PJM has responded to the Independent Market Monitor’s annual State of the Market Report, highlighting five different areas of focus out of hundreds of recommendations.

In its response released Monday, PJM said it met with representatives from Monitoring Analytics, the RTO’s Monitor, on several occasions in the leadup to the March release of the report to discuss areas of prioritization for 2020. Discussions led to prioritizing five different issues out of 213 recommendations contained in the report, including:

• a holistic review of the auction revenue rights (ARRs) and financial transmission rights markets design;
• five-minute pricing and dispatch;
• a capacity market default market seller offer cap;
• the future of up-to-congestion transactions; and
• energy market power mitigation.

“Some of the recommendations in these areas propose solutions that may require additional analysis by PJM and Monitoring Analytics; stakeholder discussion and vetting; or are recommendations on which PJM and MA have not yet agreed,” PJM said in its response.

ARR/FTR Market Design

The ARR/FTR products have been a major area of focus for PJM, the Monitor and stakeholders in recent years, the RTO said, going back to 2017 when PJM filed changes to comply with a FERC order removing the use of historic source points in the ARR allocation process and shifting the allocation of balancing congestion from FTR owners to load. (See FERC Accepts PJM’s FTR Plan, Rejects Rehearing Requests.)

The issue took on greater importance after the 2018 GreenHat Energy credit default, PJM said, calling into question the credit requirements for FTRs and the value of the long-term FTR auction. Subsequent discussions at the ARR/FTR Market Task Force have resulted in movements to alter the auction structure.

As a recommendation contained in the independent consultant report on the GreenHat default released last year, PJM is conducting a “holistic review” of the ARR/FTR products and procedures and is in the process of hiring a consultant to conduct a review. PJM reviewed the final scope for the holistic review to be done by the consultant at the June 26 task force meeting. (See PJM Revises Consultant Scope for ARR/FTR Review.)

“PJM is engaging in this holistic review with an open mind and looks forward to working with Monitoring Analytics and stakeholders on the consultant’s final report,” PJM wrote in its response. “The current structure that is implemented in PJM has been in place for over 20 years. That length of time, in addition to questions raised by stakeholders on the effectiveness of the current structure, necessitates such a review.”

5-Minute Dispatch and Pricing

In May 2019, the Monitor presented a problem statement and issue charge to the Market Implementation Committee addressing transparency and process improvements for real-time energy price formation.

Since then, stakeholders have discussed market rule changes and areas to increase transparency in the governing documents. Several key changes remain under discussion, including: the alignment of energy and reserve prices with the target time of the dispatch instructions; the configuration and periodicity of the dispatch algorithm; the formulation of the real-time dispatch and pricing; and the transparency of the LMP verification process performed by PJM.

Members gave a nearly unanimous endorsement of PJM’s short-term proposal to resolve issues in five-minute dispatch and pricing at the June 3 MIC meeting, while urging the RTO to continue seeking intermediate and long-term solutions. (See PJM 5-Minute Dispatch Proposal Endorsed.)

PJM said changes in the alignment of prices and dispatch instructions and frequency and configuration of the dispatch algorithm are “beneficial” and will increase incentives to follow dispatch. The RTO said it cannot currently support proposed changes to the formulation of the real-time dispatch because no analysis is available determining the benefits, costs or operational impacts related to the proposal.

PJM said it appreciates the Monitor raising issues regarding transparency and process improvements around real-time energy price formation.

“The real-time dispatch and pricing of the PJM system is complex,” it said. “Taking time to identify where those processes may be improved and where more transparency would be beneficial is important to PJM.”

Default Market Seller Offer Cap

Stakeholders discussed changes to the capacity market’s default market seller offer cap (MSOC) at the MIC in 2017 and 2018, advancing a proposal by PJM before it ultimately failed to pass at the October 2018 Members Committee meeting. (See “Market Seller Offer Cap Balancing Ratio,” PJM MRC/MC Briefs: Oct. 25, 2018.)

The default MSOC is defined as the net cost of new entry multiplied by the average balancing ratio for all performance assessment intervals in the prior three years. The proposal would have calculated the balancing ratio used in the default MSOC and nonperformance charge rate formulas by averaging the balancing ratios from the three delivery years that immediately preceded the capacity auction.

Despite lengthy discussions on the issue, consensus was not reached on changes. In February 2019, the Monitor filed a complaint with FERC explaining the problems it believes exist with the current default MSOC (EL19-47). (See Monitor Asks FERC to Cut PJM Capacity Offer Cap.)

The complaint has yet to be resolved at FERC. PJM said it understands the IMM’s justification for the complaint and recognizes that it has resulted in uncertainty in capacity market rules but would have preferred to address the issues outside of FERC rather than waiting for an answer.

UTC Transactions

As a result of changes in market behavior and stakeholder questions on the value of up-to-congestion (UTC) transactions, PJM wrote a paper in 2015 providing background and education on their value and highlighted concerns with their use. Recommendations included altering the biddable locations for UTCs to generation buses as source only, trading hubs, load zones and interfaces and allocating uplift to UTCs consistent with increment offers (INCs) and decrement bids (DECs).

The recommendations were discussed at the Energy Market Uplift Senior Task Force and culminated in two separate FERC filings, the first of which was accepted in February 2018 and decreased the bidding nodes for virtual transactions in PJM. (See FERC OKs Slash in Virtual Bidding Nodes for PJM.)

The second filing, which was rejected by FERC in January 2018, proposed to allocate a portion of the uplift in PJM to UTCs as if they were an INC at the injection point and a DEC at the withdrawal point. PJM and stakeholders chose not to propose an alternative in response to FERC’s invitation to do so in its order. (See FERC Queries PJM on Virtual Transaction Rules.)

PJM said it believes inconsistencies in the allocation of uplift costs existing between UTCs and other virtual transactions is “inequitable” and should be addressed. The RTO is currently working with the Monitor on UTC analysis.

Energy Market Power Mitigation

PJM said its energy market power mitigation rules have been the frequent focus of stakeholder discussions and “have presented challenges,” including debate over the fuel-cost policy (FCP) process, the lost opportunity cost calculator and parameter-limited scheduling.

In September 2018, stakeholders approved a problem statement and issue charge focused on enhancing the FCP process and to explore potential alternatives to PJM’s cost-based offer rules. Discussions on the topic are currently taking place within the stakeholder process, as members approved rule changes at the March MC meeting. (See Revised Fuel-cost Policy Approved by PJM MC.)

PJM said it supports working with stakeholders and the Monitor to investigate ways to “simplify and streamline the current rules without weakening them” but wants to consider several different components of energy market power mitigation rules to make sure they work together.

“PJM firmly believes that strong market power mitigation mechanisms are critical to maintain an efficient, competitive market,” the RTO said. “To ensure those rules remain strong and that they all function cohesively, PJM believes that substantive changes to the calculation of cost-based or mitigated offers should not be considered in isolation.”