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FERC denies monitor's bid for PJM to levy fuel cost penalty against Tenaska

The Federal Energy Regulatory Commission denied a complaint filed by the PJM Interconnection's independent market monitor that sought to require the grid operator to find that Tenaska Power Services Co. violated its own fuel cost policy and assess a related penalty.

In a Dec. 19 order, FERC said PJM "acted reasonably" in concluding that Tenaska complied with the company's fuel cost policy in making a cost-based offer for the gas- and oil-fired Panda Brandywine power plant in Maryland.

The order stemmed from a December 2018 complaint filed by PJM's market monitor, Monitoring Analytics LLC, alleging that an unidentified market seller violated its fuel cost policy in January 2018 by using a natural gas cost value that was based on a method not included in the policy. FERC recently made the identity of the seller, Tenaska Power Services, public.

According to the market monitor, Tenaska's fuel cost policy allows it to calculate a reference natural gas-based power price for the Panda Brandywine unit in one of two ways: using prices from trades for natural gas delivery for the previous gas day, or through certain same-day weighted average prices on the Intercontinental Exchange, or ICE.

However, Tenaska could not use either of those methodologies on the day in question because the plant had not purchased natural gas the previous day, and ICE had no applicable trades for relevant market areas in the time frame required to calculate day-ahead market offers. Tenaska therefore based its gas costs on quotes from ICE that were provided by marketing affiliate Tenaska Marketing Ventures Inc.

Monitoring Analytics alleged the decision violated Tenaska's fuel cost policy because Tenaska should have not submitted a natural gas offer and instead run the plant on oil if the two options outlined in its fuel policy were not available.

But in its Dec. 19 order, FERC said PJM reasonably found that Tenaska did not violate its fuel cost policy. The commission pointed to PJM's operating agreement, which requires fuel cost policies to include alternative measures, including documented quotes for gas procurement, if "applicable indices or other objective market measures are not sufficiently liquid."

In Tenaska's case, its fuel cost policy states that natural gas costs may be based on independent third-party quotes under a "set of defined market conditions," which FERC said PJM reasonably interpreted to include periods of market disruption.

"The lack of market liquidity is a market condition that permits the use of third-party quotes such as the ICE data provided by Tenaska," FERC stated.

The commission also disagreed with the market monitor's argument that the data provided by Tenaska did not satisfy the definition of third-party quotes because such quotes must result from a direct interaction between an unaffiliated buyer and seller. FERC said that interpretation was not supported by either Tenaska's fuel cost policy or the market monitor's fuel cost template for natural gas resources.

FERC further disagreed with the market monitor's argument that the ICE figures could not be considered independent third-party quotes because it was obtained by Tenaska's affiliate, Tenaska Marketing.

"The market monitor failed to demonstrate that the offers to sell natural gas provided by Tenaska were made by its affiliate or offered on preferential terms," the Dec. 19 order said. "The ICE quotes supplied by Tenaska would have been available to any market participant on ICE and were verifiable."

FERC said Tenaska had a range of possible third-party quotes to choose from but relied on those at the "lower end of the range," further supporting the commission's conclusion that PJM acted reasonably on finding that Tenaska complied with its fuel cost policy.

However, the commission said it "recogniz[ed] that illiquid market conditions can present challenges in calculating accurate fuel costs." FERC therefore encouraged PJM, the market monitor and power sellers in the region to "continue to refine [fuel cost policies] ... to clarify processes for determining how a seller will develop its cost to address a wide array of market conditions, including illiquid conditions." (FERC docket EL19-27)