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Market monitor challenges PJM's failure to levy fuel cost policy penalty

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Market monitor challenges PJM's failure to levy fuel cost policy penalty

Asserting that the case "presents an important precedent for the role of fuel cost policies" in guarding against market power abuse, the PJM Interconnection's independent market monitor asked federal regulators to find that an unidentified seller violated such a policy and therefore should have been assessed a penalty.

In a complaint filed with the Federal Energy Regulatory Commission on Dec. 28, 2018, Monitoring Analytics said PJM's decision to accept the seller's "unreasonable after the fact" explanation for why its cost-based offer used a natural gas cost value based on a method that differed from the one defined in its fuel cost policy effectively renders the policy meaningless.

"If that method had been specified in the fuel cost policy, the fuel cost policy would have failed the market monitor's market power review," Monitoring Analytics said.

The cost-based offer at issue was for Jan. 6, 2018, the day after PJM's load hit its winter peak and part of the weekend during which natural gas prices "reached their highest levels" of the season, the market monitor recounted.

"A winter peak coinciding with a constrained natural gas market created the conditions that make fuel cost policies essential to the competitive functioning of the PJM energy market," Monitoring Analytics said.

Although both the seller and PJM were notified about the problem the following month, the seller responded by offering an explanation for its actions based on an interpretation "that was clearly not supported by, or consistent with the plain language of, the fuel cost policy," the market monitor recounted.

PJM nevertheless subsequently accepted that explanation, even though FERC required the grid operator to create an approval process for fuel cost policies and penalties for violations of those policies to ensure the "correct development of cost-based offers for market power mitigation on all days, including days when fuel costs rise to extraordinary levels," the complaint said.

Monitoring Analytics accordingly asked FERC to require that PJM assess the seller a penalty for violating its fuel cost policy "and reiterate the importance of having verifiable and systematic fuel cost policies." (FERC docket EL19-27)