Financial marketers are pleased with PJM’s proposal to change the way uplift charges are assessed on virtual trades but aren’t convinced by a PJM analysis that the RTO says justifies extending the charges to up-to congestion trades (UTCs).

PJM told the Energy Market Uplift Senior Task Force (EMUSTF) last week it wants to change the way virtual trades pay for uplift, replacing the current unpredictable charges with a flat per megawatt fee and assessing them for the first time on UTCs.

The changes would create new dynamics for financial marketers, who have increased their trading in UTCs eight-fold since 2010 while increment offers (INCs) and decrement bids (DECs) have dropped by two-thirds. (See sidebar: Virtual Trading 101: INCs, DECs, UTCs.)

“We like the idea of a fixed fee. The volatility and unpredictability of the operating reserve charge has had a huge impact on the viability of INCs and DECs,” Ruta Skucas, counsel to the Financial Marketers Coalition, said in an interview. “I would assume that people would resume trading INCs and DECs” if the change is approved.

She said she was uncertain whether trading in UTCs would decline. “It’s also possible that some people may just increase their trading volume,” she said.

Monitoring Analytics, PJM’s Independent Market Monitor, called for assessing uplift charges on UTCs in its 2012 State of the Markets Report. But PJM told FERC last year that its analysis of the issue found that UTCs “have a significantly smaller impact on day-ahead unit commitment and dispatch than other virtual transactions.”

Under orders from the Federal Energy Regulatory Commission, PJM conducted a new analysis that concluded that UTCs — like INCs and DECs — affect generating unit commitments and thus can contribute to uplift costs.

PJM Analysis

PJM re-cleared its day-ahead energy market for four days in December and concluded that INCs and DECs resulted in a change of 3.1% in total unit commitments while UTCs were responsible for a change of 2.3%.

PJM said the virtual transactions should be assessed charges although it is impossible to quantify their exact impact on those charges.

“Similar to INCs and DECs, whether or not UTCs drive a more optimal solution in the Day-Ahead Energy Market will change on a daily basis and a precise determination of the direction and impact on resource commitment and dispatch by UTCs is virtually impossible due to the complexity of the Day-Ahead Energy Market and the interactions of the various different types of transactions,” PJM wrote in a report filed with FERC (ER13-1654).

The analysis found that INCs and DECs resulted in increased unit commitments. UTCs caused the de-commitment of certain units and their replacement with other units, “consistent with the energy neutrality of UTCs,” PJM said.

“However, there is not always a one-to-one tradeoff between committed and de-committed units when UTCs are removed, and the cost of the units being swapped are not always identical,” PJM wrote. “In some cases UTCs may be driving the commitment of lower cost resources in the day-ahead energy market because they are in the counterflow direction of transmission constraints and are therefore relieving congestion. In other cases the opposite will occur, and UTCs will impose forward flow on a facility in the day-ahead energy market and cause increased congestion and out-of-merit commitment and dispatch for constraint management.”

Market Monitor Analysis

In September, Market Monitor Joseph Bowring released an analysis that he said proved UTCs increase shortfalls in Financial Transmission Rights funding and disproved UTC supporters’ contention that the trades help price convergence.

While PJM says it is impossible to quantify the impact of UTCs on uplift, Bowring provided precise figures.

Over a five-day sample in May, Bowring said, FTR funding had a deficit of $4.4 million with UTCs versus a surplus of $22,000 with UTCs removed — a difference of $4.6 million.

In its 2012 State of the Market report, the monitor called for eliminating UTC transactions or making them responsible for day-ahead and balancing operating reserve charges.

The monitor said the RTO deviation rate for 2012 would have been reduced by 59% percent if UTC transactions had been included in the calculation of operating reserve charges.

PJM’s Plans

At Wednesday’s EMUSTF meeting, PJM Vice President of Market Operations Stu Bresler said the RTO will propose a flat per megawatt charge for all virtual transactions and eliminate the current variable allocation on INCs and DECs, “taking away the risk of unknown and volatile charges on the back end.”

PJM’s Dave Anders said the RTO will begin discussing the specifics of a future cost allocation with stakeholders in “Phase 2” of the task force’s work, which he said should begin in the “next month or two.”

Shake-up to Virtual Market?

PJM’s proposed change — which will face close scrutiny by financial marketers — would change the dynamics of virtual trading. (See MRC Defines UTCs; Adds Bid Limit and FTR Forfeiture Rule.)

UTCs’ use has exploded since late 2010, when PJM removed the requirement that UTCs make transmission service reservations — thus removing them from a share of uplift charges. Trading in INCs and DECs declined over the same period because of what PJM called the “strong disincentive” caused by the unpredictable uplift charges they are assessed.

In 2013, INC and DEC transactions in eastern PJM paid a rate of $0.02/MWh to $33.02/MWh for deviations between the Day Ahead and Real-Time energy markets, with a mean of $3.20/MWh. Such trades in the west paid $0.02/MWh to $16.43.MWh, with a mean of $1.56/MWh. (See chart.)

“At the time rules for INCs and DECs were put in place, UTCs were not used in the speculative manner in which they are today and therefore were not included in the allocation of such charges,” PJM wrote. “However, given how the use of UTCs has evolved, it is evident, based on the fact that UTCs can shift the flow of power on the system, that they also can impact the resource commitment and dispatch of the system and consequently should be allocated a share of the applicable costs in addition to INCs, DECs and other bid and offer types that have similar impacts on the power system.”

Some stakeholders at last week’s meeting protested PJM’s reference to UTCs in the report as a “free transaction,” noting that they do pay administrative charges.

Independent Review Sought

Market Monitor Joseph Bowring pressed for PJM to institute uplift charges on UTCs immediately and not wait for the conclusion of stakeholder deliberations on a fixed-fee charge. “They’ve been getting a free ride for too long,” he said in an interview.

Skucas, however, said she would like an independent review of the analysis PJM cited in calling for uplift charges on UTCs. “We’re basing all this off five days in May and five days in December. Nobody else has had a crack at those numbers,” she said. “I would like to see a broader study… We have asked PJM to release the data so they can be analyzed by outside experts. They will not. They told us it’s a confidentiality issue.”

If uplift charges are assessed on UTCs, they must be small enough to preserve the thin profit margins on the trades, she said.

Previous Effort Failed

Financial marketers beat back an earlier attempt to assess uplift on UTCs when the Market Implementation Committee voted in September 2012 to terminate a task force to study the issue. The coalition cited a study by William Hogan, research director of the Harvard Electricity Policy Group that concluded there was no evidence UTCs caused uplift.