PJM called Thursday for a broad review of its method of providing Operating Reserve payments, saying changes were needed to reduce growing uplift costs.

Operating Reserves are “make whole” payments that ensure generators dispatched out of merit for system reliability don’t operate at a loss. Because they are collected through uplift charges and not reflected in day-ahead or real-time locational marginal prices, they cannot be hedged.

In 2012, operating reserve payments totaled a near record $649 million, 2.2% of total billing. Day-ahead operating reserve charges increased by about 90% in 2012, spiking in September after PJM increased the number of “must run” units dispatched in the day-ahead market.

PJM told the Markets and Reliability Committee it should consider an overhaul that incorporates more of the charges into LMPs.

MRC will be asked to vote on a proposed problem statement at its May 30 meeting. The effort, which would create a senior task force reporting to MRC, is expected to take at least a year.

PJM Senior Vice President of Markets Andy Ott said the focus should be a broad “re-look at the whole concept of uplift charges.”

Uplift charges often result from units that may be economic for two hours but must run for longer periods because of minimum run and ramping constraints. “It’s not an unusual circumstance. It happens every day, every hour,” Ott said.

Noha Sidhom, general counsel for Vel Energy, LLC, said her traders have reduced trading of increments and decrements because of price uncertainty. Incs and decs paid an average of about $2.50/MWh in operating reserve charges in 2012, with charges ranging from 20 cents to almost $18/MWh.

Ott said imposing fixed fees on virtual transactions to reflect their administrative costs and  contribution to operating reserve charges would result in “a much more robust market.”

The Market Monitor’s State of the Markets report included a dozen recommendations on operating reserves. Among them were a review of the allocation of operating reserve charges to ensure that such charges are paid by all responsible for incurring them, including those making up-to congestion (UTC) transactions. (See “MRC Defines UTCs”)

The monitor estimated the number of UTC transactions would have been cut by two-thirds if they were subject to operating reserve charges.

PJM contact: Lynn Horning