By Rory D.  Sweeney

Acknowledging stakeholders’ criticism, PJM removed capacity-deficiency and administrative penalties it had proposed for its fuel-cost policy rules and instead offered a single formula-based one. The proposal was made in the compliance filing PJM submitted to FERC on Aug. 16 (ER16-372-002).

The filing was supposed to focus on improving flexibility for hourly generation offers, but PJM also proposed changes to its policy-approval rules and penalties that it said were “integral to the effective clearing of cost-based hourly offers.” The RTO announced it was simultaneously initiating a petition under Section 206 of the Federal Power Act to get the additional changes implemented in case FERC decided their inclusion was outside the scope of the compliance order.

The debate over the rules governing fuel-cost policies stems from a 2015 FERC order to allow day-ahead offers that vary by the hour and the ability to update offers in real time. (See Generators Balk at PJM Proposal on Fuel-Cost Policies.)

FERC wanted the changes made by November 2015, but PJM said at the time that the required revamp to its market system would make that timeline impossible.

In this week’s filing, PJM requested an effective date of Dec. 1 for the penalty and policy-approval rules contingent on FERC issuing its approval by Oct. 17. Implementation on Dec. 1 would maximize the benefit of the rules, PJM said in the filing, because “winter is the season in which price volatility in the natural gas markets are most likely to occur.”

The Independent Market Monitor has requested a 10-day extension to the Sept. 6 deadline for submitting comments on PJM’s filing. The Delaware Public Service Commission filed comments in support of the Monitor’s request.

For the hourly offer market rules, PJM said it couldn’t accurately estimate an implementation date because it “will be one of the most in-depth and complicated undertakings in PJM’s recent history, as PJM’s systems have been designed and implemented on the basis of daily offers.” The RTO suggested it will take at least a year, but it requested approval of a timeline that gives it 30 days after FERC’s ruling to propose an estimated effective date and up to 30 days before that proposed date to determine a final effective date.

PJM kept much of its original submission for real-time offer regulations, but it proposed several definitions and revisions. Among them are:

• Prohibiting generators from oscillating between market-based and cost-based offers;
• Increasing the cutoff for real-time offers from 60 minutes to 65 minutes prior to the applicable clock hour to account for PJM’s ancillary services optimization engine; and
• Prohibiting increases to a generator’s incremental energy offer, but allowing it to increase its market-based offers in real time to reflect increases in costs. (PJM proposes defining incremental offers as those pairing price and megawatt quantities, in dollars per megawatt-hour, which combine to include all of the energy segments above a resource’s economic minimum. It excludes no-load costs.)

The fuel-cost policy rules are designed to provide clarity for how policies will be reviewed, delineate submission requirements, define consequences and outline the role of the Monitor.

Sellers without a PJM-approved fuel-cost policy could only be price takers, making offers of $0/MWh. They would also be subject to the penalty, which is up to 75% of the product of the LMP paid to the seller and the unit’s capacity during the hour. The percentage starts at 5% on the day the seller is notified about not having an approved policy and increases 5% each day until a policy is approved. It caps out at 15 days, after which the seller continues to be penalized at that rate.

PJM proposes using the same penalty for a seller who submits an offer that doesn’t comply with its existing policy. The penalty structure is based on a formula used by ISO-NE.

Sellers who have policies rejected by PJM or the Monitor would revert to a previously approved policy until the rejected policy is satisfactorily amended. The RTO also proposed a procedure to revoke a seller’s policy altogether — meaning it would no longer have any approved policy — but said it would only be used in cases of fraud or when a policy doesn’t “remotely reflect” applicable fuel costs.

PJM also proposed an annual review process, in which sellers would have to submit by June 15 of each year any updated policies or confirm that the existing policy remains compliant. PJM would then have until Nov. 1 to provide the seller with a compliance determination.

Solar, storage and run-of-river hydro would be required to have a cost of $0, while wind would need to account for energy and tax credits. Waste-to-electricity resources, such as landfill gas and biomass facilities, would have to include fuel costs even if the facility is paid to accept the waste — meaning their fuel costs would be negative.

The policies would also need to include maintenance adders, heating requirements, unit-specific performance factors and start-up cost calculations.

The filing also detailed PJM’s understanding of the Monitor’s role, noting stakeholder confusion over its involvement in initial policy approval and ongoing oversight. In previous discussions on the topic, the Monitor has questioned PJM’s proposed regulations, saying they cross into its authority.

FERC “has made clear that the act of approval or disapproval of fuel-cost policies is one to be undertaken by PJM and not the IMM,” PJM said in its filing. Penalties would only be assessed if both PJM and the Monitor agree on it. In the event that they disagree, PJM proposed that the matter be referred to FERC’s Office of Enforcement.

During a conference call last week to review the filing, PJM staff clarified that specific implementation processes would be outlined later in changes to Manual 15. The changes will be reviewed by the Market Implementation Committee.

If FERC approval allows for an effective date prior to the beginning of the annual review process, PJM plans to concentrate initially on generation units without any policies or ones that received tacit PJM approval based on negotiations with the Monitor. It would then rely on the annual review process to ensure all units had approved policies. Under PJM’s existing protocols, some units have not been under any requirement to get a policy approved and others have undergone lengthy negotiation processes with the Monitor.

Both PJM and the Monitor described “significant philosophical differences” in their perspectives on the correct oversight scheme.

The “fundamental difference,” according to Monitor Joe Bowring, is his group’s role in the process. PJM made some “significant mistakes” in the filing and isn’t “correctly observing that division of labor set forth in the Tariff,” he said.

Ed Tatum of American Municipal Power asked about the differences in opinion on how short-run marginal costs should be handled.

Bowring responded that PJM’s proposed protocols should be adjusted. PJM’s Jeff Schmitt said that would be addressed in changes to Manual 15.

Jason Cox of Dynegy suggested that the penalty have tiered levels corresponding to whether a noncompliant offer affected the market price, but PJM said that was not part of the filing.