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Hi, this is Travis Kavula, Vice President of Regulatory Affairs for NRG Energy.
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Hi, Todd.
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Thanks for having me.
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Thanks, Todd, for having me.
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It's Margie Phillips.
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I'm with LS Power and I'm the Senior Vice President of wholesale market policy.
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Thanks, Margie.
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Hi, Todd.
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This is Arnie Quinn.
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I'm Senior Vice President of Regulatory Policy for Vistra.
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Thanks for having me today.
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You bet.
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Yeah, and this is Glenn Thomas, President of GT Power Group.
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Thanks for having me, Todd.
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You bet, Glenn.
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Thanks for joining us.
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Last week, there was a Governor's Conference addressing questions around PJM, governance,
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operations, and the issues that are impacting consumers all across the PJM footprint.
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And the Governor's Conference drew wide media attention, headlines about surging power bills,
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a crisis of confidence and PJM governance, and any number of other criticisms for leveled.
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But I'm curious from each of your perspectives as panelists that participated, what did you
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take away from the tone of the summit?
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And beneath the rhetoric, was there any real challenges that you think we ought to be focusing
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on in reality as opposed to perhaps some of the rhetoric?
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Margie?
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Sure.
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I thought it was interesting that everyone on our panel, and I was on the market's working
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kind of panel, I think we all agreed that they have worked and they can worked.
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But there is a uniform concern about the unanticipated, significant amount of megawatts coming on
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the system because of data centers.
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And then the fact that there's going to be a cost allocation problem because that demand
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is going to cause prices to go up because we don't yet have the supply to meet it.
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So I thought it was a constructive conversation once the politics took second place.
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I thought there was a good amount of consensus that there are a few things that we should
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probably do in the near term.
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We do need a better handle on the load forecast.
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We need a much better sense of how big is this problem.
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If we could do something with the interconnection process, probably both the load and the generator
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interconnection process, I think that would give us a better sense of how many resources
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really can come on and how quickly can they come on.
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And so I think once you have a better sense of what the load is and once you have a better
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sense of what the new supply is, then you have a much better picture of how serious is
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this problem.
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I think we're going to learn that it is something that we need to stay focused on, but it is
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not a crisis.
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It is not the end of the world and it's not something that's not manageable.
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Thanks, Arnie.
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Yeah, and if I could just add Todd, again, first of all, the tip of the hat to the governors
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for organizing this conversation.
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I thought it was a very helpful and engaging conversation to see that many people gathered
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in one room, represented from all the commissions in the PJF footprint gathered together to
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talk about these really important issues.
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I just think it's just remarkable in and of itself.
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I'm not sure there has been a gathering that big.
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A folks just talking about PJM issues and it's because of the governors, they were able
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to assemble that.
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And I also agree with Arnie that I think there were some very constructive observations
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that were offered and some takeaways that can be acted on and load forecasting is certainly
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at the top of that list.
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I think there's two sides of this equation.
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There's a supply side and there's a demand side.
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There's been a lot of conversation about whether the supply side is up for the challenge,
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so to speak.
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And I think there's a lot of reasons to believe that it is.
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But there's also some serious questions on the demand side about whether we're accurately
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predicting what is indeed likely to come on the system and not only the volume of what's
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coming on the system, but how it's coming on the system and how can be best integrated.
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So I think it's certainly time to roll up our sleeves and do some work in that area.
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Yeah, it helps to have an accurate target, right?
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That we're aiming for.
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We're shooting at nothing.
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We're sure to miss.
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So a lot of the conversation that we heard from some of the panelists and some of the
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governor's staff was that PJM is not responding fast enough to demand and price pressure and
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the cost implications, of course, that margin noted a moment ago.
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But do you think giving states a greater or a more formal role in the process actually
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solves any of these issues?
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Or does it just create a new level of uncertainty or new risks?
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Having states engaged is important, right?
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I mean, states have a huge role in this.
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PJM has always recognized that.
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And over the years, PJM has expanded not only its staff to support state relations, but
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its engagement with the states.
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I'll be going to the Opsie meeting next week.
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I'm doing nothing but talking about issues related to PJM with state policy makers.
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So the state engagement is at the end of the day a positive thing.
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But also governance matters.
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And at the end of the day, PJM is a public utility with an independent board of directors
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that is regulated by FERC.
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And it's important for states and stateholder body to be feeding the board and informing
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the board and providing appropriate advice and counsel to the board.
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It's important for the board to make decisions that are in the best interest of the market
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and sending those decisions to FERC for them to deliberate and ultimately determine if
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those paths are just unreasonable.
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I would add that I think there is a large role for state regulators, governors, commissioners
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to play going forward.
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I'm a little disappointed that there's so much finger pointing instead of focusing how
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we can cooperate going forward.
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But while PJM is the federal entity that is telling us what the wholesale price to build
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a new power plant is, the retail regulators have so much jurisdiction to run with that.
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They permit the load.
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They permit the generators.
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If they want to put obligations on either they can do so.
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And they control retail rates.
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So if they want to create different class rates with a concern on cost allocation, they
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can do that.
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So I agree with Glenn.
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It's really important we coordinate.
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But at the same time, both federal and state regulators have really important jobs to do
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to make this work.
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Yeah, I agree with that.
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And I recognize that the states can file comments and be active at FERC, the federal
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regulator.
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So it does make a lot of sense to try to get them coordinated and part of the solution
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development process on the front end, along with all the other stakeholders.
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One other thing I'd have though is I've always thought of the capacity market as being that
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thing that makes sure that everyone is doing their fair share.
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And when everyone decides that they're going to lean on the system, then prices are going
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to go up.
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And if we have political actors trying to prevent that from happening so that the decisions
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that have been made are not reflected in the prices that will drive the solution to
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that shortage, then I start to become worried.
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So that role for the political actor is there to feed the process, but not to distort it.
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Thanks, Arnie, that's helpful.
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So there was some discussion around re-reg or utility ownership, utility rate basing
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a new generation.
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Several of you were on the panel that talked about resource adequacy.
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Would re-reg or allow utilities to build new gen actually lower bills as some of the folks
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argued?
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Or does that look like it would actually backfire on consumers?
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Well Todd, I can take a stab at this.
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You're talking to an old dog who watched PTAM go to this sort of deregulation.
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And I think everybody conceded that being part of a regional organization lowers prices.
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There is no reason to think that won't continue.
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And I think that the biggest demonstration of that is that PTAM had a special process to
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try and get more generation online faster.
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And the response to it was incredible.
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There were about 26,000 megawatts bid in.
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I can't remember exactly how many cleared I know my company bid in 700 megawatts at a
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billion dollars.
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And the point is if a utility has an RFP that most they can maybe get one or two to
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land on their balance sheet and that customers then take up the risk of the performance of
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that power plant.
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And at the end of the day, that technology can become very obsolete and the utility has
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rate-based it and stuck customers with it for 20 years.
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Because when you rely on the PTAM market to drive new investment, the investors take
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the risk.
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And if their technology becomes obsolete, prices go down.
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Consumers don't bear that risk.
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I think that regulators still appreciate that.
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But like everybody, all corporations are looking to grow their share of the business.
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So it would make sense that utilities want to get back into a business that they perceive
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has a lot of growth opportunity.
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Sure.
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We could blame them, right?
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Yep.
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And let me build on that.
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I think in this moment, when we're talking about the uncertainty around the load forecast,
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I don't think anyone is saying that significant new load isn't coming.
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It is.
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But is it 30 gigawatts by 2030 that PGM talks about?
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Is it some lower number like 24 gigawatts?
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Is it a bigger number?
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In a world where we're not highly confident in how much new demand is coming, a world
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where you're insulated from guessing too high.
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And that's exactly what the utilities are.
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If they guess too high, they're still going to get paid.
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They're still going to recover costs.
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I think it's especially important that we rely more on the competitive supplier where
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we will absolutely respond to the needs of our customers new and existing, but we're
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not going to respond until we have a level of confidence that new customers are going
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to come.
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And the utilities just don't operate with the same frame of mind.
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Yeah, maybe to drill down on that point a little bit more.
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As I said, I sat there at the conference that I think I heard seven or eight different
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versions of the load forecast.
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Who do you want to bear the risk of that load forecast being wrong?
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Is it the generators, an Arnie's company, is it Margie's company, is it Travis's
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company, or is it the average day consumer?
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And a lot of the options on the table, including utility, rate-based build, that squarely
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puts the risk onto consumers.
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And then you're going to be paying off that risk for the next 30 years.
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So we're talking about potentially binding customers into the 2060s when you just don't
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have to.
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You should let the competitive markets sift through all that.
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It's also weird that you've got this dynamic where people are pointing to demand growth
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that's happening in one segment of this market data centers.
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And that's, of course, the issue that is driving prices higher.
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So they're the ones in a sense causing that effect.
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But the regulated utility solution would be to build and rate-based generation that
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would be paid for by everyone in order to prevent that harm.
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Basically, they're rather than avoiding the harm.
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They're sort of fast forwarding to achieving it by rate-based generation.
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And that's the paradox and not one that utility generation ownership proposals have
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really grappled within any logical way.
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Recent media coverage has zero zeroed in on the most recent couple of capacity auction
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results into borrow a phrase that's been used, record high prices as a driver of consumer
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bills.
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And certainly that is sharpen the focus of the political folks in PJM as well as the
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regulators, of course.
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I guess the question people are asking at the highest level before we drill down is
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are markets actually working as intended or do they need some kind of reform to better
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reflect the cost implications to consumers versus the investment criteria needed for new
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resource deployment?
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Well, Todd, maybe just taking a look first at the consumer angle.
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I mean, it is true for customers who are exposed to the spot price of capacity that those
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capacity costs have gone up and that shows up in higher bills.
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But it is important to put that into the broader context.
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I was looking at some data from P. Sagan, New Jersey.
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And for the customers, we serve their capacity costs make up about 20 to 30% of our supply
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charges.
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And supply charges, as you know, are just one part of a customer's bill.
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Let's call it about half of a customer's bill.
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So realistically, even with these high prices of capacity baked in, they really do only
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account for about 10 to 15% of customers bills.
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And let's just say the bills that customers have seen and the price increases are by and
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large and not related to increases in that capacity price over time.
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It tends to be in fact more related to regulated utility spending in polls and wires as well
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as the public policy surcharges, things like renewable energy programs, energy efficiency
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programs, and that over time, have driven these bills up.
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There's a lot going on, but it's first helpful to put into context what's actually going
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on in consumers bills.
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And Todd, I'll just say based on the number of conversations we're having, the other
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side of that market working response is customers, especially large customers coming to suppliers
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and asking about the ability to both support existing resources that could be in jeopardy
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or develop new resources.
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And I think one thing we need to remind ourselves of is that the auctions that preceded
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the two with quote unquote record high prices had record low prices.
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And that first auction that popped happened right after 6,000 megawatts of generation
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left the market.
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So there was a rational response to very low prices and there is a very rational response
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to high prices.
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And we're having a bunch of conversations and we're doing a bunch of things ourselves
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that respond when the price signals tell us that we need to respond.
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I would add that there has been policy goals that have very strongly impacted the wholesale
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market.
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And frankly, we weren't really taking account of them.
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And PGM became concerned that we weren't valuing the contribution of various resources.
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A lot of money was spent on renewable clean resources, but at the end of the day, many
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of them can't be dependent on to keep the lights on for 24 hours.
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So part of the rising costs is to assure that as the states pursue their policy goals,
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that we maintain a reliable PGM.
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And in turn, that is causing some states to lean on other states and how that's impacting
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cost is probably going to play out because some states had a more diverse portfolio and
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are not leaning on the system while other states are very much depending on other states
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to carry their load during periods of shortage.
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One thing I'll add to UTAG and I'm the one person on here who isn't in a company.
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So the folks you have on this call are the real experts and advising their companies.
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But I just feel like we're at the beginning edges of a real build out here in PGM and
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probably even in the country.
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And you can see all the leading indicators.
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There have been higher prices.
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I mean, that will certainly get the attention of anybody looking to develop.
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You look at the turbine manufacturers.
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They're doubling in some cases, tripling their capacity to manufacture.
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You're seeing states talk about what they can do to make permitting decisions faster.
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I mean, that's red and blue states.
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We're having conversations at the state level that we've never had before in recognition
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of the fact that energy capacity is needed.
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States that we're looking to retire resources or at least start to talk about the idea that
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these resources need to stick around.
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So I think there's a growing recognition that where we've gone into a period where more
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energy is going to be needed and the affordability of that energy is very, very important to voters.
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I'm here in the Philadelphia area and there's a gubernatorial campaign going on across
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the river in New Jersey.
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I can watch a football game on a Sunday afternoon and see at least two dozen ads about utility
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costs in my area.
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And that didn't happen before.
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I think like I said, there's early indications that we're really on the cusp of a major build
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out here.
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And as Margie pointed to the RRI numbers, my rough figure is there's been seven gigawatts
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of announcements separate and apart from that RRI.
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So I think we're really seeing some signs that we're going to see some pretty significant
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investments coming here soon.
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I think that's an important data point that you've raised, Glenn, and really everyone
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on the conversation here.
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We did a little work a few months ago now because the narrative had really tried to be
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established.
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The generation costs and capacity in particular were driving up customers costs.
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Bills were going up and I'll borrow a quote again, a thousand percent, which was never
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the case.
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But that was the way it was being framed by folks who had a perhaps an interest in getting
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back into the generation game and didn't want to draw attention to where some of the costs
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actually were being created for customers bills.
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So we retained energy tariff experts, a firm that does tariff analysis to do some work
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for us.
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And they did some analysis across the PGM footprint at utility service territories in
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a number of states.
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And a couple of things became pretty clear.
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The first of which is even with the higher capacity clears, the generation component, which
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includes both capacity and energy, had remained flat to declining over the last 10 to 15 years
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and virtually ever service territory.
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While I think as you noted, Travis, the wires charges had gone up and Margie, you've
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referenced state policy a couple of times, that they had resulted in increases to consumers
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bills.
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And we didn't do the research in an effort to point fingers or to accuse because there
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are investments that need to be made to ensure a reliable system.
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But it was more designed to try and push back on a false narrative that somehow this
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one auction or now a couple of auctions is what is driving consumer cost increases over
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the last decade.
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And so I'm curious you all have been part of some of the discussions around these issues
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and this issue came up a bit at the governor's conversation last week.
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Do you have any other takeaways that you get out of the findings that report uncovered
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or how come that part of the discussion isn't really breaking through the conversation?
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Why is it so easy to just say, our generation is driving up costs when the data frankly
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doesn't support that anywhere?
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Todd, I think there's a pretty easy response, which is T&D costs.
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The states have been responsible for and capacity and energy, PJM has been responsible for.
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And I'm a little disappointed sometimes that our discussions have so much less to do
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with facts and a lot to do with rhetoric.
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And I think the problem is we're in a highly politic sized environment.
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And so it's just very easy to point your finger at this third party.
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It is for PJM's for profit, but it really operates in a nonprofit way.
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And it's just so easy to blame them instead of looking at themselves and saying,
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geez, what did I do here to help contribute to these higher costs?
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And that's why I think we have to go back to a partnership where everybody takes responsibilities
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for what's within their jurisdiction.
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Yeah, and it's sort of like the old adage about the frog and gradually warming water.
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The frog doesn't ultimately know that it's going to boil.
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And that's kind of what happens to transmission and distribution charges.
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They tend to move in one direction up as the revenue requirement increases over time.
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And that's not a competitive market where scarcity or oversupply causes a marginal price
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signal that will sometimes be very high and then be worked off and go very low the next year.
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So very different dynamic, the way competitive markets are supposed to function
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with that marginal cost price signal is to convey not only a spot price on the margin,
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but also to kind of scare people into getting themselves hedged and entering into longer term
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or stably price contracts.
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But that is certainly not something we've seen in the regulated charges, which have been
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mono directional up and to make matters even worse and to kind of bargey's point.
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I think there's a very real question about whether these in some sense there is even a regulator
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for a lot of these costs in any meaningful way.
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When you look at the way transmission is constructed and its costs are recovered from consumers
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in PJM, an awful lot of it comes through one off supplemental projects that are proposed
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by transmission utilities, more or less rubber stamped in the sleepiest of PJM stakeholder
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committees and then pass through in fork formula rates with little to no meaningful regulatory
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process.
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Candidally, if even 10% of the attention that's currently being paid to capacity markets
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were focused on these supposedly regulated charges, I think we'd be probably in a better
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place for consumers.
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Picking back on that, I think to your question Todd, it is about the suddenness of the capacity
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market increases and I mean to Arnie's point that he made earlier, those prices were very,
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very low for three years.
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They gave it a retirement signal and people did exactly what the market was telling them
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to do and then just don't let it go.
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At least for capacity market purposes almost overnight, things change and change very quickly.
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The playbook for regulated water companies is to come in every year and a half and ask
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for an 8% increase and get a 5% or 6% increase.
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But they do it gradually, they do it regularly and I would argue over time, consumers probably
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pay more if we look at that model on the electricity side.
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If prices would have been $200 for the last 10 years, would we have the outrage?
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I don't know about that but I do know consumers would have been paying more over that time
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period.
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Yeah, that's an important distinction to make.
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We appreciate that, Clint.
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So there's obviously the 800 pound gorilla perhaps that we haven't talked about yet is
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the political intervention and the desire for many to keep politics as far afield from
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what is inherently becoming more and more political environment.
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Can you talk a little bit about the perspective of political intervention?
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Do you view it as damaging?
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Do you view it as potentially helpful?
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Does it actually worsen volatility if politicians, I don't care what color, what stripe, what
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political party doesn't matter?
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But if they're putting their thumb on the scale, is that make it difficult for you to invest
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in the projects that we know that will meet over time for reliability, for new supply,
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for retention of existing resources?
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It certainly doesn't help that the investment community sees all this uncertainty and we
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did see PJM respond to a number of these policy requests and that's how we got to very
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low prices and generators exited the system.
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We would argue those regulatory interventions were bad, although we couldn't have nonetheless
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predicted the AI growth.
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It doesn't help to have regulatory intervention, but at the same time, it is important that we
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be mindful in the wholesale market of the fact that politics is inescapable and that there
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will always be cost allocation issues and it's going to be a balance, but I would reiterate
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my company finds this kind of political intervention very challenging.
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Yeah, Todd, I completely agree with that.
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I know when I talked Vistra's board, the regulatory risk is the risk that feels the hardest
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to manage because with commercial risk, there's usually some action we can take that will
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mitigate that risk.
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With political or regulatory risk, all you can do is hire the very best regulatory team
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you possibly can and hope for the best.
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And I'll say, I think in the most recent past, to Margie's points, there's always going
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to be a political element to the way decisions are made and how markets get designed.
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That's where we need a federal regulator that stands up to a set of principles, not in
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a pointy headed bureaucratic way, that ignores political realities, but in a long-term way
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that says, these are the principles by which we're going to make decisions and we're going
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to stand up for those principles and make the hard decision.
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And sometimes the very unpopular decision and the decision that's going to get them some
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political heat.
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And when they don't do that, then everyone along the chain has a harder time also standing
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up to political pressure.
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And I go back to the decision in the DPL South case where P. Jambley, if there was a mistake,
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it was in fact exactly the way their market was designed to run and FERC intervened to
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say, yeah, it's okay.
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We will change a market after its run.
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And that one decision, I think, undermined confidence that FERC or federal regulator
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would kind of hold the line and stand up for its principles.
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And obviously, investment in new generation is predicated upon some kind of longer-term
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revenue stability in order to get that capital in the ground.
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And that'll have to come from bilateral contracts or some kind of hedges off of that.
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But you've really increased the risk in P. Jam over time that longer-term contracts
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will have the value of their bargain eroded by political interventions.
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I mean, counterparties are more willing to enter into those long-term deals if the underlying
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market structure against which the deal settles is consistently defined.
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Like Arnie is saying, nearly all of these commercial contracts have changed law provisions
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and the commission and P. Jam are constantly changing the rules.
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And now governors want to always change the rules.
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So, customers can then either find themselves paying a significant risk premium that
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encompasses that regulatory uncertainty or alternatively, they can pay a lower price
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that includes that contract with change in law provisions.
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But that'll be invoked when P. Jam and the commission once again change the rules.
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So naturally, a lot of this bilateral contracting has diminished and what that means is probably
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less of a willingness to make or less stable environment to make generation investments
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potentially in P. Jam.
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And it also injects, frankly, a negative feedback loop.
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Many of the changes to the P. Jam market are precipitated by buyers or even sellers
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who are unhappy with their exposure to the single auction spot price outcome.
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Bilateral contracting would avoid that exposure.
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But then again, such contracting is going to be less likely to occur because there are more
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and more political interventions.
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So a vicious cycle has started and it almost needs either the kind of vision thing
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that Arnie has described or some other policy that needs to be found in order to write this market.
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So, Glenn, let me turn to you because your conference comments make a point to stress that
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P. Jam's capacity construct is still the best tool in the toolbox if it's left in a way to operate
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stably. I'll let you define that.
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Do you think some of the discussion around the governor's proposals or the addition of
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perhaps additional political implications undermines that stability or is that political dialogue,
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maybe the impetus we need to work on making the changes that would help give stability to that
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capacity market construct?
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So, in general, if you like the conversations are changing at the state level,
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you'd walk through the halls of a general assembly five or six years ago and folks weren't
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concerned necessarily about reliability. P. Jam had 28% reserve margins, prices were low,
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everything was going great. In fact, most of the conversations were about how can we retire
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some of the assets that we think are some of the dirtier assets out there. That is very much
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changed at the state level. I don't think there's really a policy maker out there in this space.
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It doesn't believe we need more megawatts on the system and more importantly and maybe somewhat
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ironically, there's a strong desire, regardless of the world's political spectrum you stand to
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retain the existing assets. So, you know, quarters you would never have thought about,
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recognize the need to keep what's on the system there. And in my ideal world, I mean, that should
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continue in good times and bad, so to speak, that every policy maker should be asking themselves
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when they think about regulation or policy. What does this do to reliability? What does this do to
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affordability? So, and like I said, I feel like that message is permeating. I also feel like
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there is a growing recognition that quote-unquote intervention is not a healthy or desirable thing.
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That said, I think the governor's also want to see a little bit more accountability. I think they
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want to see a little bit more, I think visibility into the P. Jam process and how it works. And I
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think that's going to take a little bit of time. I mean, these markets are not necessarily easy
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things to pick up on. And it's going to say take some time to appreciate the role that P. Jam
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plays here. Does the political intervention spur more stability or does it lead to more instability
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depending on the outcome? I mean, the one good thing I would say is I've yet to hear a governor
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or even a state commissioner stand up and say, let's get rid of the capacity markets. Yeah. And
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for a catatectinal conference in June, and I don't recall anybody standing up and doing it,
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probably much to the chairman's should grin at the time. Because I mean, chairman Chris, who
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was pretty transparent in his views that he didn't necessarily think that the capacity construct
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was the right way to go. So to that extent, I think that's positive. I think nobody will
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necessarily say that a ninefold increase in capacity prices is a good thing. Sure. I would say
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that's not a good thing. I mean, it's tough to defend that kind of market, but the idea that we
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need a capacity construct as part of a properly designed and well-functioning market, I think is
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accepted. And the question is getting some stability to that mechanism. And obviously,
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political intervention can undermine that. But I think it's a two way street. And I think the markets
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have to give the policymakers confidence as well. Hey, Margie, you mentioned a couple of things in
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your comments about tinkering with markets often causes more harm than good. Are there a couple
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smarter reforms that you think people should focus on instead? Yeah, I think many of us are thinking
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that we need to encourage PJM to find ways to continue to speed the interconnection process for
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large load if they show up with their own new generation. That could really help. Clearly,
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everybody's talked about load forecasting. You're probably the biggest challenge. And there are other
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things that we can talk about. None of us like the administrative aspects of the market. But for
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example, there is a backstop mechanism in PJM. And that is only if we have three failed auctions,
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which we're in really bad shape if that happens. So we might want to look at that and see if we can
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change that. Also, Christlock's the new generation is controversial. And we'd have to think about it,
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but it certainly helps to incent investment. So those are some of the things. And also,
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frankly, outside of the capacity market, there's still a lot of work to be done. We don't have gas
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and electric coordination where we'd like to see it be. We still have concerns with sometimes the
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disconnect between operations and markets, which is operators act very conservatively. And so,
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right when you want the price signal to be in the energy market to be going higher to show scarcity,
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the operators take actions to mute that signal. And so we think there's room there as well. So,
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we're all focused on the capacity market, but we can all keep enhancing the rules. Of course,
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that balance is that the challenge of not changing everything so often, but focusing on what can
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be enhanced. Thanks, Margie. Travis, you've talked about bilaterals and longer term contracting to
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reduce reliance on spot prices. Is that a realistic policy response to governors affordability concerns?
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I think it should be. And it's something that consumers themselves and a majority of PGM
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states can take action around right now. I mean, I offer myself as a personal example.
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You know, last year, I signed the five year fixed rate deal for my power supply. And so, frankly,
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whatever happens to the capacity markets going up, going down, it's not going to affect my retail
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rate. And it's a shame that more people are not both customers small and large are not on
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contracts like that. It affords stability for their bills and upstream it provides some more
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stable source of revenue so that people can make investments in generation. I mean, the
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seminal question is whether the way the spot price is supposed to work is it's supposed to send
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sometimes volatile signal to encourage consumers and to encourage generators to hedge the risk of
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that volatility by entering into these long term agreements. And if you don't have a sufficient
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encouragement to do that or a policy that requires it, then you end up having to make changes to
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the spot market that diminish the strength of that marginal cost signal. You end up doing things
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like having to mute the signal, but then over procure capacity. Whereas right now, we're trying to
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run a fairly tight chip in PJM, which has 160,000 megawatts of load and generation,
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meant the difference between the floor and the ceiling on that spot price is only a few thousand
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megawatts. We can either do this through a more relaxed, which is to say sometimes bloated administrative
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design or we can have a competitive market that's working as it should, which in all the other
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commodity markets is framed as trying to encourage people to not be so exposed to the spot price in
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order to get better capital formation through bilateral longer term contracts. Thanks Travis.
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Arnie, I'm going to come to you because the issue that's really been driving a lot of this
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discussion and the big storyline at the summit was the demand growth that's coming from AI and
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data centers and really the uncertainty around how big that problem that we're trying to solve is.
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I know we've kind of talked about it a little bit already. Power futures aren't signaling that we're
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seeing growth at the pace and tender that perhaps some of the rhetoric is suggesting. So I'm curious
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if you have thoughts in your view about just how much and just how soon we think some of this load
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will appear and what are your concerns with some of the projections on what we think we're going
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to get from AI and data centers. There is the availability of new chips. There is just the cap
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X spending that goes into building these data centers. A gigawatt data center costs 40 billion dollars.
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So the kind of demand growth we're talking about is trillions of
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dollars of cap X spending and then there's just the time and effort it takes to just build these
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facilities which you can track and vendors do track and if you use those factors and do a top
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down load forecast you can get numbers and again there's a range and you see different numbers from
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different consultants but it's somewhere on the order of say 60 gigawatts of demand growth for the
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region like PJM using a variety of measures of PJM retaining its market share you get the
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man growth on the order of 22 gigawatts to 26 gigawatts by 2030. That's still very significant
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but it's much lower than PJM's 30 gigawatts and I think importantly it's substantially lower
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than the numbers you would get if you just added up what each utility in PJM said it was going to
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get in terms of new data center growth and I think what makes all of this really hard is the
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really high numbers, freak policy makers out and make them think that they've got to throw out
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market designs that have worked for years and years and years and they're so uncertain and so
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unrealistic that the forward market doesn't know what to believe and probably underestimate
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demand growth. So you're kind of getting the worst of both worlds. Yeah and it's interesting that
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you raised that Arnie because one of the questions that we hear a lot is we don't know what the
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load forecast is or we're not sure what we're aiming at but we know we have to get there because we
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don't want to have a shortfall we'd all agree with that but a Rocky Mountain Institute study that
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was published years ago now highlights that even 1% in overestimated load forecast each year would
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translate into spending billions on power resources that may not be needed and I think that's
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instructive for how policymakers may want to think about calibrating expectations and Margie
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you point out a couple of times now about load forecasting lacking consistency and credibility.
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Do you reforms that you think would give investors and states more confidence? Can you tick off
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two or three things that you think are top of mind? I think the question is does PTAM have the
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capability? Do they need to hire an independent third party? Do states themselves need to look at
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what the transmission utilities are telling them? We have to remember that it is in the transmission
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utilities interest to inflate those numbers because it does go into rate base and there could be other
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things too you could have deposits right security and collateral some of the states Ohio and Indiana
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have done that on a transmission basis but maybe there's creative ways where PTAM can do it on a
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capacity basis as well so that at least entities are willing to put their money where their mouth is
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and then if they don't show up there is some money that can be allocated back to consumers or
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something like that so it's an interesting one because both the state had some control over what
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it could charge data centers but it's an interesting exercise I think to think about whether PTAM
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Q could impose milestones on interconnecting load. Yeah Gleinia thoughts? Yeah I agree with everything
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I'm Margie has said maybe just put a finer point on it I mean Todd you used to be chairman of
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a public utility commission I was as well Travis was a public utility commissioner I mean I think
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this is something where the state public utilities could be working very closely with the utilities
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auditing what is being submitted to PJM to make sure that whatever is being submitted to be PJM
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which is being baked into the load forecast which is then used to set the reliability requirement
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which is then used to develop the capacity charges so that all those things line up and there's
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absolutely a role for state commissions to play here so that the end of the day everybody has
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confidence in those load forecasts because state commissions are really uniquely positioned here to
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be able to review confidential data to get into the weeds and really audit what the utilities are
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submitting to PJM here. Yeah Travis yeah it's worth noting that the utilities in PJM have not been
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great oftentimes that load forecasting historically I mean as part of research we did in Virginia we
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went back and looked at every dominion integrated resource plan to understand how six years out of
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the plan being submitted to their commission they were right or they were wrong about the load
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forecast and they were consistently wrong they were wrong on average of an average of 12 and a half
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percent error again just six years out of their forecast and all of those IARPs were before data
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center growth had really taken off like a rocket which just further magnifies both the uncertainty
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as well as the numbers the size of the numbers in question so what you do the math a wrong
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forecast like that if it finds its way into the actual capital a regulated utility is spending that
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goes into its rate base so that that has easily implications of thousands and thousands of dollars
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per residential customer so it's not only about getting better at reading the magic ball which is a
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very hard thing to do but something that state utility commissions need to take seriously it's about
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making sure that for supply agreements that the risk of load forecasting is owned by competitive
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suppliers and customers because that's an easy way to coordinate off that risk when you have two
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parties neither of which has recourse to a captive base of consumers and then for all the regulated
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grid costs that's a more challenging thing to get at because there you're talking about long range
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and even more uncertain load forecasts being the premise under which huge investments in transmission
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and distribution rate base are made which will one way or another be recovered from whatever
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consumers happen to be on that grid so again I think that latter thing is actually in some sense
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the more important customer affordability and risk issue even though it's not right in front
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of the headlights right now because capacity markets are there was a lot of talk about governance
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and institutional reform and there was talk about creating a new governor's collaborative within
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PJM and what that might do positive or negative so would that actually improve accountability or
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does it add more red tape is there possible benefits or how do you see this as somebody that was in
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the room where it happens so to speak for the Hamilton fans out there when this whole PJM process got
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started yeah and that movie didn't end well for Hamilton as I remember that's correct but with that
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at a very high level having governor's office engagement in the PJM world is a positive thing
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having governors that know and understand what PJM is and does and can appreciate the value that
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PJM provides on a daily and yearly and historical basis I view as a positive thing I don't believe
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creating an organization a replace or supplement opc is a good thing and I don't think the governors
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are headed in that direction so I think that's positive and this thing state commissions as a
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general proposition are better positioned to stay in tune with these issues they have the
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engineers they have the economists and more importantly they have the institutional knowledge because
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there's a long learning curve on these issues and having an institutional expertise and state
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government is better situated in a public utility commission then in a governor's office I also
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think it'll reduce the likelihood of governors taking the pot shots at PJM and maybe being a little
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bit more careful with their intervention and accusations toward PJM so that said I think from
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what I understand the collaborative and where it's headed it's going to continue to be a forum for
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governors and their staff to talk about PJM issues I look forward to engaging in those discussions
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selfishly is very helpful to me to have all 13 think governors and the DC in a single room
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it cuts down on my travel time so I appreciate the ability to talk to folks in that setting I thought
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it was great to be able to do that last week and I look forward to doing it in the future
spk_0
thanks Glenn I think that's super helpful so to the stakeholders that are with me the board turnover
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and leadership changes that are already underway at PJM and now of course conversations around
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governance what kind of governance reform do you think is useful or needed to balance state input
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and market stability so you can do the things you do and make informed decisions about investments
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that you'll make I have a very strong feeling about this first of all yeah Margie go ahead I think
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our new board members are terrific so I am so excited about that they understand they're engaged
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and they come from a wide perspective we have Matt Nelson who is a state commissioner in New England
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and we've got a former market monitor and a professor so I'm really positive on that what I would
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like to see is that frankly the model was mentioned I really like the Nesco model in New England
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because it's about trust the governors nominate people to that committee and it's people who work
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for them and then report back to them on the issues we've heard a lot about trust at the Constitution
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Center so we need to find a way to build up the governor's trust at the same time this organization
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needs somebody representing them in the stakeholder process so really does understand these details
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it's very complicated and so can work with the stakeholders and then work with this organization
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to try and produce the best outcomes. Thanks Margie. All right so as we come to the end of our
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conversation it seems appropriate for us to have some next steps so what are some practical steps
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that PJM states and policymakers can take right now to ease affordability concerns and ensure
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a strong and reliable system consider this a speed round if that's easier to help you formulate
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your answer. I'll start I think again these markets have worked very well for a long
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long period of time both the energy market and the capacity market and our history is we allow
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them to evolve as we identify issues that we need to to address I think near term a little bit more
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focus on the energy market which generally works very well but still does not always reflect
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like the value of fuel on a cold winter weekend in the energy price is something that we could spend
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some more time on so that the energy markets doing a little bit more work in the capacity market
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is doing a little less work so that's that's probably something like reserve ancillary service
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reserve product changes. I think the other thing and we talked about this as well is we do need to
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do some reforms on the interconnection side if we want markets to work and we all do part of that is
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making it as easy as possible for new resources to enter the market the reforms it forged it in
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order 2023 I think were well intentioned and thoughtful I don't know whether the cluster study for
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interconnection is really the long term solution so I think a thoughtful reform to the generation
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interconnection so resource owners can respond as quickly as possible it's also probably in line.
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Yeah and all double down on Arnie's comment there especially since it's fresh in mind I just
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co-authored a paper with a Colorado PUC chairman Eric Blankon generator interconnection and I
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guess put in the simplest possible terms if a competitive load serving entity has a contract
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with a data center that's long term bilateral contract predicated on new generation investment
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that generation should just be very top of the interconnection queue it clearly has strong
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demonstrable commercial interest and more to the point there should be some alignment on the state
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and electric distribution company side to allow that load to move in rough tandem with the
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addition of generation you know to the degree that people are having a public policy concern
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about data centers coming online rising prices at least we should facilitate those data centers
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who want to make investments in additionality but to come into the system nimbly in order to
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tamp down that concern and essentially accept a direct allocation of the costs of
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additionality onto their own shoulders so let's remove the barriers there. I'll pile on with an
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agreement with everything that Travis and Arnie said the other thing I think PGM can do is really
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look at its demand response programs we know that some data center owners have announced that they
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have flexibility but we need to get the markets right so they are rewarded for that flexibility
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and that will also help manage what we need going forward. So Todd I'm going to take the spirit of
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your question and ask myself a different question. Okay sounds like a recovering politician but
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all right yeah so I'm going to ask myself if I had 30 seconds to talk to a governor what advice
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would I give him? And the advice would be this just be patient allow these markets to work and
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don't do anything stupid because this is a moment where there's and I know that's hard to do in
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the face of political pressure due to rising costs that are hitting consumers bills and I fully
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expect or appreciate that there's a lot enormous political pressure to do something because
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consumers are feeling the pain of increased costs I totally get that but I feel like we're at the
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cusp of a tremendous build out in generation in this space I feel like there's a lot of risks
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associated with the load forecast I feel that this is a problem that the markets can solve and
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I think the states will be rewarded for their patients here and they will be punished if they try
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to go either outside the market or do something rash that's going to be disrupted to a market that
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is really well positioned to address these challenges so that would be my 30 seconds of advice to
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any governor in the P.J. footprint. And Glenn that is an excellent way for us to close so I want to
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take a moment to thank Glenn Thomas Arnie Quinn Margie Phillips and Travis Kabula all of whom were
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panelists at the P.J.M. governor's confab last week in Philadelphia for sharing some insights from
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their both comments at the conference but also their insights from coming away from the conference
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with our list of to-do's and we're certainly appreciative of that and we know that this is probably
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not the end of this conversation but just the next step so thanks very much for joining us today
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and we look forward to an extended conversation over the coming months.
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The P.J.M. governor's conference highlighted where pressure is facing the grid including rising
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demand political scrutiny and questions about whether or not the markets are working.
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States, P.J.M., federal regulators and competitive suppliers all have a role to play in ensuring
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reliability without shifting risks unfairly to consumers. Strecking the right balance is imperative.
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As our guests explain, there's no easy answer but there are clear paths forward like better load
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forecasting, smarter interconnection reforms, demand response and appropriate collaboration between
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states, P.J.M. and competitive power suppliers. It's also critical to understand what drives prices
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customers see on their monthly utility bills and where supply costs sit historically in relation to
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other expenses like distribution, transmission, policy costs and other utility spending.
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At the end of the day, price signals in the market are needed to spur investor action.
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They will rise and fall with supply and demand providing greater efficiency and managing costs for
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consumers over the long run. Policy certainty is essential. Frequent rule changes, political
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interventions, auction timing changes or moves towards re-regulation create uncertainty that
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slows investment just when it's needed most. Letting competitive markets work will be essential to
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providing the energy infrastructure that America needs. Thanks for listening. You can learn more about
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these issues and more on our website at epsa.org and follow us on social media on x at epsanews and
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linkedin. The music for this podcast is produced by let me hold that L.T.D. Be sure to subscribe and
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join us next time on energy solutions.
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Energy Solutions is brought to you by the Electric Power Supply Association.
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Epsa represents America's competitive power suppliers which bring about 175,000 megawatts
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of power generation resources to customers throughout the United States.
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The music in this episode is written, produced and performed by let me hold that L.T.D.
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Discover the power of competition at www.epsa.org