The Federal Energy Regulatory Commission last week ordered a review of PJM’s rules regarding up-to-congestion transactions (UTCs), saying the RTO may be discriminating in how it treats these and other financial trades.

FERC’s ruling (EL14-37) came in response to a PJM filing in June defining UTCs as virtual trades and seeking to subject them to the RTO’s Financial Transmission Rights (FTR) forfeiture rule. (See MRC Defines UTCs; Adds Bid Limit and FTR Forfeiture Rule.)

The commission ordered a Section 206 proceeding to determine whether PJM is improperly treating UTCs differently than increment offers and decrement bids in the interpretation of the forfeiture rule and in the application of uplift charges. It ordered FERC staff to schedule a technical conference on the issue.

PJM’s filing sought to apply the FTR forfeiture — previously applied only to INCs and DECs — to UTCs. The rule is intended to prevent traders from submitting UTCs that boost the value of their FTR. It is applied when those UTCs result in a higher LMP spread in the day-ahead market than in the real-time market.

PJM’s Market Monitor told FERC that PJM’s method for applying the rule to UTCs is inconsistent with how the RTO treats INCs and DECs because it relies upon the contract path, rather than modeled flows.

Trading in UTCs has increased eight-fold since 2010, while INC and DEC trading has dropped by two-thirds. The shift occurred after PJM removed the requirement that UTCs make transmission service reservations.

“The recent growth in UTC transactions, and the corresponding decrease in other virtual transactions, strongly suggests that many UTC transactions may be used in place of virtual transactions. To the extent that a UTC transaction is simply the combination of two virtual transactions that have been connected, it may not be appropriate to treat UTC transactions differently than INCs and DECs in applying the FTR forfeiture rule,” the commission wrote.

“For instance, where a UTC is submitted in combination with INCs and/or DECs and the associated flows on the constrained paths of the combined transaction may be different from those assumed when considering the transactions individually, the tariff may not protect against manipulative transactions.”

The commission also said the forfeiture rule “does not consider trading of INCs/DECs and UTC transactions for the purpose of preventing congestion in order to benefit a short FTR position.”

The commission said it expects to rule on the matter within five months after submission of post-technical conference pleadings. Any refunds resulting from the review will be effective from yesterday, when the notice of the 206 proceeding was published in the Federal Register.

Attorney Ruta Skucas, who represents the Financial Marketers Coalition, said UTC trading volumes will likely drop while the case is pending.

“There will be potentially months of uncertainty” for UTC traders who don’t know if they will be assessed uplift charges, she said in an interview.