By Rory D. Sweeney
FERC last week rejected PJM’s proposal for revising how it implements its financial transmission rights forfeiture rule, ordering the RTO to instead adopt a portfolio approach suggested by the Independent Market Monitor (EL14-37).
The commission, however, declined to order any refunds.
The ruling was the result of a Section 206 proceeding ordered in 2014 to determine whether the RTO was improperly treating up-to-congestion trades (UTCs) differently than increment offers (INCs) and decrement bids (DECs).
The order says the forfeiture rule should be applied to UTCs as well as INCs and DECs. The order did not address whether uplift — currently assessed on INCs and DECs — should also be applied to UTCs. Instead, it said that issue would be considered in broader Notice of Proposed Rulemaking on uplift cost allocation. (See related story, FERC Proposes More Transparency, Cost Causation on Uplift.)
The forfeiture rule was implemented in 2000 to prevent market participants from using virtual transactions to create congestion that benefits their FTR positions. The FTR holder forfeits the profit from its FTR when it submits an INC or a DEC at or near an FTR location that results in a higher LMP spread in the day-ahead market than in real time.
The commission ordered the 206 investigation after PJM proposed redefining UTCs as virtual transactions and making them subject to the forfeiture rule, which had previously been applied only to INCs and DECs. (See FERC Orders Review of UTC Rules.)
Worst-Case Scenario
The current rule evaluates virtual transactions individually against the “worst-case” bus — the location at which the transaction has the biggest impact on congestion. A forfeiture is triggered if at least 75% of the energy flowing between the transaction bus and the worst-case bus is reflected in the constraint.
PJM had proposed continuing to evaluate transactions individually but replacing the worst-case bus technique with a generation-weighted reference bus to evaluate DECs and a load-weighted reference bus to evaluate INCs.
Under the worst-case approach, one trader’s INC (an offer to sell energy at a specified source location in the day-ahead market) may be paired with a different market participant’s DEC (a bid to purchase energy at a specified sink location day ahead). PJM said that can result in forfeitures occurring when they should not.
False Positives, Negatives
But the commission ruled that the RTO’s proposed fix didn’t go far enough, saying the individual transaction approach does not capture the impact of a market participant’s overall portfolio of virtual transactions on a constraint.
“This may lead to forfeitures from some participants who have offsetting positions elsewhere and thus whose virtual transactions did not actually impact the constraint. Likewise, the rule may fail to invoke forfeiture on some participants who do not impact the constraint with a single transaction but have additive positions elsewhere that, on net, do impact the constraint significantly,” the commission said.
It ordered PJM to adopt the Monitor’s proposal to evaluate the net effect of a participant’s entire virtual portfolio — INCs, DECs and UTCs — on the constraint.
A UTC would be included in the portfolio as an INC at its source point and as a DEC at its sink. Because UTCs include both source and sink, there is no corresponding worst-case bus with which to compare it. (In a related order, the commission also accepted a PJM compliance filing establishing the criteria for determining the source-sink paths for UTCs (ER13-1654-001, ER13-1654-002)).
FERC also ruled that PJM must evaluate power flows using a load-weighted reference bus, which PJM already uses to calculate certain components of LMP, instead of the worst-case bus. As a result, the commission said, the 75% trigger should be replaced with one based on a percentage of the total binding megawatt limit of the constraint related to the FTR path.
“Specifically, to trigger a forfeiture, the net flow across a given constraint attributable to a participant’s portfolio of virtual transactions must meet two criteria: (1) The net flow must be in the direction to increase the value of an FTR; and (2) the net flow must exceed a certain percentage of the physical limit of a binding constraint,” the commission explained. “Although any volume can cause congestion, this second condition recognizes that increased volumes relative to the binding limit are more symptomatic of transactions that increase the value of an FTR.”
It noted that CAISO uses a such a method in its congestion revenue rights settlements. The ISO determines that congestion has been significantly impacted if a CRR holder’s entire portfolio exceeds 10% of the constraint’s flow limit.
The commission said eliminating the worst-case bus would increase the transparency of the forfeiture methodology, allowing market participants to monitor their own activity to determine if they are significantly impacting constraints related to their FTRs.
Compliance Filing
FERC ordered PJM to submit a compliance filing within 90 days to modify its Tariff to incorporate the new approach.
It rejected concerns that the portfolio approach would discourage transactions at liquid trading spots such as zones, hubs and interfaces, saying transactions at those locations should be included in the forfeiture evaluation.
It also ruled that counterflow FTRs and virtual transactions that relieve congestion should no longer be exempt from the forfeiture rule. “Holders of counterflow FTRs are able to manipulate congestion to benefit their FTR position,” the commission said.
The commission rejected calls from some trading firms to eliminate the forfeiture rule, saying that the requests were outside the scope of the proceeding and that the rule was necessary to deter cross-product manipulation.
Despite finding the current methodology not just and reasonable, FERC said refunds were “not appropriate.”
“As some parties have indicated, they have based market decisions on the current Tariff rules that cannot now be revisited, and the commission has not always ordered refunds when market decisions are affected. Moreover, while market participants were on notice that the FTR forfeiture rule might change, the nature of any change was uncertain. The bids, offers and decisions market participants made could have been different had they been aware of the nature of the revised FTR forfeiture rule.”