FERC partly granted a complaint from LS Power challenging the PJM calculation of opportunity cost adders (OCA), requiring operating agreement (OA) revisions to more thoroughly document the inputs and algorithms behind the OCA.
The adder is a component of the cost-based offers that resources submit in the energy market and aims to capture the revenues that may be missed out on if a resource with limited run hours is dispatched when prices are low (EL24-91). The commission wrote that market participants do not have adequate information to determine whether their OCAs are accurate and account for all factors that may limit when a resource can be operated.
The order requires that market sellers have access to unit-specific inputs, assumptions and results — including intermediate results; a public posting describing the models and algorithms used in the calculator and hypothetical examples showing how they function; and that the Independent Market Monitor and PJM meet with market sellers on request to discuss assumptions built into the calculator and its results. A compliance filing is required within 45 days of the Aug. 14 order.
“We find that the PJM operating agreement is unjust and unreasonable because it fails to provide market participants with a sufficient level of detail regarding the calculation of OCAs,” the commission wrote. “Inaccurate OCAs that are too low (i.e., do not fully reflect the market participant’s opportunity costs) could cause resources to prematurely use up their limited run hours when energy prices are lower and render them unable to operate in subsequent periods when prices are higher and they are most needed to provide energy and support the bulk electric system’s reliability. As such, accurate OCAs are essential to help ensure the efficient use of energy-limited resources in PJM, support accurate price formation, and increase market participants’ confidence in and understanding of how market power mitigation provisions are being implemented.”
The complaint, which was filed in March 2024, argued that the Monitor has not provided enough information on its OCA calculator and market participants are not able to replicate its results. In some cases, LS Power said it has identified issues that have led the Monitor to make changes in how it determines the OCA. Overall, however, it argues the Monitor has not engaged in adequate communication with market participants and has been unwilling to make changes when requested. The complaint also argued that PJM’s decision to eliminate its OCA calculator in June 2020 and instead rely on the Monitor’s calculator should have been brought to the commission as a change to the OA.
LS Power wrote that only one pollutant was being modeled for its Chambersburg and Rockford generators, causing their adders to be significantly diminished and resulting in the units being prevented from operating during high pricing periods due to emissions limits on their air permits. It estimated the Rockford adder should have been 25 times higher than what the Monitor calculated. After reporting the issue to the Monitor, the company said it was referred to the Manual 15 language detailing the OCA calculation.
The Monitor responded to the complaint stating that it’s the responsibility of market sellers to submit information about the pollutants that can limit a resource’s run hours and said it met with the company to discuss the adder several times in April, May and June 2022. After additional pollutant data was provided on July 26, 2022, the Monitor updated its modeling of LS Power’s resources.
LS Power also argued the Monitor was calculating different OCAs for the six units at its Aurora Generating Station, despite each unit being identical. The complaint argued the Monitor has not transparently addressed the cause of the difference.
While investigating volatility in the adder calculated for a different resource in June 2022, the Monitor said it identified an error in the calculator, where a flaw in the calculation of shadow prices reduced the output that resource was modeled as produced, causing its emissions to vary. The issue was resolved on June 23, 2022, and the Monitor stated there was minimal impact on LS Power’s units.
In a separate issue, the Monitor said there was an error causing variable operating and maintenance costs (VOM) to be double counted for the Chambersburg generator. This was corrected the same day LS Power raised the issue. The primary issue leading Chambersburg to hit its emissions limit in the period discussed in the complaint was PJM dispatchers using the resource to resolve local constraints.
The Monitor defended the transparency of the calculator, stating it is adequately detailed in Manual 15 and the only inputs that are not available to resource owners are locational marginal price (LMP) and gas futures, which are proprietary and confidential data provided by a vendor. It stated it has held multiple educational workshops for PJM stakeholders, with materials available online, and will continue to hold more sessions. It also argued PJM can empower third parties, such as the Monitor, to aid in the calculation of market parameters so long as the RTO is the entity implementing them, which the Monitor said is the case here.
PJM also voiced transparency concerns in its response, stating it has requested access to the software behind the adder, which the Monitor has declined to provide. It supported the Monitor’s role in the OCA calculation, however, stating that PJM staff are the final arbiter of the adder to be included in cost-based offers.
The RTO engages in annual reviews of the OCA to ensure the process outlined in the OA and Manual 15 is being followed, in addition to periodic review of adders calculated for individual resources to watch for trends and abnormal values. The RTO wrote it has identified instances where it sought further review and was able to request data and meet with the Monitor.
Responding to LS Power’s request that FERC allow market sellers to propose their own adders, PJM said it already has a pathway for alternatives to be submitted so long as it can be demonstrated the default calculation is not representative of a unit’s opportunity costs. PJM stated it has approved alternative OCAs in the past.
The commission wrote that more transparency could help identify and resolve the sort of errors the Monitor outlined.
“The IMM acknowledges that some errors occurred in the calculation of some OCAs. While some of these errors may have been limited in scope, such errors nonetheless harm the efficient functioning of markets and undermine market participants’ confidence that the market rules are being implemented appropriately. There is also the possibility that there are additional issues with OCA calculations that LS Power and other market participants have not been able to identify due to the opaqueness of current OCA calculation process,” the order states.
The commission declined to require that PJM calculate the OCA, finding that it has remained in control of the implementation of the adders, and declined to require that PJM allow alternative OCAs to be provided by market sellers who cannot demonstrate that the default methodology does not account for some limit. The commission said the issue of PJM having access to the calculator is out of the complaint’s scope but encouraged PJM and the Monitor to collaborate on allowing access.
