UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Uplift Allocation and Transparency in Markets Operated by Regional Transmission Organizations and Independent System Operators ) ) ) Docket No. RM17-2-000 PJM INTERCONNECTION, L.L.C. COMMENTS TO NOTICE OF PROPOSED RULEMAKING Pursuant to the Federal Energy Regulatory Commission’s (“Commission”) Notice of Proposed Rulemaking issued in the above-referenced proceeding on January 19, 2017 (“NOPR”), PJM Interconnection, L.L.C. (“PJM”) hereby submits the following comments. I. INTRODUCTION The NOPR is the fifth of the Commission’s notices of proposed rulemakings arising out of its proceeding in Docket No. AD14-14-000 addressing price formation in markets operated by Regional Transmission Organizations and Independent System Operators (collectively, “RTOs/ISOs”).1 To date, PJM has generally supported the Commission’s initiatives in the Price Formation Proceeding, and indeed believes that many of the steps taken by the Commission will improve price transparency across all RTOs/ISOs. Moreover, PJM generally supports the NOPR’s goal of increasing transparency in the reporting of uplift in RTOs/ISOs.2 However, PJM believes the proposed rules regarding uplift allocation attempt to distribute uplift in a more surgical manner than a “cost causality” methodology is capable of accomplishing. In PJM’s view, the Commission’s proposed rules do not actually achieve the goal of allocating uplift based on cost causation because such a goal is unachievable at the level of granularity proposed by the Commission. In this sense, and as explained below, the premise of the NOPR that uplift can be 1 Hereinafter, the “Price Formation Proceeding.” 2 See e.g. NOPR at P 3. allocated to deviations that cause uplift and that “helpful” versus “harmful” actions3 can be easily identified and incentivized through cost allocation does not recognize the intertwined and complex nature of uplift, which makes the identification of the specific cause of costs elusive and ultimately impossible. For these reasons and the reasons outlined in more detail below, PJM believes the Commission’s proposed uplift allocation methodology will add significant complexity and arbitrariness while moving no closer to the Commission’s intended goal of allocating uplift based on cost causation principles.4 Rather than mandating this new uplift allocation methodology, the Commission should continue to focus its efforts on minimizing the total amount of uplift, as this goal provides a far more substantial benefit to all market participants. The Commission has attempted to do this through the reforms it proposed in its recent “FastStart Pricing NOPR,”5 for which PJM was largely supportive.6 Accordingly, PJM urges the Commission to alter its approach to this NOPR to largely move forward with its transparencyrelated provisions while declining to mandate its proposed cost allocation methodology. II. UPLIFT ALLOCATION A. The NOPR Incorrectly Assumes Allocation of Uplift Can Be Used to Influence Specific Market Behavior The NOPR states that “[a]t the highest level, the allocation of uplift costs should, to the extent possible, encourage behavior that will reduce the need for uplift-creating actions and avoid discouraging market participant behavior that lowers total production costs (i.e., enhances 3 See e.g. id. at P 14. 4 See e.g. id. at P 4. 5 See Fast-Start Pricing in Markets Operated by Regional Transmission Organizations and Independent System Operators, Notice of Proposed Rulemaking, 157 FERC ¶ 61, 213 (2016). 6 See generally PJM Interconnection, L.L.C., Comments to Notice of Proposed Rulemaking, Docket No. RM17-3-000 (Feb. 28, 2017). 2 efficiency).”7 While PJM agrees with this general statement in principle, it does not believe this goal can be achieved. From an RTO/ISO perspective, there is no way to determine with certainty which specific deviations generate uplift before or after the market has cleared.8 Because this cannot be determined with any degree of certainty, constructing an allocation methodology that discourages such transactions is impossible. In order to achieve the Commission’s goals, a market participant would need to know which types of transactions will cause uplift at the time they transact in the market. However, from a market participant’s perspective, uplift is random. Neither they, nor the RTO/ISO, can determine the amount of uplift they will be allocated until after the market has cleared and the profits and losses of all market transactions are calculated. Nor can the market participant or RTO/ISO determine whether a specific transaction contributed to the creation of uplift given the complexity of the market. Accordingly, by the time a market participant is allocated uplift, it is too late for it to take action that would have reduced uplift. Further, the same transaction on two different days can result in different uplift allocations because system conditions and other market participants’ behavior can change from day-to-day, resulting in different amounts of uplift for relatively similar Operating Days.9 For these reasons, it is difficult for PJM to envision how the Commission’s proposed uplift allocation, or any allocation methodology, can achieve the Commission’s intended goals of apportioning uplift based on cost-causation principles or induce market participants to behave in a manner that would result in a lower uplift allocation to them. 7 NOPR at P 2. 8 See e.g. PJM Interconnection, L.L.C., Report on Price Formation Issues, Docket No. AD14-14-000, at 28-29 (Feb. 17, 2016) (“PJM Price Formation Report”). 9 Capitalized terms used and not otherwise defined herein have the meaning set forth in the PJM Open Access Transmission Tariff (“Tariff”) and Amended and Restated Operating Agreement of PJM Interconnection, L.L.C. (“Operating Agreement”). 3 B. The Commission Should Not Require Uplift Allocation Based on Specific Categories In the NOPR, the Commission proposed to split uplift costs into at least two categories: (1) a system-wide capacity category and (2) a congestion management category. 10 The NOPR states that the Commission’s intention is to allocate the costs to the market participant that caused the uplift. However, in order to achieve Commission’s intended goal, it would be necessary to clearly define why a specific transaction is collecting uplift (i.e. capacity or transmission) and then determine which transaction caused that uplift. It is PJM’s opinion separation of uplift into these two categories would be an arbitrary determination because all market transactions ultimately impact how PJM maintains power balance and controls transmission constraints. For example, when PJM solves its Day-ahead Energy Market or dispatches the system in real-time, the power balance constraint and transmission constraints are solved simultaneously. This is because the transactions that resolve transmission constraints and those that are used to balance supply and demand are the same. Every injection or withdrawal on the power system imposes some flow on a transmission facility that is ultimately lost through transmission system losses, consumed by load, or used to meet the needs of interchange transactions. Segregating transactions into specific categories can only be done subjectively, which is inconsistent with the principles of cost causation. For these reasons, splitting uplift into the proposed categories should not be required. C. Ambiguities in NOPR Proposal Could Lead to Unintended Consequences. The Commission’s proposed exemption of deviations from a day-ahead schedule caused by a transaction following dispatch is appropriate.11 This is part of PJM’s practices today and helps reinforce the incentive for resources to follow dispatch. 10 See NOPR at P 40. 11 See e.g. id. at P 53. 4 Importantly, the manner in which PJM determines deviations for resources that are following dispatch instructions differs slightly from what the Commission has proposed. Today, generation and demand response resources following PJM dispatch are assessed deviations based on the difference between where PJM dispatched the resource and its actual output (or consumption). PJM employs this methodology as opposed to what the Commission has proposed, which is the difference between actual output and the day-ahead scheduled megawatt amount.12 Notably, under one possible reading of the Commission’s proposal, a resource could elect to follow its day-ahead schedule in real-time and not be assessed a deviation even though PJM dispatched the unit differently in real-time. If a resource does not follow dispatch in realtime, it requires the RTO/ISO to take counteractions to control the system that may result in uplift being created. For this reason, PJM instituted changes in 2008 to measure deviations of resources based on how well the resources follow real-time dispatch instructions. Requiring PJM to remove this enhancement to how it determines deviations would dilute the incentive to follow dispatch and increase uplift payments. While PJM believes that no universal definition of “deviations” is required across all RTOs/ISOs because each RTO/ISO’s system is different and subtle nuances may influence how deviations are calculated, should the Commission proceed with a universal definition of “deviations” in a Final Rule, PJM recommends that the Commission clarify therein that deviations must be based in part on how well resources follow RTO/ISO dispatch instructions in real-time, and not merely whether they operate to their day-ahead schedule. 12 See e.g. id. at P 38. 5 D. Changing the Determination of Uplift Allocation from Daily to Hourly Will Increase Volatility, But Will Not Provide Actionable Incentives. PJM opposes the Commission’s proposal to require that “real-time uplift costs allocated to deviations must be settled using hourly uplift rate calculations.”13 Currently, the rate at which PJM charges deviations to its market participants is calculated on a daily basis, rather than an hourly basis. PJM uses this methodology in large part because the accrual of uplift payments in the PJM markets is based on the profits and losses for a specific transaction over a set of hours, rather than over a single hour. For example, if PJM commits a generator to run for its Minimum Run Time of four hours, the resource’s Market Seller will receive an uplift payment if its total costs exceed its market revenues across the entire four hours, regardless of the profits or losses in any one hour. Importantly, PJM’s Members currently pay a per MWh rate for deviations over the course of an entire Operating Day, and deviation rates are calculated separately for the eastern and western portions of the PJM Region. Moving to twenty-four different hourly rates, as opposed to a single daily rate, will have the inherent effect of increasing rate volatility. In a market in which uplift payments are credited hourly, this change would align deviations with the hourly cost of uplift. However, it will also increase the risk each Market Seller undertakes because the volatility of the rate it pays will increase. As noted, market participants are unable to respond directly to uplift costs until after they are already exposed to them, and it is impossible for market participants and RTOs/ISOs to know in advance which hours will have relatively high or low uplift costs. Therefore, in PJM’s view the proposed increase in granularity of the rate calculation cannot be used to drive a specific beneficial behavior, and will likely only serve as a deterrent to market participants engaging in transactions generally given higher rate volatility. 13 See id. at P 35. 6 E. The Commission’s Netting Proposal Will Result in a More Volatile Uplift Allocation Which May Have Adverse Effects PJM’s interpretation of the NOPR is that the Commission’s proposed ideal uplift allocation would directly allocate uplift to the causal parties based on their resources’ net impact on the market. To achieve this goal, the Commission proposes that RTO/ISOs identify deviations that either help or hurt “efforts to address system needs” and do so for each market participant on a “net” basis.14 Under this proposal, each market participant’s portfolio would be netted across each uplift category to determine their portfolio’s impact. In a second step, those impacts would be determined to be helpful or harmful. Only those market participants with net harmful deviations would be allocated uplift. Generally, the more granular the allocation of uplift, the more volatile and sizeable the allocations will become. By reducing the number of parties over which uplift is allocated, either by attempting to implement a more causal allocation process or by allowing widespread netting of deviations, each remaining party that receives an allocation of uplift will receive a relatively larger share of total system uplift. This reality, combined with the fact that a market participant cannot tell if a transaction will cause uplift at the time it is submitted, along with higher rate volatility, will likely mean that the Commission’s proposed allocation methodology will generate enough uncertainty in the market that it will deter even beneficial activity, and accordingly should not be adopted. Moreover, the Commission’s reference to “efforts to address system needs” is extremely broad, and it is unclear to PJM as to the intended goal of identifying “helping” and “harming” deviations. If the “system need” is price convergence, a way to identify “helping” and “harming” deviations could be whether the transactions associated with the deviations are profitable. Those transactions that are profitable would aide in converging prices, while those 14 See NOPR at P 45. 7 that are unprofitable would not. Of course, here too this is not necessarily known to market participants at the time they execute their transactions. On the other hand, if the “system need” is minimizing uplift, it is unclear what the defining criteria would be for the reasons previously stated. With regard to the Commission’s request for comments on advanced notification requirements in determining helpful deviations,15 PJM agrees with the general premise that advance knowledge of the impact of market activity on the transmission system will always help the RTO/ISO make better-informed, more optimal decisions concerning resource dispatch. However, whether or not those decisions, absent that information, would have resulted in more or less uplift is an entirely different matter that requires much more rigor than a simple notification time threshold. Accordingly, the Commission’s proposed notification requirement is not advisable. F. PJM Has Made Substantial Progress On Reducing Uplift The Commission should be commended for its efforts to ensure better price formation across RTOs/ISOs. However, it should be noted that PJM has already made substantial improvements to its market rules and operational practices to minimize the amount of uplift in its markets. Figure 1 below shows the percentage of all of PJM Market Participants’ bills that have been attributable to uplift, and hence unhedgeable, since 2001. 15 See id. at P 50. 8 Figure 1 As shown, in 2001 uplift accounted for 8.5% of market participant’s bills, but has steadily decreased over time. Even in 2014, the year of the Polar Vortex in the PJM Region, and in many ways the catalyst for the Price Formation Proceeding, uplift was less than 2% of total customers’ bills. Importantly, in response to the cold weather events of 2014, PJM instituted several changes to its operational practices and market design to minimize uplift, including but not limited to: 1. real-time scheduling of long lead combustion turbine units with Day-ahead Energy Market commitments; 2. use of closed loop pricing interfaces and thermal surrogates to set price for voltage and stability issues; 3. increased use of analytical tools to identify uplift trends; 4. increased operator training and awareness; 5. real-time monitoring and identification of units incurring uplift; and, 9 6. changes to the way in which combustion turbine units are compensated for lost opportunity credits.16 These steps helped enable uplift decrease to historically low amounts in 2016, in which uplift constituted a mere 0.35% of total bills. In other words, in 2016 approximately 99.65% of PJM total billed amounts were attributable to costs other than uplift, and thus were hedgeable. Accordingly, PJM’s current rules have helped greatly reduce uplift compared to prior years, and PJM’s current rules fairly and equitably allocate uplift.17 While PJM believes improvements can still be made to its uplift allocation methodology, notably by treating Up-toCongestion transactions comparably to other Virtual Transactions,18 these are more circumscribed changes. In contrast, the Commission’s proposal will require a tremendous amount of resources to implement, will cause increased rate volatility, and in PJM’s view, is no closer to allocating uplift based on cost causation principles than PJM’s current methodology. III. TRANSPARENCY PROPOSAL PJM is generally supportive of the Commission’s proposed reforms to increase transparency surrounding the creation and allocation of uplift, and offers the following comments on specific aspects of the Commission’s proposal. A. Reporting Requirement The Commission proposes that: “within 20 days of the end of each month, each RTO/ISO post on its website two reports, at minimum, regarding uplift payments. First, the RTO/ISO should report the total uplift payments in dollars paid daily to the resources in each transmission zone, subject to certain exceptions described below. Each RTO/ISO must post the total amount of uplift in dollars in each category (e.g., day-ahead, real-time, voltage and local reliability) paid to resources in each transmission zone for each day within the calendar month. We propose to require that each RTO/ISO post 16 See e.g. PJM Interconnection, L.L.C., 152 FERC ¶ 61,165 (2015). 17 See PJM Price Formation Report at 28. For a more detailed description of PJM’s current uplift allocation methodology, see id. at 28-32 18 See id. at 33. 10 uplift payment amounts based on its specific uplift categories to allow market participants to distinguish between different types of uplift. Second, each RTO/ISO must post the resource name and the total amount of uplift paid in dollars aggregated across the month to each resource that received uplift payments within the calendar month.”19 PJM is supportive of the Commission’s proposed reporting requirement, so long as it acts as a minimum standard for RTO/ISO reporting requirements, and allows RTOs/ISOs to have more stringent reporting requirements. For example, with regard to the total amount of uplift paid daily to market participants for market activity in each Transmission Zone, PJM already reports this information within seven Business Days after the end of each month, not twenty days after as proposed by the Commission. Additionally, PJM does not object to reporting uplift by category as the Commission proposes. B. Reporting Uplift By Resource PJM does not oppose the Commission’s proposal to report uplift by resource.20 However, PJM does not currently do so because of stakeholder concerns related to revealing market-sensitive information - particularly bidding strategies. PJM urges the Commission to consider these factors when deciding whether to require all RTOs/ISOs to report uplift by resource as proposed. C. Transmission Zone Definition and Reporting. With regard to the Commission’s proposal to define a Transmission Zone as “a geographic area that is used for the local allocation of charges,”21 PJM supports this definition as long as PJM may continue to utilize its current Transmission Zones, described in Tariff, Attachment J, to allocate uplift. PJM allocates uplift by these Transmission Zones today, and 19 NOPR at P 83. 20 See e.g. id. at P 82. 21 See id. at P 85. 11 does not believe it would be prudent to change this longstanding practice in response to the NOPR. Moreover, PJM opposes the Commission’s proposal that “transmission zones with fewer than four resources need not be reported individually; rather, transmission zones with fewer than four resources may be aggregated with a neighboring transmission zone and reported collectively.”22 Because PJM reports uplift on a daily basis, this could mean that on one day, four or more resources in a Transmission Zone may receive an uplift allocation, meaning the Transmission Zone would not be aggregated with another Transmission Zone on that day for reporting purposes; while the next day fewer than four resources in a Transmission Zone may receive uplift allocations, meaning the Transmission Zone would be aggregated with another Transmission Zone for reporting purposes. Given this fact, the Commission’s proposal adds unneeded complexity and decreases transparency because whether a Transmission Zone’s daily uplift allocation is based on a standalone or aggregated basis will likely vary over time. Instead, PJM believes its current practice of reporting uplift by Transmission Zone, even if only one resource in that zone receives uplift on a given day, provides sufficient transparency to the market while also protecting market sensitive information. D. Charge Code PJM seeks clarification on the Commission’s proposed requirement “for a daily breakdown of uplift categories by charge code.”23 PJM is unsure what the Commission means by “charge code” in this statement. If the Commission is referring to billing line items on market participants’ bills, PJM already shows market participants’ uplift charges by billing line item today, and does not object to continuing this practice going forward. 22 See id. at P 89. 23 See id. at P 86. 12 E. Additional Details in Uplift Report PJM notes that its current uplift reports provide more details than those proposed by the Commission,24 and takes no position on whether these additional details should be mandated to be reported across all RTOs/ISOs.25 However, PJM requests that it may continue to publish these additional details if they are not mandated by any Final Rule because they provide greater transparency to all market participants. F. Posting Operator Initiated Commitments The Commission seeks comment on the types of unit commitments that should be reported as operator-initiated commitments.26 To clarify, in PJM there are no “automated” commitments either real-time or day-ahead. Instead, several applications, including PJM’s intermediate-term security constrained economic dispatch (IT SCED) software, provide commitment suggestions to PJM operators while considering maintaining power balance and controlling transmission constraints. PJM operators perform additional analyses once these suggestions are received, including running transmission studies to ensure committing the resource will not result in overloads prior to finally committing a unit. Both these analyses and the operators’ decisions all occur after the clearing of the Day-ahead Energy Market, which occurs by 1:30 PM on the day prior to the Operating Day. Therefore, PJM does not have an “automated” way to post the types of unit commitments after the close of its Day-ahead Energy Market. 24 Notably, PJM’s reports on uplift provide uplift totals by Transmission Zone describing, among other data: 1) Day-ahead Energy Market Operating Reserve credits; 2) balancing Operating Reserve credits; 3) reactive credits; 4) Blackstart credits; and 5) Lost Opportunity credits. See PJM.com, Uplift Data (available at http://www.pjm.com/markets-andoperations/energy/uplift-data.aspx). 25 See NOPR at P 83. 26 See id. at P 93. 13 Accordingly, PJM interprets the Commission’s proposal to require PJM to post all commitments made by PJM operators that occur after the close of the Day-ahead Energy Market. PJM is able to accomplish this goal, but requests clarification that this was the Commission’s intended outcome. Further with regard to the proposed reporting timeframe of four hours,27 PJM believes it will be able to comply with this deadline the vast majority of instances, subject to unforeseeable technical issues. PJM therefore requests that in any Final Rule, the Commission provide flexibility in the reporting timeframe to account for such technical problems so that if they are to occur, PJM is not exposed to a compliance violation. G. Common Set of Categories The Commission next seeks comment on whether it should define a common set of categories used as the reason resources are committed across all RTOs/ISOs.28 PJM is supportive of the Commission defining a minimum set of categories but requests the Commission permit each RTO/ISO to develop its own additional categories as desired. RTO/ISOs have different market designs and operational practices, and therefore each RTO/ISO should separately define how they commit resources and for what reasons. Additionally, it is unclear what level of detail the Commission is contemplating for such categories. Notably, PJM believes that the identification of specific resources committed to control specific transmission constraints is CEII and therefore should not be published. A Final Rule should clarify the level of detail envisioned for this proposal. 27 See id. at P 94. 28 See id. at P 95. 14 H. Transmission Outages With regard to whether additional reporting of transmission outages should be required,29 PJM does not believe this is necessary. PJM currently provides substantial information on transmission outages on its website,30 and believes the level of detail it currently posts on its website is sufficient and that posting more information, namely transmission outages that disconnect generating units or stations from the transmission system, may risk releasing confidential market participant information because the status of a unit or station would be identified via this posting. Accordingly, PJM requests that the Commission not require further disclosures related to transmission outages compared to what PJM already makes public today. Further, PJM is supportive of the Commission’s proposal to “include certain provisions related to transmission constraint penalty factors in their tariffs because transmission constraint penalty factors can significantly impact market clearing prices.”31 I. Posting Model Data The Commission seeks comment on “whether certain classes of market participants are prohibited from obtaining the network model in certain RTOs/ISOs.”32 PJM acknowledges that certain entities are prohibited from accessing market models, however there are good and important reasons why that is the case. PJM posts substantial data related to its models and systems,33 taking into account the need to also preserve market participants’ market sensitive information, but most importantly the 29 See id. at P 100. 30 See PJM.com, Outage Information (available at http://www.pjm.com/markets-and-operations/etools/oasis/systeminformation/outage-info.aspx). 31 See NOPR at PP 96. 32 See id. at P 101. 33 Specifically, PJM posts its FTR model on its website. See PJM.com, Financial Transmission Rights (available at http://pjm.com/markets-and-operations/ftr.aspx). Further, PJM posts supplemental information, such as transmission outage 15 security and reliability of the bulk transmission system. PJM’s internal models contain significant amounts of sensitive and CEII data that if it made publically available, would compromise the security of the bulk electric system. It is true that in some limited instances, PJM shares some of these models with certain entities that it does not with others (for example, EMS model data with Transmission Owners). But in these limited instances, these models are shared not for the sake of market transparency, but because Transmission Owners use this information to coordinate the reliability of the transmission system with PJM. When this information is shared, it is done so pursuant to non-disclosure agreements and in a highly secure manner. Notably, the Transmission Owners do not in any way financially benefit from this information, but instead need this information to perform their essential transmission function. PJM believes that its current procedures and rules for sharing model data strike the correct balance between market transparency, complying with NERC requirements, protecting the security of the bulk electric system and believes that these procedures should not be changed as a result of the NOPR. IV. IMPLEMENTATION TIMELINE With regard to the Commission’s proposed implementation timeline, PJM agrees with the Commission that 90 days from any Final Order’s effective date is sufficient time to submit a compliance filing with conforming tariff revisions.34 However, should the Commission decide to proceed with the cost allocation provisions of the NOPR despite the reservations stated herein, PJM notes that many factors will contribute to when PJM can implement any Final Order. Importantly, if a Final Order is issued requesting an implementation date before the Fall of 2018, it will be extremely difficult for PJM to implement revisions by then because PJM’s human, data, on OASIS. See PJM.com, Outage Information (available at http://www.pjm.com/markets-andoperations/etools/oasis/system-information/outage-info.aspx). 34 See NOPR at P 102. 16 financial and technical resources are already allocated to implementing Coordinated Transaction Scheduling with MISO by October 2017, hourly offers by November 2017, and 5-minute settlements by February 2018. Further, if a Final Rule requires extensive changes to PJM’s current processes for allocating uplift, additional time will be required for implementation. While PJM could institute the transparency changes on a shorter timeframe (preferably 9 months after the issuance of a Final Rule in this proceeding), PJM cannot begin to make any system changes needed for uplift allocation until after it implements 5-minute settlements in early 2018.35 Accordingly, PJM requests that any Final Order issued in this proceeding not require PJM to implement any reforms related to uplift allocation before April 2019 if such reforms are indeed required by any Final Rule. V. CONCLUSION For the foregoing reasons, PJM respectfully requests that the Commission consider its comments herein. Respectfully submitted, Craig Glazer Vice President – Federal Government Policy PJM Interconnection, L.L.C. 1200 G Street, N.W. Suite 600 Washington, D.C. 20005 (202) 423-4743 [email protected] 35 Steven Shparber Counsel PJM Interconnection, L.L.C. 2750 Monroe Blvd Audubon, PA 19403 (610) 666-8933 [email protected] See e.g. PJM Interconnection, L.L.C., Order No. 825 Compliance Filing, Docket No. ER17-775-000 (Jan. 11, 2017). 17 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Audubon, PA this 10th day of April, 2017. Steven Shparber
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