PJM stakeholders narrowly approved an issue charge to examine the RTO’s operating reserve demand curve (ORDC) and transmission constraint penalty factors and the possible creation of a “circuit breaker” to control energy prices in an emergency.

The problem statement and issue charge, sponsored by nine different stakeholders, was approved in a sector-weighted vote of 2.505, barely passing the 2.5 threshold for endorsement at last week’s Markets and Reliability Committee meeting. Sixty-one members voted in favor, with 59 voting against.

John Rohrbach, representing Southern Maryland Electric Cooperative, presented the issue charge designed to consider whether an administrative mechanism, such as a circuit breaker, should be established in PJM’s energy market to protect consumers and market participants from financial impacts resulting from scarcity price signals.

Rohrbach said the recent pricing events in ERCOT, SPP and MISO during the winter storm emergency in February illuminate the potential adverse impact from the lack of a circuit breaker in PJM’s ORDC and transmission constraint penalty factor rules. Rohrbach said the issue charge was designed to highlight the lack of a circuit breaker in the future PJM ORDC rules and pertinent sections of the Operating Agreement for addressing an extended period in which ORDC penalty adders are binding.

Rohrbach said extreme pricing for an extended or indefinite period during an emergency can create costs that far exceed the value of any contribution to preserve grid reliability.

PJM uses an ORDC and transmission constraint penalty factors to establish locational marginal pricing. Under current PJM rules, the maximum price the energy component of an LMP can reach is $3,750/MWh.

But the “downward sloping” ORDC that was approved by FERC in May 2020 and takes effect in PJM on May 1, 2022, allows the RTO’s LMPs to reach or exceed $12,050/MWh in cases of extreme reserve shortages. (See FERC Approves PJM Reserve Market Overhaul.)

Key Work Activities

Adrien Ford of Old Dominion Electric Cooperative outlined the key work activities of the issue charge.

The first includes education on the current and pending PJM market rules for use of ORDCs and transmission constraint penalty factors in LMPs, including the input assumptions for the ORDCs. Ford said the education will also include pricing rules during emergency actions, triggers for performance assessment intervals (PAI) and the automatic use of the maximum reserve penalty factors. Education is slated to begin in July.

The second key work activity features exploring potential circuit breakers or other stop loss approaches that could limit extreme pricing when the cost “likely far exceeds the value of any contribution to preserving grid reliability.”

Ford said discussion would also include potential additional operational authorities needed by PJM to maintain grid reliability under conditions with excessive costs.

“Grid reliability is extremely important,” Ford said.

Work on the second key work activity is expected to take six months. Ford said efforts will be made to expedite voting to receive FERC action on any potential rule changes before the downward sloping ORDC takes effect in May 2022.

The third key work activity features exploring potential enhancements to PJM’s ORDC rules to address the impact of recent changes in PJM’s dispatch protocols on forecast uncertainty. Ford said stakeholders will examine and address the additional market and credit risks of the ORDC changes considering the recent pricing events in ERCOT, SPP and MISO.

Work on the issue charge will take place in the Energy Price Formation Senior Task Force.

Stakeholder Opinions

Stakeholder opinions on the issue charge were divided, with some saying the planned work doesn’t go far enough and others indicating the issue could become too complicated to implement before the ORDC changes next year.

Kent Chandler, executive director of the Kentucky Public Service Commission, said he sees the new ORDC as a “massive risk” to consumers in PJM. Chandler said the revised ORDC should have never been filed by the PJM Board of Managers or approved by FERC. (See PJM Files Energy Price Formation Plan.)

A review of the ORDC is necessary, Chandler said, but PJM and stakeholders need to “move immediately” to ensure a circuit breaker is in place before the implementation in May 2022. Chandler said any proposal that doesn’t prioritize having a circuit breaker in place at the end of the work is “inadequate.”

Dominion Energy’s Jim Davis, a co-sponsor of the issue charge, said the concept behind the work is not to reexamine the ORDC issue but focus on the creation of a circuit breaker. Davis said in order to develop an effective stop-loss provision, stakeholders need to be able to consider different aspects of the ORDC set to be implemented.

“I think we’re fortunate to be able to contemplate a circuit breaker prior to the implementation of the new ORDC construct, but we cannot do so in a vacuum,” Davis said. “We need to be able to consider enhancements to the ORDC rules.”

Susan Bruce, counsel to the PJM Industrial Customer Coalition (ICC), said many ICC members have facilities in ERCOT, SPP and MISO that were impacted by the winter emergency event and don’t want to see a similar event happen in PJM. Bruce said it’s the stakeholders’ responsibility as “stewards” of the PJM market to make sure markets work for customers.

“We want to make sure the markets are working for all market participants,” Bruce said.

Becky Robinson of Vistra said she believed it was more appropriate to proceed with a “focused effort” to address circuit breakers instead of a broader discussion in the issue charge. Robinson said the work to create a circuit breaker could be “weighed down” by a broader discussion of the issue.

Paul Sotkiewicz of E-Cubed Policy Associates said the third key work activity in the approved issue charge was “a bit more open-ended” than he would like. Sotkiewicz said having the circuit breaker in place is very important but thinks discussions may get “bogged down” in the third key work activity and won’t get to the point of creating a circuit breaker.

Sharon Midgley of Exelon presented an alternative problem statement and issue charge on behalf of multiple sponsors regarding a scarcity pricing circuit breaker for a vote. Midgley said the alternative issue charge arose out of the “overly broad scope and ill-defined problems” of the first issue charge and to focus specifically on creating a circuit breaker.