By Suzanne Herel and Rich Heidorn Jr.

WILMINGTON, Del. — Calpine won stakeholder approval for an initiative that could give generators more flexibility in pricing following an unusually lengthy debate before the Markets and Reliability Committee Thursday.

Dave Pratzon, representing Calpine, presented a problem statement and issue charge arguing that permitting generators to revise their offers hourly to reflect changes in gas prices would result in reduced risk premiums, benefiting consumers.

But some stakeholders questioned the scope of the problem statement, saying it should also include language calling for reconsideration of the 10% adder that generators are allowed to include in their cost-based offers. The adders provide a cushion against uncertainties, including fuel prices and heat rates that can vary with temperatures and plant loading. Hourly pricing would reduce the fuel price risk, they reason, reducing the need for the adder’s price cushion.

Walter Hall, representing the Maryland Public Service Commission, said the PSC would oppose the problem statement if it did not include a reconsideration of the adder. PJM and the Independent Market Monitor also backed inclusion of the adder in the problem statement.

Challenge Reaching Consensus?

“I don’t want to set this group up to fail,” said PJM Executive Vice President for Operations Mike Kormos, referring to the senior task force expected to be assigned to study the problem and recommend a solution. “It may be difficult to reach consensus without this issue. We think this is an important issue.”

“Clearly it’s related,” said Market Monitor Joe Bowring. “It doesn’t make any sense [to exclude it]. I think it’s avoiding something that’s really obvious.”

But Pratzon rejected Hall’s request to include the adder as a “friendly” amendment. Pratzon said he wanted to avoid “scope creep” and was not authorized by his client to broaden the initiative. He suggested the adder be addressed separately by the Cost Development Subcommittee.

Jason Cox of Dynegy came to Pratzon’s aid, saying, “I’m concerned that Calpine’s problem statement is being hijacked.”

“This issue is very narrow,” he added, saying hourly pricing would reduce the use of the adder. He said those concerned about the adder should propose their own problem statement.

The problem statement was approved by voice vote with two votes against it.

PJM Stands Alone

Pratzon introduced the proposal to the MRC in March, saying PJM is the only organized market in the U.S. that does not allow generators to vary their offers hourly. (See PJM May Consider Hourly Pricing for Generators.)

As approved, the initiative would also permit consideration of more flexible offers by energy storage and price-based demand side response. Market power protections were also added to the scope.

Pratzon said the issue gained urgency because the Federal Energy Regulatory Commission had declined earlier this month to change the start of the gas day, a blow to efforts to improve gas-electric coordination. (See related story, PJM Considering Change to DA Deadlines in Response to FERC Order on Gas Schedule.)

John Farber of the Delaware Public Service Commission and Ruth Price of the Delaware Public Advocate’s office pressed Pratzon for how the change to hourly pricing would benefit ratepayers.

Pratzon noted that a 50-cent per MMBtu difference in the price of gas translates to a difference of $3.50/MWh. With hourly generator offers, he said, the price will “be lower some hours, higher some hours. But overall it will be better.”

The Adder’s Role

Although the adder was not included in the problem statement, Kormos said it would be included in the educational portion of the task force’s work. “I’m finding it hard to understand how that couldn’t be permitted,” he said.

According to the Market Monitor, the adder was included in the definition of cost-based offers in 1999, based on the uncertainty of calculating the hourly operating costs of combustion turbines under changing ambient conditions. However, in docket (EL15-31) — in which PJM proposed limiting the adder to the $100 for offers exceeding $1,000/MWh — generators argued that the adder also provided protection against gas-price volatility.