A proposal to allow intra-year switching to nodal pricing failed at the Members Committee Thursday, falling just short of the two-thirds vote needed for approval.

The proposal by retail marketer Direct Energy, which would have allowed a limited number of such switches monthly, was opposed by members who said it would create administrative problems for electric distribution companies (EDCs) and potential losses for Financial Transmission Rights holders. The sector-weighted vote was 3.3 in favor and 1.7 against, short of the 3.34 total needed for passage.

It was the second loss for Direct Energy, which failed to win more than 35% support for its bid at the Market Implementation Committee (MIC) in August. (See TOs Flex Muscles, Reject Retailer’s Nodal Pricing Bid)

David Scarpignato, head of PJM regulatory affairs for Direct Energy, said the changes would allow retail marketers to offer more innovative products. He said it would not have significant impact on EDCs or other market participants because it would cap switches at to 5% of the EDC network service peak load.

The Members Committee in 2005 unanimously endorsed a Tariff change allowing the switch to nodal pricing. But after more than seven years under the new rules, all but 15% of PJM load is still using zonal pricing.

The rules give customers one chance a year to switch to nodal pricing, effective June 1 in alignment with the planning year. Customers must provide notice of their intention to switch by October or January depending on type of service.

Scarpignato said the annual window for switching has limited retail marketers’ ability to provide innovative products such as price responsive demand, which he said is most attractive to those with nodal pricing.

The current rules mean it can take a customer up to 17 months to make the switch after deciding to do so — “major barrier” to adoption, Scarpignato said.

Scarpignato said the change would also help reduce congestion costs across PJM and assist PJM operations, which has said it would like more “granular” dispatch of demand response resources.  Under the current zonal dispatch, Scarpignato said, “some of the DR in that zone is actually hurting” PJM’s attempts to relieve constraints.

Scarpignato’s argument won support from representatives for Old Dominion Electric Cooperative and Dominion, as well as from Howard Haas of Monitoring Analytics, PJM’s independent Market Monitor. “Nodal pricing is the way to go,” Haas said. “Unequivocally it is the way to go.”

Representatives from Exelon Corp. and Pepco Holdings spoke in opposition.

Jason Barker, of Exelon, said his company saw little “utility” to allowing intra-year switching and significant financial risk to the remaining zonal customers, who could see their costs increase.

“As the operator of three EDCs we do see substantial downside,” he said. “We’re disappointed that it’s come before the Members Committee after being roundly defeated at the MIC.”

Gloria Godson, of Pepco, said the change would be a “significant burden” on EDCs. “We will have to add additional staff to manage this.”

Scarpignato said the intra-year switches would have minimal financial impact on FTR holders and others in the zone. He said new customers connect to the grid year-round without major impacts.

In answer to a question from Godson, PJM’s Tom Zadlo said the change could impact FTRS. “It is potentially possible that there are some impacts on FTRs but it’s impossible to quantify.” The impact would depend on the size of the loads that switched, he said.

Marji Philips, representing Hess Corp., said economists’ preference for nodal pricing is similar to their support for energy–only markets in lieu of a capacity market. “It’s good in theory. As a practical reality it stinks.”

Philips said that PJM’s hedging tools are based on zones and hubs. If many customers switch to nodal pricing in mid-year, she said, it could create “ghettos” where customers will have to pay more of a risk premium because suppliers can’t hedge their loads.

Fourteen of 16 public power members voting supported the change along with three-quarters of 20 other suppliers and all eight end use customers. Transmission companies voted 7-2 against while generation owners split 5-5.

Scarpignato said after the meeting that his company was not giving up. “It was an extremely close vote,” he said. “We’re considering our options.”