By David Jwanier and Rich Heidorn Jr.

Members agreed to consider changing the $1,000/MWh offer cap last week following a debate over whether unusually high gas and electric prices during January were a fluke or a sign of winters to come.

The Markets and Reliability Committee approved PJM’s proposed problem statement, which 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. The accompanying issue charge was also approved.

The initiative passed with 27 abstentions and 11 “no” votes. Susan Bruce cast 10 of the no votes and four abstentions on behalf of the PJM Industrial Customer Coalition. Bruce said the coalition had never voted against a problem statement before.

“We are perhaps rushing to judgment,” she said, noting that PJM had not released all of the results of its analysis of the winter. “… As I sit here today, I don’t know what I don’t know.”

The measures were amended to include an Oct. 31 target date for completion, in order to facilitate a Federal Energy Regulatory Commission order by the end of the year. Also added was the Market Monitor’s request to clarify the offer cap’s application to incremental, startup and no-load costs.

FERC Orders

On Jan. 24, FERC granted the RTO’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 below $1,000. (See Stakeholders Preview Offer-Cap Debate.)

The proposal to consider changing the cap appeared to have the support of generators. Jason Cox, of Dynegy, praised PJM for being “proactive.”

But most of the comments came from those representing load.

Will High Prices Repeat?

“It’s not exactly clear to us that this sort of issue is going to happen over and over again,” said Raghu Sudhakara, of Rockland Electric Co.

“If the purpose is to pull the wool over the eyes of people … and finagle something through without us understanding it, I have a problem with that,” said Gloria Godson, of Pepco Holdings Inc., who insisted the stakeholder process include an examination of high gas prices. PHI abstained on the vote.

Carl Johnson, who said he considered voting no, ultimately cast 15 abstentions on behalf of the PJM Public Power Coalition. “It’s seems [PJM] is taking everything in the FERC order and trying to put it into the Tariff,” he said. “We don’t think having to get a waiver is always a bad thing.”

He also said that the actual impact of the FERC waivers — which yielded about $9,000 in make-whole payments to generators whose production costs went above the offer cap — might not warrant months of prickly debate.

Walter Hall, of the Maryland Public Service Commission, said he was concerned that PJM was “somewhat telegraphing the result you are expecting.”

Not Hypothetical

Bob O’Connell, of J.P. Morgan Ventures Energy Corp., warned members that a no vote would not end efforts to lift the cap.

An MRC rejection “doesn’t prevent members from creating a user group and rushing this through an alternative stakeholder process that may disenfranchise certain members,” O’Connell said. “I suspect there are [at least] five members sitting at this table today that would want to move this forward.”

Steve Lieberman, of Old Dominion Electric Cooperative, said ODEC would have voted no but feared rejection of the measure would lead PJM to make a unilateral section 205 filing with FERC to lift the cap.

Executive Vice President for Markets Andy Ott indicated Lieberman’s concern was well founded, saying PJM needs to act.

“This is not theoretical; this is an issue where we had [generator] costs over $1,000,” Ott said. “No matter what happens at FERC [with relation to future gas prices], we could have gas prices where the $1,000 offer cap doesn’t work. We feel it needs to be addressed by next winter.”

ODEC’s Ed Tatum lamented that efforts to lift the offer cap were the latest of recent PJM initiatives — following changes to limit imports and demand response in the capacity market — that could increase prices for load.

In a discussion over which stakeholder group should address the issue, Tatum argued in favor of the MRC, noting that it involves reliability. He expressed reservations about the Capacity Senior Task Force, which he said had not been a friendly venue for load.

“This RPM [Reliability Pricing Model] stuff has not worked out well for the left side of the room,” he said, referring to where representatives of cooperatives, industrial customers and public power were seated. “We’re not getting a lot of love.”

The committee voted to assign the issue to a new task force reporting to the MRC.