Over the objections of the Independent Market Monitor, PJM stakeholders last week endorsed creation of a cost-based offer calculator, the result of more than a year of discussions over the RTO’s fuel-cost policy (FCP).

The proposal by Public Service Enterprise Group (PSEG) — which calls for the development of the informational-only calculator through continued discussions at the Cost Development Subcommittee — won 69% support of the Market Implementation Committee with 136 stakeholders voting in favor. A non-binding poll asking if members preferred the package over the status quo also passed with 133 “yes” votes (68%).

Bhavana Keshavamurthy of PJM reviewed the PSEG proposal addressing Key Work Activity 4 of the fuel-cost policy enhancements issue charge. The work activity proposed exploring potential enhancements to FCP rules by examining a “lack of a penalty exemption and/or safe harbor for minor violations in a market sellers’ fuel-cost policy, and/or lack of appropriate crediting mechanism for a market-seller’s self-report of a potential fuel-cost policy violation.”

The issue charge divided work into two phases, with Phase I exploring potential enhancements to FCP rules. A package by the PJM Industrial Customer Coalition was approved at the February Markets and Reliability Committee meeting, and FERC approved revised Operating Agreement language in July. (See PJM Fuel-cost Policy Changes Approved by FERC.)

Phase II work included exploring potential alternatives to PJM’s current FCP rules and cost-based offer rules. The MIC held 14 special sessions on the issue since August 2019, resulting in the PSEG package.

PSEG Package

Keshavamurthy said market sellers sought to reduce their compliance risk for submitting cost-based offers and ensure that only competitive offers consistent with the FCP are used to clear the markets when mitigation is applied.

To deal with some of the concerns, the PSEG package includes the development of an informational only cost-based calculator. The use of the calculator would be optional by market sellers, Keshavamurthy said, and it could be used as a comparison with a market seller’s calculated offer.

The initial version of the calculator would be in an Excel/SharePoint platform, Keshavamurthy said, with the final version placed in the Markets Gateway. Keshavamurthy said PJM will provide a non-binding three-part cost-based offer (start up, no load and incremental energy offer) by midnight prior to the market day, and market sellers will have the option to overwrite the fuel-cost or any other input variable in the cost offer calculation.

Gary Greiner, director of market policy for PSEG, said there would be no change to the current market submission process and no manual or Tariff changes. Greiner said existing cost-based offer rules will remain status quo under the proposal, and the market seller is still responsible for submitting cost-based offers into Markets Gateway.

Greiner said regardless of the value produced by the calculator, the market seller will still be liable for penalties associated with incorrect cost-based offers under Schedule 2 of the Operating Agreement, and PJM will assume no responsibility for any errors produced by the calculator.

Greiner said cost-based offers are one of the areas of greatest exposure for generators, and a great deal of time and money is spent on creating the offers. He said the proposal makes sure that whatever fuel cost is used, the calculator would help see that “the math carries through the model appropriately.”

The calculator would create more transparency regarding variable inputs, Greiner said, and serve as a “valuable tool for generators.”

IMM Opinion

Catherine Tyler of Independent Market Monitor Monitoring Analytics recommended that stakeholders reject the PSEG proposal, saying its “real intent … is to develop a calculator that can be used by PJM to calculate reference levels (as in ISO-NE).”

The IMM said reference prices are generic costs used in place of actual unit specific costs in setting offer caps. “PJM does not know and cannot know the fuel costs of generators in real time,” the IMM said, citing bilateral transactions, which it said, “are common in times of market stress.”

“PJM will face incentives to overstate fuel costs in the absence of actual information,” the IMM added.

Greiner denied the proposal was a step toward reference pricing, saying that would require a different stakeholder process. He said conversations he’s had among stakeholders, including generation owners, has not yielded support for reference pricing.

“There’s not a covert operation going on here to sneak reference pricing into the equation,” Greiner said. “And it’s not a shift in accountability.”

In opposing the PSEG proposal, the IMM recommended improving training for generation owners on cost-based offers, better documentation of cost calculation methods in Manual 15 and “better validation processes implemented by generation owners.”

Generators have the responsibility and resources to determine their own costs correctly, Tyler said, and having PJM publish cost-based offer calculations will shift responsibility for developing the correct costs from the market seller to the RTO.

Tyler said PSEG’s proposal would require three calculations – the market seller, the IMM and PJM. She said the IMM’s experience with the opportunity cost calculator has shown that competing calculators cause confusion and add complexity.

To maintain accurate cost calculations for more than 700 generation units in the PJM footprint would be a “costly task” for the RTO, Tyler said, requiring several full-time staff members to complete the daily calculations.

Tyler said if the goal is to confirm the underlying model that a market seller is using to calculate costs, that can be done in simpler ways and less expensive ways that don’t require daily support.

“We know that there are going to be incorrect results, and we expect PJM to issue penalties to market sellers who use those incorrect results,” Tyler said.

Stakeholder Questions

Gregory Carmean, executive director of the Organization of PJM States Inc. (OPSI), asked if the PJM calculation could be used as a reference as a defense if a generation owner is referred to FERC for enforcement. Carmean also asked if the calculator would be discontinued if PJM finds out that generation owners were improperly using the RTO’s calculations to rebut FERC referrals.

Keshavamurthy said the PJM calculator is optional only and does not change the market seller’s responsibility for submitting accurate cost-based offers.

Greiner said if a market seller today is currently creating its own cost-based offer and it discontinues that practice because of PJM’s discretionary tool, they would be doing that “at their own peril.” Greiner said PJM has no obligation to put numbers out in the tools every day, and there’s no statement of accuracy in the numbers.

“For the market seller to do that would be a fairly risky proposition,” Greiner said.

Paul Sotkiewicz of E-Cubed Policy Associates said he thought Carmean was “reading way too much” into the proposal. Sotkiewicz said one of the issues that has been discussed at length by stakeholders in the FCP special sessions is penalties based on errors in the data.

Sotkiewicz said the calculator would provide a “sanity check” for the market seller to make sure no apparent errors exist in their cost-based offer. He said there’s nothing in the proposal that relieves the market seller of its responsibility to provide an accurate and truthful cost-based offer.

Sotkiewicz said FERC enforcement staff would not rely on one number in a referral and would instead conduct a “thorough investigation,” looking at all the provided data.

“I would request respectfully to turn the temperature down on the whole idea of FERC enforcement,” Sotkiewicz said. “We are responsible as market sellers for the accuracy of a cost-based offer.”

Monitoring Analytics President Joe Bowring said there’s no way to be assured that PJM’s cost calculator won’t be used at FERC in the situations Carmean asked about. He said a market seller will use “anything in their arsenal” to defend themselves when challenged.

“It shouldn’t be used for that purpose, but it will be,” Bowring said.