By Rich Heidorn Jr. and David Jwanier

PJM told the Federal Energy Regulatory Commission last week it should allow a Duke Energy peaking plant to recover $9.8 million it spent on expensive natural gas it was unable to burn in January.

Responding to a complaint filed by Duke May 2 (EL14-45), PJM disagreed with Duke’s legal analysis and some aspects of its claim. But it said not paying Duke under the circumstances would be an “[in]equitable result” for generation owners.

The Market Monitor and others argued against Duke’s claim, saying capacity resources such as Duke need to be responsible for their fuel-cost risk.

What’s at Stake

If FERC rules in Duke’s favor, PJM’s tab could total tens of millions. In a filing supporting Duke’s claim, NextEra Energy Resources said it will make a similar claim to recoup $1.3 million in gas costs. Mike Bryson, executive director of system operations, told RTO Insider last week that about 10 companies have informed PJM that they also suffered “stranded gas” losses.

On Thursday, the Markets and Reliability Committee approved a problem statement to improve PJM’s procedure for committing gas-fired units. The initiative was broadened at stakeholders’ suggestions to cover several additional issues, including the definition of an outage and handling of dual-fuel units. “We’d like to get [solutions] before the winter so we don’t have a replay of the confusion” of January, said Mike Kormos, executive vice president for operations.

Duke’s Claim

Duke’s claim resulted from the late January cold snap. On Jan. 27, PJM issued a Maximum Generation Alert for the following day, signaling that all generation capacity resources should be ready to operate. (See related story, Recordings Capture Tense Operations During January Cold.)

As a result, Duke purchased $12.5 million worth of gas, enough to run five of the eight 80-MW units at its Lee County, Ill., facility for both Jan. 27 and 28. (Due to the mismatch of the gas and electric days and pipeline restrictions, Duke needed to purchase enough gas for two 24-hour periods in order to cover all hours for Jan. 28.)

Duke said it was able to recoup $2.6 million by self-scheduling several of the Lee units on Jan. 27 and 28, selling unused gas and receiving “very limited make-whole payments and credits” from PJM, leaving it with a loss of about $9.8 million.

Duke asked PJM to indemnify it under section 10.3 of the PJM Tariff, which requires that a generation owner be held “harmless” for “obligations … to third parties, arising out of … a Generation Owner’s (acting in good faith to implement or comply with the directives of the Transmission Provider) performance of its obligations.”

As an alternative, Duke seeks “a one-time, Duke-specific waiver” of Operating Agreement and Tariff provisions that bar make-whole payments.

PJM: No Order

In its filing last week, PJM insisted that its conversations with Duke did not constitute a directive to buy gas.

“It is a common occurrence that PJM dispatchers indicate that units need to be available to run only to later find that due to changes in load conditions, PJM does not need to commit the particular unit,” PJM said. “Although clearly done under more stressful conditions here, dispatchers are called on a routine basis and asked to prognosticate on whether units might be picked up and run in real time. Dispatchers answer those questions based on the best information they have available but are not providing guaranties through their answer.”

PJM also disagreed with Duke’s request for indemnification 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 said.

Commission approval of Duke’s request, PJM said, “would open the floodgates for a host of meritless claims that would present an existential threat to PJM and every independent system operator and regional transmission organization.”

PJM said capacity resources such as Lee must be offered into PJM’s markets on a daily basis and “do not have an automatic right to recover all of its costs should the units not actually be dispatched.”

Nevertheless, it said Duke should be compensated under a waiver because of the “extraordinary” circumstances of January. “Gas balancing losses that are usually no more than a routine `cost of doing business’ were in some cases transformed, in large part due to the conditions of the gas market and large price fluctuations, into multi-million dollar losses,” PJM said.

Monitor: Don’t Pay

In its own filing last week, the Market Monitor called on FERC to reject Duke’s request, saying it would be “a dramatic change in market rules and an associated, inappropriate shift in the costs and risks of the market to customers.”

The Monitor said Duke chose to rely solely on interruptible gas pipeline service and did not invest in back up fuel capability. “It is inappropriate for Duke to ask PJM customers to hold it harmless from such decisions, from which Duke has benefitted. It is also unfair to Duke’s competitors, who may have made different choices about fuel supply.”

The Monitor also said more than half of Duke’s claimed losses resulted from its delay in purchasing gas, which rose from $37/mmBtu to $63/mmBtu in the hours before Duke decided to purchase.

Retailers and the PJM Industrial Customer Coalition were also unsympathetic. The “waiver would harm the market, principles of market certainty and market participants … who may be forced to pay even more for Balancing Operating Reserve costs,” said the Retail Energy Supply Association.

Several generators, the PJM Power Providers Group and the Electric Power Supply Association filed comments siding with Duke.

“Denying Duke’s complaint despite Duke’s good faith efforts to comply with the PJM directive would be unjust and unreasonable,” FirstEnergy said. “System dispatchers need to have confidence that resources will perform when instructed to do so. And market participants must have confidence that, when directed by system operators to act for the sake of reliability, they will be made whole for the costs to carry out dispatcher’s instructions.”

NextEra Energy Resources also supported Duke, saying it also suffered losses in late January. NextEra said PJM “committed” a 290-MW generator in Sayreville, N.J., that NextEra co-owns with GDF Suez before the Jan. 27 operating day. PJM cancelled its dispatch, leaving the plant with a $1.3 million loss for unburned gas.

NextEra’s filing included a transcript of its exchange with PJM, in which one PJM dispatcher assured the company it would be reimbursed for its gas purchases: “I understand that you guys have already purchased the gas, ah, that’s not an issue, as far as if you’re worried about being reimbursed for that … PJM will obviously take care of that.”