Load serving entities in PJM are starting to calculate how much their bills are going to increase for a frigid January that sent load and prices to new records. And, as they made clear to PJM last week, they aren’t happy.

“We have a market that’s not functioning,” said one stakeholder during a testy session of the Market Implementation Committee Friday. “We have people who scheduled in the day-ahead market as they were supposed to and they are getting hit with these unbelievable costs.”

Carl Johnson, representing the PJM Public Power Coalition, said his members’ operating reserve charges will be “absolutely extraordinary.”

Referring to other PJM members, he added: “We’ve seen unprecedented confusion, verging on panic.”

The complaints were sparked by high natural gas prices that prompted PJM to obtain a waiver allowing the RTO to issue make-whole payments to generators whose costs exceeded the $1,000/MWh offer cap.

Generators, who want the high costs to set market clearing prices, are also unhappy.

“We cannot ever let this happen again. We have to get these prices reflected in offers,” said a second stakeholder. “You’re creating day-ahead versus real-time risk. You’re creating risk that [generators are] going to buy fuel and then not burn it.”

“Even if you don’t have deviations, the way it looks now, every megawatt that flows is going to get hit” with make-whole charges, said a third.

PJM officials were unable to provide members last week with the total energy market and uplift charges from January.

PJM Chief Financial Officer Suzanne Daugherty said that PJM, which billed $33 billion in all of 2013, billed “a lot more than 1/12th of that” during the month. Eight of the top ten winter demand peaks in PJM’s history occurred during January.

Members won’t see the full impact of January in their bills for months because of a lag in demand response data. The debate over the future of the $1,000 price cap will likely last far longer.

Windfall vs. Market Integrity

The Federal Energy Regulatory Commission, which approved PJM’s request to allow make-whole payments for generators whose costs exceeded the cap, has yet to rule on PJM’s request to lift the cap altogether through March 31.

That would allow high-cost gas generators to set clearing prices, which PJM and generators say is essential to preserving the integrity of the RTO’s single price energy market, in which the marginal unit sets the price for all generation operating.

Load serving entities say lifting the cap would result in an unjust windfall for the vast majority of generators, whose costs never approached $1,000/MWh.

PJM said the make-whole payments would affect about 6,800 MW of mostly older combustion turbine generation, whose prices could be as high as $1,500 to $2,000/MWH.

“Since this generation is the least efficient on PJM’s system, much of it rarely or never operates, and as little as 50 to 100 MW may be all that is operating and bearing these high costs,” the Maryland Public Service Commission said in arguing against lifting the cap. “Shockingly, PJM has requested that the entirety of the 135,000 to 140,000 MW required to operate to provide service during extreme cold weather events receive this price spike-induced pricing.”

Rationale for Cap

In a 2002 rulemaking, PJM noted that the cap was at least five times the marginal cost of production of its highest cost units, and said it “serves to permit scarcity pricing while preventing the exercise of market power that would result if the cap were higher.”

In arguing to lift the cap for the remainder of the winter, PJM told FERC that continuing to rely on make-whole payments “falls short of Commission policy, and PJM’s fundamental market design, that clearing prices should reflect the marginal costs of the last resource needed to clear the market.”

The RTO cited a prior FERC ruling saying that uplift costs must be minimized because they “fail to send clear market signals” needed to encourage new market entry.

PJM vs. NYISO Approach

The Electric Power Supply Association, which represents generators, asked FERC to not only allow PJM’s market-clearing request, but also to impose it on NYISO. “It is time to move past Band-Aid fixes for persistent structural problems in these markets,” EPSA said, calling the price caps “outdated.”

The New York ISO also won a make-whole waiver to its $1,000 price cap, through Feb. 28. But unlike PJM, it did not seek permission to let units with costs over the cap set clearing prices. That, NYISO said, would lead to “over-compensating” generators.

DC Energy LLC, which trades financial transmission rights in PJM, supported EPSA’s request, saying a disparity in treatment between the two regions would lead to “unwarranted interface flow and congestion in the NYISO-to-PJM direction” that could lead to “even more generators being dispatched and compensated out-of-market in NYISO.”

Criticism of PJM Operations

At Friday’s MIC meeting, members also pressed PJM staff to commit to full after-action review similar to what it provided regarding the September heat wave.

“I would hate for PJM staff to be disconnected from the emotional state in the market created” by January’s events, one stakeholder said. “That would come across as tone deaf… I think this does really warrant all hands on deck.”

Members also complained that poor load forecasts led to excessive uplift charges.

Emergency demand response was called on January 7, 8, 27 and 28, although the Jan. 8 dispatch was cancelled when load came in lower than expected.

PJM officials have said their load forecasts in early January were inaccurate because there was no historical record for the kind of RTO-wide cold experienced during the polar vortex.

“Based on the waiver and tariff it’s tough to put those costs anywhere but BOR,” said Adam Keech, director of wholesale market operations.

Costs due to operator actions to preserve reliability — “conservative operations” — will be assessed to real-time load and exports. Uplift resulting from deviations between day-ahead and real-time schedules are collected from all those with deviations including increment offers and decrement bids.

PJM officials said the make-whole payments will be recovered through Balancing Operating Reserve (BOR) charges in bills to be sent in February. Because DR providers have 60 days to submit metered data, uplift charges from the DR calls won’t show up in bills until March and April.

Market Manipulation?

Opponents of lifting the caps urged FERC to conduct fact-finding before issuing a ruling in the case, in part to determine whether market manipulation played a role in the high gas and power prices.

The Maryland PSC said the commission should investigate PJM’s claim that inefficient combustion turbines with heat rates of 14,000 to 18,000 Btu/kWh were needed to provide service during the cold.

“PJM forced outage rates this winter have exceeded 20% where they normally do not exceed 8%, an increase that affects almost 20,000 MW of generation,” the PSC wrote. “…Can the commission rule out the potential that some of this generation has been withheld in order to drive market prices higher or is suffering outages for other impermissible reasons?”

Washington Gas Energy Services, Inc., a retail gas and electricity marketer, said PJM’s dispatch during the cold “left gas generators having to bid `whatever it takes’ to buy the gas in the open market…When electricity generators become gas buyers with no alternatives, the gas sellers quickly raise prices as high as possible. With the $1,000/MWh cap in place, there is at least some resistance to the gas prices exceeding $100/MMBtu.”

Maryland regulators also noted there was a disparity in gas prices on pipelines serving PJM generators. While PJM cited prices at two city-gates on the TRANSCO pipeline that could push generators’ costs above the cap, TETCO’s pipeline was offering pricing that allowed CTs to produce power at costs below the cap, Maryland said.

Impact on retail marketers

In addition to uplift charges, market participants also will be assessed for more than $2 million to cover defaults by two power retailers that were unable to cover the price spikes. CCES LLC, operating as Clean Currents, defaulted on $1.6 to $1.8 million while People’s Power & Gas LLC owes PJM $400,000 to $600,000.

PJM will ask the Board of Managers at its Feb. 12 meeting to approve an assessment on members to collect the defaults. The allocations will show up in March bills.

Exempt are associate members, municipal members that have received waivers, Emergency and Economy Load Response and ex-officio members, such as state consumer advocates.

The assessment formula spreads 10% of the default over all non-exempt members — about $250 to $350 per member.  The remainder will be assessed based on total gross activity for the month of the default and the two previous months.

While PJM isn’t aware of any of other retailers in financial distress, Daugherty said she couldn’t promise “there’s no one else.”

Most at risk are retailers that sold power on fixed-price contracts, particularly in states that don’t allow suppliers to pass through costs attributable to changes in market rules. In Pennsylvania, “fixed means fixed” for the term of the retail agreement, retailer Ethical Electric said in a protest to the PJM waiver request.

State regulators have warned customers to review their contracts. Many variable-rate plans do not contain price ceilings.

The Retail Electric Supply Association sided with generators supporting PJM’s call for allowing $1,000-plus generation to set clearing prices, saying that its members can hedge energy prices but not uplift costs.

The group includes retailers that are part of larger companies that own generation, including PPL, GDF Suez, AEP and Exelon, whose generation affiliates would benefit from high market clearing prices.