Can capacity markets be designed by democracy?

Abstract

Regional Transmission Organizations (RTOs) are stakeholder-driven organizations where changes to rules or protocols go through a process of stakeholder approval. Based on interviews with PJM stakeholders, we observe the perception that the process is held up by specific coalitions. We use voting data from the PJM stakeholder process and a model of participatory decision-making to assess these stakeholder perceptions, integrated with a model of PJM's capacity market to address how stakeholder-driven processes can design market constructs that promote reliability. We do observe a strong voting coalition by demand-side interests (electric distribution utilities and large direct-access customers) but not by supply-side interests. In theory, this demand-side coalition can act in a pivotal manner to prevent any rule change from going forward. In the capacity market redesign case in practice, the pivotal or swing participants are more likely a smaller segment of financial market participants, such as hedge funds and banks.