By Suzanne Herel

WASHINGTON — All of the speakers at a FERC technical conference on Thursday agreed that PJM’s allocation method for financial transmission rights and auction revenue rights could be improved. They just couldn’t agree on what changes would make it better.

The commission called the information-gathering session after the Financial Marketers Coalition and others protested PJM’s proposal to eliminate the netting of negatively valued FTRs against positively valued FTRs within portfolios and to increase ARR results by 1.5% annually (EL16-6-001, ER16-121). (See FERC Orders Tech Conference on PJM FTR Rule Changes.)

David Patton of Potomac Economics, which serves as the market monitor for MISO, NYISO, ISO-NE and ERCOT, told FERC staff that the commission should broaden the inquiry and “adopt some principles instead of just looking at incremental rule changes.”

In particular, he said, the settlement obligation should be well defined, the settlement of FTRs should be non-discriminatory and FTR shortfall costs should be allocated as consistently as possible with cost causation.

“I would recommend you issue a [Notice of Proposed Rulemaking] that all RTOs’ [methods] are unjust and unreasonable and issue some principles,” he said.

PJM’s Tim Horger asked the commission to render a decision by April 5 to provide adequate notice to participants before the 2016 annual ARR allocation and FTR auction.

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.

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 the current proposal, which fell short of reaching the consensus necessary to make a Section 205 filing. (See ODEC Seeks Last-Ditch Vote on Deadlocked FTR/ARR Issue.)

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

The conference consisted of four panels: ARR and FTR modeling, sources and apportionment of underfunding, PJM’s proposed modifications and alternative solutions.

PJM Market Monitor Joe Bowring took issue with the notion of underfunding.

“I don’t think there’s any such thing as underfunding,” he said, noting that there is no guarantee of full funding for FTRs in the day-ahead market. “There is revenue inadequacy.”

PJM’s netting provision, he said, provides a subsidy to those with more negatively valued FTRs in their portfolio, creating a larger payout to some holders of the same product. Removing netting would ensure that all negatively valued FTRs are treated the same and all positively valued FTRs are treated equally.

While Patton said FTRs are primarily a financial instrument whose integrity needs to be preserved, Bowring said that the product was created in order for load to be reimbursed fairly.

“FTRs were about replacing firm transmission rights, ensuring that load that paid more than generators received got that money back,” he said.

FTRs were created when PJM operated only a real-time market. When the day-ahead market was formed, FTRs became a day-ahead product.

“There was a very good reason behind that change, to solidify the incentive to participate in the day-ahead market,” because that’s the best place to manage risk, said Stu Bresler, PJM’s senior vice president for market operations. “I think it’s critical and it needs to be preserved. It was created to be a fungible product around firm transmission service, to allow it to be traded, if you will, with the idea of getting the value back to the load. I think the theory has worked.”

Speakers who opposed the Tariff changes said it’s not fair for FTR holders to pay for balancing congestion — reflecting the differences between day-ahead and real-time load and generation.

“FTR holders are not the cause of congestion imbalances and shouldn’t be allocated them,” said Abram Klein of Appian Way Energy Partners. “The congestion belongs to load.”

Bowring rejected Klein’s argument.

“The idea that balancing congestion should be separated out … that’s just wrong,” he said. “We’re going to force load to guarantee the value of FTRs in the day-ahead market? That’s standing logic on its head.”

David Mabry of the PJM Industrial Customer Coalition pointed out that participants choose to be involved in the FTR market. “The part of the market where people are coming in voluntarily is where underfunding is happening. From that perspective, the process is working correctly,” he said. “Where it may not be working, it’s where folks are going into the process hoping to get some money out of it. But it is not a guarantee.”

Said Bowring: “Even in the darkest days of the lowest levels of revenue inadequacy, FTRs were still highly profitable.”

During the panel discussing alternative solutions, Harry Singh of J. Aron & Co. said a better market design would include separating out balancing congestion.

“When PJM started out, it was a real-time market,” Singh said. “Day-ahead congestion plus real-time congestion does not equal what you would have in a single settlement system.”

“PJM does agree that the allocation and balancing of congestion is something that we should look at,” Bresler said. “I don’t think the PJM ARR and FTR construct is in need of complete overhaul. I do, however, think there are areas for further investigation and adjustment.”

One idea would involve updating the set of source points, which date to 1998, involved in ARR allocations, he said.

Joe Wadsworth of Vitol agreed with Singh and recommended redefining the FTR product to be settled with only day-ahead congestion funds.

In addition, he said, fully funding FTRs would make them more valuable. “Increased confidence in FTRs would lead to a reduction of risk premiums and stronger values for ARRs than what otherwise might have occurred,” he said. “You’re going to generate more funding that will benefit transmission customers.”

Wadsworth also suggested allocating shortfalls due to outages to the transmission owners responsible for them — an incentive to reduce outages and schedule them when they cause the least congestion.

Bresler said he did not think the FTRs should be guaranteed full funding, or that underfunding should be allocated all to load.

“Commission guidance would be extremely helpful at this stage,” he said.

[Editor’s Note: An earlier version of this article mistakenly reported that J. Aron & Co. is a member of the Financial Marketers Coalition.]