By Suzanne Herel and Rich Heidorn Jr.

PJM must develop a new method for allocating auction revenue rights that doesn’t consider extinct generators, FERC ruled last week.

The commission said PJM had correctly diagnosed that its existing rules for ARRs and financial transmission rights were no longer just and reasonable because modeling assumptions it adopted to address FTR revenue inadequacy had “resulted in unwarranted cost shifts between ARR holders and FTR holders” (EL16-6-001, ER16-121).

But it rejected PJM’s proposal to address the problem by reducing Stage 1A infeasible ARRs by increasing its zonal load forecast growth rate. FERC said the proposed escalation factor “would trigger unnecessary transmission enhancements” because it would rely on outdated historical source and sink points.

“Instead, to address infeasible Stage 1A ARRs, we require PJM to revise its Tariff to remove the use of historical generation resources for requested ARRs in Stage 1A of the allocation process if those resources are no longer in service and develop a just and reasonable method of allocating Stage 1A ARRs based on source points that reflect actual system usage.”

FERC also shot down PJM’s proposal to eliminate the netting of negatively valued FTRs against positively valued ones in holders’ portfolios, saying the RTO had not proven that the netting rules were unjust and unreasonable.

In addition, the commission agreed with PJM that underfunding can be reduced by excluding imbalance costs not related to day-ahead congestion from FTR settlements. It ordered that PJM allocate balancing congestion to real-time load instead.

PJM has 60 days to submit a compliance filing reflecting the Tariff changes directed by FERC.

Technical Conference

FERC’s ruling relied in part on comments at a technical conference held in February. (See No Consensus on PJM FTR/ARR Allocations.)

The commission called for the information-gathering session after the Financial Marketers Coalition and others protested PJM’s proposal to eliminate the netting provision, which would have increased ARR results by 1.5% annually.

The coalition — representing DC Energy, Inertia Power, Saracen Energy East and Vitol — objected to the elimination of netting, saying PJM hadn’t proved that the rules were unjust and unreasonable, nor that the proposed changes would fix underfunding.

An FTR entitles its holder to credits based on locational price differences in the day-ahead energy market when the transmission grid is congested. FTRs can be purchased or converted from ARRs, which are allocated to network and firm point-to-point customers.

‘Sidestep’

FERC noted that PJM described its proposed escalation factor “as a targeted reform intended to sidestep the underlying allocation dispute (and corresponding stakeholder impasse).”

Since March 2011, the RTO has held three separate stakeholder processes to address FTR revenue adequacy.

Stakeholders and PJM had been wrangling with the issue of FTR underfunding for more than a year when Steve Lieberman of Old Dominion Electric Cooperative offered a proposal combining recommendations from the RTO and the Independent Market Monitor.

Although the proposal fell short of reaching the consensus necessary to make a filing under Section 205 of the Federal Power Act, PJM offered it as a unilateral filing under Section 206. (See PJM to File FTR, ARR Rule Changes with FERC.)

FERC said that short-term changes implemented by PJM because of the lack of stakeholder consensus on a comprehensive fix had improved revenue adequacy “to better than historical levels” but unfairly shifted revenues from ARR holders to FTR holders.

“When it is required to issue a pro rata reduction in transmission congestion credits due to underfunding, its netting policy … results in a cost shift from participants with larger shares of positive target allocation FTRs to participants with larger shares of negative target allocation FTRs,” reducing the hedging value of prevailing-flow FTRs, the commission said.

Because PJM’s current Tariff requires it to use historical paths in its Stage 1A ARR allocation, the RTO has modeled “dummy generators” where the historic source points are no longer in service, creating a disconnect between the Stage 1A ARR allocation and actual system usage.

That can result in infeasible Stage1A ARRs, “as some pathways may appear to be infeasible even though, in actual system usage, these lines are not overloaded. As the PJM Tariff has no mechanism by which to update this requirement, future changes in the resource mix and retirements will only further exacerbate this issue,” FERC said.

The commission clarified that Order 681, its 2006 rulemaking on long-term firm transmission rights, “does not guarantee, or require PJM to use, historical paths” in its ARR allocation.

Doesn’t Address Root Cause

FERC said PJM’s proposal to increase zonal load growth “is an inappropriate solution that does not address the underlying root cause” of infeasible ARRs.

It said the proposal “could trigger transmission enhancements to paths that are not needed for reliability and are not able to be justified through the benefits of relieving congestion through PJM’s economic planning process.”

“Any transmission enhancement identified under escalated load projections distorts the planning process, such that transmission planning is not based on expected system conditions. Additionally, in some cases, these paths may reflect generators that no longer exist or generation that load no longer utilizes (due to sale of the generation unit or the termination of a bilateral contract). PJM’s existing [Regional Transmission Expansion Plan] process would not identify a need to build the transmission enhancements for projected reliability or market efficiency needs without using an adjustment unrelated to system needs. Moreover, developing transmission enhancements solely to address infeasible ARRs ignores the more fundamental issue of why PJM should continue to model requested ARRs based on historic generation paths that load no longer utilizes.”

Netting Proposal

PJM said its plan to eliminate netting was justified because participants with fewer negative target allocations subsidize those with more negative allocations.

But the commission said it was “not persuaded that counterflow FTRs actually contribute to FTR revenue inadequacy or that the elimination of netting would improve FTR funding.”

It agreed with arguments by the Financial Marketers Coalition that portfolio netting does not result in cross-subsidies among parties holding prevailing flow and counterflow FTRs because the current practice guarantees that both positive and negative target allocations are treated in the same manner.

“We further find that PJM’s proposal would only reallocate FTR revenue inadequacy among various market participants without actually addressing the fundamental issues associated with FTR revenue inadequacy.”

FERC disagreed with the Market Monitor’s assertion that a market participant can protect itself from FTR revenue inadequacy by holding counterflow FTRs to shrink its net positive target allocation.

“The Market Monitor’s argument is flawed because it ignores the fact that market participants take into account expectations of FTR revenue inadequacy when transacting in FTR auctions, a point that the Market Monitor even noted in its 2015 Quarterly State of the Market Report,” the commission said.

It also disagreed with Exelon’s contention that holders of counterflow FTRs are not exposed to underfunding under the current netting rules.

“PJM and commenters supporting the elimination of portfolio netting have not provided evidence sufficient to reverse established commission precedent that states that PJM’s existing netting provision is just and reasonable,” FERC said.

Balancing Congestion

The commission acknowledged that its ruling that PJM change its handling of congestion imbalance — caused when there is less transmission in the real-time energy market than was assumed in the day-ahead market — represented a shift from its 2013 FirstEnergy Solutions order, in which it ruled that challengers had failed to prove the methodology was unjust and unreasonable (EL13-47).

“Such a finding does not preclude the commission from re-examining the issue when circumstances have changed or additional evidence has been presented,” it said. “By the time of the PJM filing in this case under Section 206, circumstances had changed considerably.”

The commission said including balancing congestion in the settlement of FTRs “contributes to the identified unjust and unreasonable cost shift between ARR holders and FTR holders, is inconsistent with cost causation principles and reduces the efficacy of FTRs as a hedge.”

Back to the Stakeholder Process

Following the technical conference, the commission solicited comments on other issues, including updates to the seasonal feasibility tests and source and sink points and whether transmission owners were incented to schedule outages in alignment with FTR/ARR rules.

But the commission said it would not order additional changes on those points. “While additional improvements to PJM’s ARR/FTR construct may be warranted, including those proposed by commenters, we refer these proposals to the PJM stakeholder process for further consideration and development.”