PJM’s plan to hire a consultant to review the RTO’s auction revenue rights (ARRs) and financial transmission rights markets appears likely to set up a conflict between load-serving entities and financial traders.

A draft of the proposed scope of work shared with stakeholders Wednesday poses nine issues for the consultant to address, one-third of which question the current market’s balance between LSEs and other market players.

“Is load systematically disadvantaged under the current mechanism?” PJM asks. “Are there aspects of the current mechanism that result in profits to non-load-serving participants without commensurate or associated benefit to load?”

The draft also questions whether the current allocation of balancing congestion to load is appropriate, noting that “much of the negative balancing congestion in PJM can be attributed to financial products available in the day-ahead market, primarily up-to-congestion transactions (UTCs).”

It also asks whether the ARR allocation methodology should be changed “in order to increase the value of ARRs to load.”

Dave Anders, PJM director of stakeholder affairs, who presented the draft to the ARR/FTR Market Task Force on Wednesday, said the RTO is seeking a consultant that has sufficient knowledge of the subject matter while also being independent enough to provide a “fresh look” at the issues.

The consultant is being hired in response to a recommendation in the “Report of the Independent Consultants on the GreenHat Default” that called for an outside expert to review PJM’s FTR market and other PJM markets to evaluate the risks and the benefits of rule changes. (See “PJM Seeking Consultant on ARR/FTR Task Force,” PJM MIC Briefs: May 13, 2020.)

Anders said he recognizes stakeholders have a wide variety of views regarding what the consultant should accomplish.

“We want to make sure that stakeholders view the selection of the consultant, as well as the work that they perform, as credible,” Anders said.

The draft includes an “overarching question” that asks whether the current ARR allocations and FTR auctions “constitute an appropriate mechanism in an LMP-based market by which to ensure that load receives the value of the transmission system for which it is paying through” network integration transmission service (NITS) and firm point-to-point transmission service charges.

Anders said PJM is requesting that the consultant first gain an understanding of the RTO’s ARR/FTR mechanism and FERC orders that created the structure.

The scope of work also questions:

• the virtues of path-based vs. network allocations of CRRs;
• whether modeling differences between day-ahead and real-time markets are a cause for concern;
• whether new products should be offered, including a path-based FTR, and FTRs of different tenors (e.g., weekend-only, seven-day on-peak hours);
• whether some products should be removed from the FTR auctions; and
• whether FTR trading points that should be added or removed.

Susan Bruce of the PJM Industrial Customer Coalition said the independent review is something industrial customers are “welcoming with open arms.”

Bruce said her group would like to see the scope of the consultant’s review to include the role of the FTR market in generation development and understanding the role of liquidity in countering market power. “If [the FTR/ARR markets are] serving their intended purposes, then great,” she said. “If not, then let’s look under the hood a little bit more closely.”

Joe Wadsworth of Vitol said the questions concerning potential new products address practical commercial uses and were out of place in the consultant’s scope of work. “To me, it’s more of a practical commercial issue that would be driven by the experience of market participants that actually utilize the product,” Wadsworth said.

Anders said the experience of market participants and commercial use of the product is something that should be considered in any determination to change the product mix. He also said the information that consultants could provide isn’t necessarily a determination of whether a change is made.

Any changes resulting from the consultant’s review would go through the normal stakeholder process, Anders said.

The review is expected to last a couple of months, Anders said, and will be dependent on feedback received from the consultant candidates.

Anders said PJM would not reveal the list of potential consultants now but said the RTO will make its selection and define the scope of the project “informed by input from all stakeholders.”

During the task force meeting, the Independent Market Monitor outlined its proposal to directly allocate congestion revenues to LSEs.

Exelon, NextEra Resources and Public Service Enterprise Group countered with a presentation that alleged the Monitor’s proposal would hurt customers, saying it “fails to understand how congestion and FTRs are currently employed by LSEs to manage risk.”