On January 12, 2018, FERC rejected PJM Interconnection, L.L.C.’s (“PJM”) proposal to revise its allocation of the costs associated with day-ahead Operating Reserves and real-time balancing Operating Reserves.  Specifically, PJM proposed to allocate uplift charges related to these reserves to Up-to-Congestion transactions (“UTCs”), a type of virtual transaction, in the same way that such uplift is allocated to other virtual transactions—namely, incremental offers of supply (“INC”) and decrement demand bids (“DEC”).  FERC rejected PJM’s proposal, without prejudice, on the grounds that PJM had failed to demonstrate that UTCs were sufficiently similar to INCs and DECs to justify allocating uplift to UTCs in the same manner that it allocates uplift to INCs and DECs.

In its October 17, 2017 filing proposing the changes to its Tariff, PJM stated that UTCs are currently exempted from uplift allocation because they were originally created as a way for market participants wheeling power through PJM to hedge against real-time congestion, and that UTCs evolved after some time into purely financial products through a sequence of market rule changes.  Despite this history, PJM contended in its filing that “there is no rational reason why UTCs should continue to be exempt from uplift allocation,” and noted that this exemption means that UTCs cost comparatively less per transaction than do INCs and DECs.  PJM also stated that UTCs are not exposed to the same energy pricing risk, which may make the current treatment of UTCs under the PJM Tariff unduly discriminatory.  PJM argued that it was appropriate to treat a UTC as an INC and a DEC for purposes of uplift allocation because UTCs, like INCs and DECs, “can impact the commitment and dispatch of resources in the day-ahead market, transmission flows, and prices, and can therefore influence the amount of uplift incurred.”

In its order rejecting PJM’s proposal, FERC concluded that PJM had failed to demonstrate that UTCs were sufficiently similar to INCs and DECs to support allocating uplift to UTCs in the same way it allocates uplift to INCs and DECs.  Specifically, FERC stated that PJM had failed to show how UTCs behave in PJM markets with sufficient similarity to INCs and DECs to justify using the same uplift cost allocation methodology.  FERC also noted that PJM had not “attempted to quantify the approximate magnitude of UTC’s impact on commitment decisions or uplift costs, nor shown that this amount justifies the proposed allocation of costs to UTCs.”  In rejecting PJM’s proposal without prejudice, FERC noted that “it may be appropriate to allocate some uplift costs to UTCs,” and accordingly left the door open for PJM to propose an alternative uplift allocation methodology for UTCs.

FERC’s order can be found here.