By Ted Caddell

Stakeholders representing load said Thursday they may oppose efforts to change PJM’s $1,000/MWh offer cap, despite a frigid winter in which high gas prices forced the RTO to obtain temporary waivers from the limit.

“We’re not convinced that last winter proves the need to change the cap,” Walter Hall, of the Maryland Public Service Commission, said after PJM officials gave the Markets and Reliability Committee a first read on a problem statement to consider raising or eliminating the cap.

John Farber, of the Delaware Public Service Commission, said he fears costs will quickly rise if PJM raises the cap. “We need fact gathering to determine if there’s a long-term issue here,” he said.

Exelon’s Jason Barker responded that the issue is one of simple math. “There’s no question in our mind that this issue is ripe for consideration,” he said. “PJM’s pricing must be correct so we have an adequate response from generators next winter.”

FERC Actions

On Jan. 24 the Federal Energy Regulatory Commission granted PJM’s request for a waiver allowing make-whole payments for generators with operating costs above the $1,000 cap. PJM said the waiver was necessary to allow some gas-fired generators to cover marginal costs that hit $1,200/MWh in late January, as spot gas prices spiked to $140/mmBtu.

The January order allowed PJM to fund the make-whole payments through uplift charges. On Feb. 11, FERC granted a second waiver eliminating the cap through March 31, allowing high-cost generators to set locational marginal prices.

FERC lifted the cap over the objections of consumer advocates, state regulators and others, who said allowing the RTO’s most inefficient generators to set clearing prices would provide a windfall to the vast majority of generators with costs well less than $1,000.

Moderating temperatures and gas prices rendered the second waiver moot. But Thursday’s discussion — and a surprising report filed by the Market Monitor the day before — suggested the cap’s long-term future will be hotly debated in the coming months.

Problem Statement

PJM’s proposed problem statement says stakeholders should consider lifting the cap because this winter’s extreme conditions had for the first time put the limit at odds with rules requiring capacity resources to offer their output into the day-ahead energy market.

“A large amount of generation was offered into, and cleared, PJM’s energy market at prices likely below the generators’ costs of producing that energy,” PJM said. “The Operating Agreement’s `must-offer’ and `offer-cap’ provisions mean that the sellers were required to offer the available capacity of their generation resources below their marginal costs.”

Most stakeholders agree that it is improper to force generators to sell below cost. But a report that Market Monitor Joe Bowring filed with FERC on Wednesday may further stoke concerns about the risk that raising or eliminating the cap will lead to price gouging.

Monitor’s Review

The Monitor’s report (ER14-1144) covered the period between Jan. 24, when the first waiver took effect, and Feb. 11, when it was superseded by the second.

The only day during that period that resulted in waivers was Jan. 28, when seven generators owned by three companies sought relief.

The Monitor reviewed the requests at FERC’s direction and concluded that all but $9,118 of the nearly $584,000 in requested make-whole payments should be rejected.

The Monitor rejected requests to include the 10% “adder,” which is typically included in offers based on the uncertainty of calculating operating costs for combustion turbines under changing ambient conditions. “It is not appropriate to include the 10% adder in make-whole payments to generation owners in this situation because it is not an actual cost and the generation owners did not pay it,” the report said.

The report said all seven of the units requesting waivers purchased gas for less than the estimated price on which their cost-based offers were based and that five of the seven had better heat rates than what was reflected in their requests. Three of the generators withdrew their requests in response to the Monitor’s challenges.

The report said one generator purchased gas at a price 45% less than the estimate on which it based its waiver request. “When combined with an actual heat rate 4% better than included in the waiver request and removal of the 10% adder, the actual cost of the unit was about 52% lower than the cost included in the waiver request, lower than the $1,000/MWh offer cap,” the Monitor said.

The Monitor is conducting a broader review of all price offers by gas units in January to identify any evidence of overcharging. That review could result in recommendations that PJM seek refunds, Bowring said.

Lengthy Debate Predicted

PJM’s Adrien Ford, who presented the problem statement, said PJM agreed with the Monitor’s calculations on the waiver requests.

Ford said she hoped the Market Implementation Committee could complete work on the problem statement within three months, a timeline she acknowledged was “optimistic.”

Load representatives predicted a longer debate.

“I think this is going to be a tough issue from the customer perspective,” said Susan Bruce, of the PJM Industrial Customer Coalition. “We are still digesting what happened” over the winter.

“From the perspective of the consumer advocates this is a very touchy issue,” agreed Dan Griffiths, executive director of the Consumer Advocates of PJM States (CAPS).

Bowring, too, cautioned that three months might be too ambitious a time frame for a full review. He said that it might be too early to say if any substantive change is necessary. “If it turns out our investigation shows this is a one-off, you don’t want a permanent solution,” he said. “You want a one-off waiver.”

The issue would be assigned to the MIC under PJM’s proposed Issue Charge. The proposals are expected to be brought to a vote at the MRC’s next meeting.