By Rory D. Sweeney

VALLEY FORGE, Pa. — Is PJM’s day-ahead auction more art or science?

That question was raised by several stakeholders at Tuesday’s special session of the Market Implementation Committee on price transparency, after the disclosure that PJM operators — rather than algorithms — make the final decision on which units clear the day-ahead auction.

PJM’s Mike Ward, who manages the day-ahead market operations, downplayed human involvement in the process, saying “most of the tweaking is on the edges.” But that didn’t satisfy Calpine’s David “Scarp” Scarpignato or Public Service Enterprise Group’s Gary Greiner, who questioned the subjectivity of the operators.

“I’m sure you’re doing things that ‘make sense,’ but when you get people making the decisions, I could adjust things differently around the edges than what you might,” Scarp said.

“We’ll run two, three, four more cases to keep adjusting it. We don’t just take it [once], that’s it and we approve it,” Ward said. “It’s hard to describe how we do it. … I judge [the benefit or harm] by the number of people calling and complaining.”

To avoid cutting into units’ profit, the operators compare LMPs to costs, Ward said, and consider many other factors, such as minimum or maximum runtimes.

“Are there rules for that or is it more art than science?” Greiner asked.

“We don’t want people to lose money,” Ward responded. He noted that the percentage of load bidding into the day-ahead auction has risen from 75% when he started to “close to 100%” today.

PJM’s Chris Callaghan explained the RTO’s commitment review process, which ensures system reliability by allowing reliability engineers to provide input for commitment decisions and review the final plan. Any additional units identified as necessary from that final reliability check are committed in the Reliability Assessment and Commitment run. Engineers look first at non-cost options, followed by gas-fired combustion turbines, then by steam-generation units to satisfy reliability at the least cost, he said.

Continuing the discussion on price formation, PJM’s Scott Benner explained the RTO’s current thinking on complying with FERC Order 831, issued in November. The order caps at $2,000/MWh all incremental offers allowed to set LMPs and requires validation of offers exceeding $1,000/MWh to “ensure that a resource’s cost-based incremental energy offer reasonably reflects that resource’s actual or expected costs.”

PJM plans to implement a process to address those requirements in November but must submit its compliance filing by May 8, Benner said. A third-party vendor will provide “near real-time” commodity prices to enable PJM to calculate theoretical cost-based offers and compare them with actual offers received.

“We should be able to understand their costs or at least their general spot market activity,” Benner said.

“We’d be checking to make sure if your offer was in accordance with your fuel-cost policy,” PJM’s Jeff Schmitt said.

Throughout the presentations, stakeholders and PJM staff recommended objectives for the group’s final product, many of which focused on providing deeper insight into how the RTO makes price-formation decisions.