Up-to congestion transactions were in the spotlight Thursday as the Markets and Reliability Committee:
- Approved a definition of UTCs and a limit on trading of them;
- Approved rules for deciding when UTC traders will forfeit Financial Transmission Rights; and
- Heard first reading of proposed UTC credit requirements.
The trading limits and FTR forfeiture rules each passed with only one no vote. But the near unanimity dissolved when Andy Ott, PJM senior vice president for markets, reiterated his call for imposing fees on UTCs. Echoing a recommendation by Market Monitor Joseph Bowring, Ott said fixed fees on UTCs would help reduce uplift from Operating Reserve charges (see “PJM Proposes Operating Reserve Changes to Cut Uplift”).
Ott said PJM staff will perform an analysis on how UTCs both benefit market liquidity and increase system congestion. The analysis, which Ott said was necessary to “demystify” UTCs, also will compare them with other virtual trades — increment offers and decrement bids. “We need to have actual analysis, not suppositions, not opinions,” he said.
Carol Smoots, counsel to the Financial Marketers Coalition, said she was “disappointed that some sort of back room deal has been agreed to” regarding fees on UTCs.
Smoots said virtual trades already pay fees, including 40% of line loss charges. “To say the financial sector is not contributing to the cost of physical supply is not accurate,” she said.
Smoots said financial marketers have become a “convenient dumping ground” for fees because they are a small sector with limited voting power within PJM. “Being singled out because some folks don’t choose to use this product is very troubling,” she said.
Almost 95% of UTC trading volume came from financial traders in 2012 versus less than 5% by physical traders, according to the State of the Markets report.
J.P. Morgan vice president Robert O’Connell said fees could undercut UTCs’ role in creating liquidity and price convergence between the day-ahead and real-time markets. If the market-wide benefits of UTCs and other virtual trades outweigh their costs, O’Connell said, they shouldn’t pay any fees. Setting a fee “sends the message that `we don’t want you to converge any closer than $1 or $2,’ whatever the fee is.”
Jeffrey Mayes, general counsel for the monitor, said the definition of UTCs and any consideration of fees should be the subject of a transparent process beginning with a problem statement. “This proceeding isn’t going to do that,” he said.
Trading Limits
Reason for Change:
PJM proposed the cap because high bid volumes can make it difficult for the RTO’s day-ahead markets software to reach solutions.
Impact:
PJM can limit market participants to no more than 3,000 UTC transactions each in the day-ahead market when necessary for market operations. (A similar cap also applies to increment offers and decrement bids.)
The definition of market participant includes all sub-accounts established under the member. Affiliates will be treated as separate participants and have their bids counted individually.
The cap includes changes to the tariff, Operating Agreement and Manual 11.
FTR Forfeiture Rule
Reason for Change:
The rule is intended to prevent market manipulation — in this case, the submission of UTCs that boost the value of a participant’s FTRs.
Impact:
The rule is applied when those UTCs result in a higher LMP spread in the day-ahead market than in the real-time market.
Credit Requirements
Reason for Change:
UTC trading volumes have grown dramatically since 2010 (see chart) but have no credit requirements to protect market participants against defaults.
Impact:
The Credit Subcommittee conducted polling on five alternative credit requirements for UTCs. PJM’s recommendation (Alternative F) won support from 91% of the 159 members responding to the survey, besting Alternative C with 48%.
The alternatives vary by how much collateral would be required and how much credit exposure the collateral would cover.
PJM’s proposal sets a bid screen based on the 70th percentile of the difference between the bid price and two-month rolling historical real-time costs for prevailing flow bids. It uses the 80th percentile for counterflows.
The cleared portfolio requirement is based on the 70th percentile of the difference between the cleared price and two-month rolling historical real-time costs for prevailing flows and 95th percentile for counterflows.
PJM analyzed the impact of the five proposals against trading results for April 2011, July 2012, and January 2013 to evaluate shoulder, summer and winter periods. It also looked at how they fared against the largest losses in the 10-month period between January 1 and Oct. 31, 2012. (See chart.)
“There is not likely one perfect set of credit requirements that would cover every period,” PJM Chief Financial Officer Suzanne Daugherty said. Daugherty said the goal was to find a balance that minimizes exposure without setting collateral requirements “so high that it shuts down the market.”
One alternative (Alternative E) showed the lowest remaining exposure and highest credit requirements in all scenarios while another (Alternative B) had the lowest credit requirements and left the highest remaining exposure. (See chart.)
UTC traders would need at least $200,000 in collateral, the same as for increment and decrement transactions.
Traders in Financial Transmission Rights are required to post $500,000. Daugherty said the lower requirement was justified because UTCs’ exposure is limited to a single day while FTR exposures range from one to 36 months.
Daugherty said that because all market participants benefit from the liquidity UTCs add, PJM doesn’t support limiting defaults to only those trading UTCs.
Next Steps:
The Credit Subcommittee has scheduled a conference call for 1 pm today to discuss the results of the committee’s polling on the five alternatives.
The Market Implementation Committee (MIC) is scheduled to consider the issue May 8 and submit MRC a single option to consider on May 30.
