WILMINGTON (April 2, 2013) — PJM officials were left scratching their heads Thursday after stakeholders rejected the RTO’s tariff changes for determining when to issue forfeitures against Financial Transmission Rights.

“We’ll have to take it back and see what we’re going to do,” said Stu Bresler, PJM vice president of market operations, after the changes won only a 2.29 vote from the Markets and Reliability Committee, far below the two-thirds (3.34) threshold required. “We have no manual language.”

Bresler said he was surprised by the vote because the PJM proposal had won about 90% support at the Market Implementation Committee on March 6, besting an alternative proposed by Market Monitor Joseph Bowring.

At issue are the criteria for applying the FTR forfeiture rule, which is intended to prevent participants from submitting virtual bids that boost the value of their FTRs.  Forfeiture rules would apply when those transactions result in a higher LMP spread in the day-ahead market than in the real-time market.

Recently Discovered

Bresler said PJM discovered only recently that it disagreed with the criteria by which the monitor has been determining whether a company’s virtual bid is “at or near” the delivery or receipt buses of its FTR. PJM does the billing for forfeitures and has the authority to use its own determination if it disagrees with the monitor’s.

Under the PJM plan, companies would lose any profit for an FTR if 75% or more of the energy injected or withdrawn by a virtual bid is reflected in a constrained path between FTR source and sink points.

The monitor has been applying the penalty based on the net impact of virtual bids, triggering application of the rule in less than one-tenth of 1% of transactions. In December, PJM penalized 65 companies a total of about $75,000; PJM’s load-weighted reference bus method would have resulted in penalties on a single company for only $1,500, a 98% reduction, Bowring said.

“This is a very dramatic change to a rule that’s worked well” for 10 years, Bowring told the MRC Thursday. “It makes the rule ineffective and meaningless.” Bowring said any changes in the criteria should be made after issuance of a problem statement and a full stakeholder review.

Bresler said it wasn’t until PJM attempted to create documentation explaining how the rule is applied that the RTO realized it disagreed with the monitor’s criteria. Bresler said the monitor finds the worst case increment or decrement on a path, which is inappropriate because “we don’t know where energy is being injected or withdrawn.”

Carol Smoots, counsel to the Financial Marketers Coalition, supported PJM’s change, which she said would make the criteria more transparent and reduce the triggering through false positives. “There are a lot of transactions that just weren’t done for fear of the rule being applied,” she said. “Many of my clients see the rule as definitely not clear.”

Testing the Limits

David Pratzon, representing Calpine, said he opposed the PJM proposal because he fears it would lead to traders testing the limits of the new criteria. The infrequent triggering of the rule under Bowring’s interpretation “indicated that people know how to do INCs and DECs away from FTRs,” he said.

Pat Sunseri, of Twin Cities Power, LLC, said PJM should consider the volume of transactions in its application of the rule. “It shouldn’t ever come up as a false positive for people who want to hedge their portfolio.” Bowring agreed that the rule should take trading volume into account.

Bowring said the monitor will continue to interpret the rule the way it has been doing, whether or not PJM issues penalties as a result. If it sees evidence of market manipulation that PJM does not police, he said, “we have no other recourse” but to notify the Federal Energy Regulatory Commission.

The lengthy debate ended on a conciliatory note from Ed Tatum of Old Dominion Electric Cooperative: “Let’s work this out.”