By Michael Brooks

The Federal Energy Regulatory Commission last week rejected requests by two PJM generators seeking the recovery of “stranded” natural gas costs incurred during the polar vortex last year.

But the commission also ordered PJM to change its Tariff to allow generators to submit day-ahead offers that vary by hour and to update their offers in real time. PJM is the only RTO that doesn’t allow such variable offers.

Duke Energy (EL14-45) and Old Dominion Electric Cooperative (ER14-2242) both argued that they were owed compensation due to the events of January 2014, when a cold snap sent gas prices soaring. Duke purchased $12.5 million worth of natural gas for its Lee plant in Illinois, only to have it not called on in real time. Similarly, ODEC complained that PJM canceled multiple dispatches that left gas it had purchased for its plants unused.

ODEC also said its plants’ operating costs on Jan. 23, 2014, exceeded what it could recover in the day-ahead market due to the $1,000/MWh offer cap at the time. The co-op asked for an extension of the waiver FERC granted PJM on Jan. 24, which allowed capacity resources to receive make-whole payments if their costs exceeded the offer cap for a limited time.

Duke, which was able to resell some of its gas, sought $9.8 million, while ODEC said it was due nearly $15 million.

Different Arguments, Same Result

While PJM supported the companies receiving one-time waivers, FERC denied both requests, citing its rules against retroactive ratemaking. The commission said that in both cases, ratepayers had not given prior notice that they would be responsible for natural gas-related costs.

Additionally, FERC disagreed with Duke’s assertion that it was due indemnification under section 10.3 of the PJM Tariff, which the company claimed required PJM to hold it harmless for obligations to third parties as a result of directives from the RTO. Duke told FERC that PJM had effectively ordered it to buy gas on Jan. 27, as it was likely Lee would be called upon to maintain reliability.

Although PJM supported the waiver requests, it said it was not permitted to provide Duke relief under the Tariff. “Any extension of section 10.3 to cover the type of loss Duke incurred under the circumstances at issue would read the indemnification provision into a blanket insurance policy for losses of whatever sort, caused by accident, act of God or plain misfortune that a market seller may incur in responding to PJM dispatch,” PJM told FERC in response to Duke’s complaint. (See PJM Backs Duke’s $9.8M ‘Stranded Gas’ Claim.)

FERC agreed with PJM’s interpretation of the section. “The PJM indemnification provision should not be interpreted to guarantee reimbursement of a generator’s losses on gas purchases incurred in meeting its capacity resource obligations in PJM,” the commission said. “Fulfilling its energy market commitments are among the risks the generation capacity resource has assumed … when choosing to participate in the market.”

FERC also disputed Duke’s claim that PJM’s communication with Duke on Jan. 27 constituted a “directive” by the RTO. FERC said that PJM was merely advising that Lee was likely to be dispatched for reliability reasons.

And while PJM’s Independent Market Monitor objected to ODEC receiving compensation for its purchases of gas, it supported the co-op’s request to extend FERC’s waiver by a day in order to receive $2.7 million in make-whole payments. FERC said it saw no difference between the requests.

Offer Flexibility

FERC, however, found that PJM’s Tariff may be unjust and unreasonable because it does not allow generators to submit offers in the day-ahead market that vary hourly or to update their offers in the real-time market. ISO-NE gave its generators that flexibility in December, leaving PJM as the only RTO that does not allow such changes. (See related story, ISO-NE Prices Down Sharply in Q1; Generators Using Offer Flexibility Rule.)

The commission said it expects PJM to implement new rules allowing such changes by Nov. 1 and said refunds would be effective with the order’s publication in the Federal Register. PJM was ordered to report within 30 days on its planned response (EL14-45, EL15-73).

In April, the Markets and Reliability Committee authorized the creation of the Generator Offer Flexibility Senior Task Force to consider how to implement the changes under a problem statement proposed by Calpine, which is seeking $3.3 million in compensation for stranded gas-related costs (ER15-376). (See Bid for Generator Price Flexibility Draws Debate over 10% Adder.) The commission has not ruled on Calpine’s request.

Moeller Dissents

Commissioner Philip Moeller agreed with the majority that PJM’s Tariff was potentially unjust due to the lack of offer flexibility, but he said that he was “troubled” that it was unwilling to grant the companies any relief.

PJM’s “inflexibility contributed to the inability of generation units … to recover legitimate fuel costs,” Moeller said in his dissents to the orders. The companies “acted in good faith to preserve system reliability during a time of extraordinary system stress and deserve appropriate compensation.”

Moeller also said that the majority ignored the companies’ arguments and applied “an overly narrow reading of the prior notice rule and prohibition against retroactive ratemaking to find that ratepayers somehow lacked adequate notice that they would, in fact, be responsible for paying the cost of services provided to them to ensure resource availability during system emergencies.”

The complaints should have at least been set for hearing and settlement judge procedures, he said.