The Market Implementation Committee voted overwhelmingly March 6 to endorse PJM’s proposals for applying forfeiture rules to virtual transactions, rejecting the Market Monitor’s alternatives.
The PJM proposals create criteria for applying the existing forfeiture rule for increment offers and decrement bids and extends application of the rule to Up to Congestion (UTCs) transactions, previously not covered.
PJM’s package was backed by about 90% support of MIC members voting and will be forwarded to the Markets and Reliability Committee. Market Monitor Joseph Bowring’s alternative proposals won support from only a quarter of the members.
The rules address companies (including affiliates) that submit virtual bids that affect the value of the companies’ Financial Transmission Rights (FTRs). Forfeiture rules would apply when those transactions result in a higher LMP spread in the day-ahead market than in the real-time market.
Radical Change
Bowring called the PJM proposals “a radical change” that should have been subjected to more discussion through issuance of a problem statement. Bowring said PJM’s load-weighted reference bus method would inappropriately penalize some transactions and fail to apply the forfeiture in others when it should apply.
In December 2012, for example, PJM penalized 65 companies a total of about $75,000. The new method would have issued penalties on a single company for only $1,500, a 98% reduction, Bowring said.
Stu Bresler, PJM vice president of market operations, acknowledged that PJM’s changes would reduce the triggering of the rule — which is now applied in less than one-tenth of 1% of transactions — but said the RTO has not quantified the impact.
‘At or Near’
Bresler said PJM’s proposal simply clarifies how the RTO determines whether a company’s virtual bid is “at or near” the delivery or receipt buses of its FTR.
Under the PJM plan, companies will lose any profit for an FTR if 75% or more of the energy injected or withdrawn is reflected in a constrained path between FTR source and sink points. “We don’t believe this is a radical change,” he said.
PJM proposed using a similar test for UTCs. Bowring’s proposal would have applied the penalty on UTCs based on their net impact. He said the full impact of UTCs are not captured by the PJM proposal.
Net Impact
PJM’s Tim Horger, who presented the RTO’s proposal, said it is not appropriate to use the same “net” impact rule for UTCs because increment and decrement transactions don’t involve a second bus. Increment officers have only a source, and decrement bids have only sinks. UTC transactions include both source and sink.
David Mabry, consultant to the PJM Industrial Customers Coalition, said his group fears the PJM proposal weakens preventions against abuse.
Legitimate Hedging
Pat Sunseri, of Twin Cities Power, LLC, countered: “We don’t want to see more forfeitures when the activity might not be market manipulation but legitimate hedging.” Sunseri said the FTR forfeiture rule was created to stop participants from making small virtual transactions as low-cost leverage to impact much larger FTR positions.
Carol Smoots, counsel to the Financial Marketers Coalition, said that the PJM proposal was more reasonable than Bowring’s because it reflects the differences between UTCs and increments and decrements. “It’s very troubling to have this guilty-until-proven-innocent always come up when it comes to these transactions,” she said of Bowring’s proposal.
PJM’s proposed new criteria will be in a new section (8.6) of Manual 6: Financial Transmission Rights. It will also amend Section 5.2.1 of Appendix K to the PJM Tariff and require changes to the Operating Agreement.
The MRC is expected to defer action on the UTC proposal for up to two months pending a discussion to better define UTCs. (See “Facing Opposition, PJM Delays UTC Cap Pending Broader Review.”)
