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Voice of Reason: Retail Supplier Opposes Waiver to Allow PJM Offers Above $1,000/MWh To Set LMP, Says Capacity Suppliers Should "Honor Their Commitments"

January 31, 2014

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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Washington Gas Energy Services, Inc. has asked FERC to deny a waiver requested by PJM to allow it to accept offers in excess of $1,000/MWh and for such offers to set the market-clearing LMP.

"If the proposed offer cap waiver is granted, the problems created by Generation Resources that did not prudently hedge their risk of costs exceeding the known price cap will be compounded. The door will be opened for the potential gaming of offer prices by Generation Resources such that very high clearing prices will result and revenues for all of the energy delivered will be dramatically increased," WGES said.

WGES noted that PJM specifically sought the waiver for, "Generation Capacity Resources".

"Significantly, these Generation Capacity Resources have already participated in the PJM Capacity Market through the Reliability Pricing Model (RPM) process and will be paid over $6.6 Billion this year in capacity payments. Sellers of electric supply from their Generation Resources have an obligation to offer the output of their resources into PJM's Day-Ahead Energy Market and a further obligation to limit their pricing offers to the current $1,000 per MWh cap," WGES said.

"It is prudent for a Generation Resource to have access to a fuel supply that supports the seller's obligation to offer the energy output of the resource in a cost effective manner when there is a $1,000/MWh offer cap. This can be accomplished through the purchasing of call options for firm gas supply at a price level that enables the seller to meet the price cap. Given PJM's presentation of the cost calculation that a $1,000 per MWh price for power is equivalent to $100 per MMBtu for gas, the cost for a seller to protect the price for the Generation Resource is very inexpensive when the forward curve for natural gas is well under $10 per MMBtu. Generation Resources should be expected to honor their commitments to operate within the pricing rules," WGES said.

"PJM generation dispatch operations during the recent cold weather events left gas generators having to bid 'whatever it takes' to buy the gas in the open market to keep the generators operating. 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. If the Commission were to grant PJM's request to lift the price cap, sellers of gas supply for electric energy generation will have no limits or restraints at all in their pricing, and the generators will be willing to pay 'whatever it takes' to buy the high priced gas knowing they will be able to bid the equivalent electricity price into the PJM Day-Ahead Energy Market. The proposed price limit waiver will be especially dangerous because the high electric energy prices will set the LMP for the entire amount of the generation that clears in the energy auction," WGES said.

"If the proposed offer cap waiver is granted, the problems created by Generation Resources that did not prudently hedge their risk of costs exceeding the known price cap will be compounded. The door will be opened for the potential gaming of offer prices by Generation Resources such that very high clearing prices will result and revenues for all of the energy delivered will be dramatically increased," WGES said.

"If the exposure to unlimited energy prices is created, consumers will be harmed as retail suppliers and suppliers of utility default service will add the risk of these costs into their prices," WGES said.

WGES also said it supported the comments of NextEra Energy Power Marketing, LLC, who had earlier slammed PJM's request in comments to FERC (click here for story).

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