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FERC grants PJM request to temporarily waive cap on bids


February 18, 2014

By Robert Varela
Editorial Director

The Federal Energy Regulatory Commission on Feb. 11 granted PJM's request for a temporary waiver (through March 31) of an existing $1,000 per megawatt-hour supply offer cap. The waiver will allow cost-based bids above $1,000/MWh to set the clearing price that all generators bidding into the market will receive. The commission on Jan. 24 granted PJM’s request for a make-whole waiver allowing generators to recover costs above $1,000/MWh, but not to set clearing prices at those levels.

A number of electricity and consumer groups argued that commission already had addressed any problem in the Jan. 24 order and that granting the waiver would result in wholesale and retail customers paying significantly more than the make-whole payments authorized by the Jan. 24 order. The Maryland Public Service Commission estimated that this could easily reach several hundred million dollars.

PJM argued that "no market participants can claim any legitimate harm because the PJM market has always been premised on seller recovery of marginal costs and on clearing prices based on marginal costs," the commission noted. Published natural gas prices at two key citygates in the PJM region recently averaged over $120/MMbtu, which would equate to a marginal energy cost for a simple-cycle combustion turbine generator of approximately $1,200/MWh, PJM said.

While the Jan. 24 order provided an immediate solution to the problem of generators not recovering their marginal costs due to recent spikes in fuel costs, that "left open the issue that recovering such costs as uplift fails to reflect such costs (and risks) in transparent market prices," the commission said. "By limiting legitimate, cost-based bids to no more than $1,000/MWh, the market produces artificially suppressed market prices and inefficient resource selection."

Granting the waiver may result in temporary increases of costs to load, FERC said, but it "is appropriate to allow generators to reflect their actual energy production costs, even if above $1,000/MWh, in market prices." The waiver "will ensure that marginal prices paid by consumers appropriately equal the incremental cost of servicing them, and efficient market signals—not constrained by a cap—should provide market participants with the information necessary to make informed business decisions, including hedging fuel risk," the commission said. Also, retail suppliers are better able to hedge costs included in the energy market than those limited to uplift.

"Generators with marginal costs greater than $1,000/MWh and that clear the market are, in fact, economic—not uneconomic, as some parties allege. The market clearing price under these conditions—even if it is higher than before—is a just and reasonable price that does not reflect the exercise of market power," the commission said. "Marginal cost bidding is competitive bidding."

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