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Bleed Customers Dry: State Regulators Say PJM Generators Seeking to Recover Inflated Costs Not Actually Experienced Under FERC Waiver Make-Whole Payments
Generators in PJM may be exploiting the make-whole payments granted to capacity owners by FERC, allowing cost recovery above the $1,000/MWh price cap, by, "requesting recovery of natural gas 'costs' that they did not in fact experience, but rather which represent simply a published 'spot' cost of natural gas though the generator's actual acquisition costs were well below the spot level," the Organization of PJM States, Inc. warned in a letter to the PJM board of managers.
The Organization of PJM States, Inc. (OPSI) wrote the PJM board, "to register concerns over the make-whole payments and pricing rules that are proposed for PJM generation capacity resources for incurred costs in excess of the $1,000/MWh energy market offer price cap during the period January 24 through March 31, 2014."
"It is clear from PJM's petitions to the Federal Energy Regulatory Commission ('Commission') in Docket Nos. ER14-1144 and ER14-1145 that approval of the requested relief was driven by 'record-setting' spikes in natural gas fuel costs. It is further clear from the Commission's January 24 and February 11, 2014 Orders approving PJM's requests that such make-whole payments and pricing are permitted only to recover actual, legitimate costs to acquire natural gas that result in pricing above PJM's tariff offer cap," OPSI said.
"Based upon PJM's Docket ER14-1144 petition and the Commission's Order approving it, we believe that affected generators may only be permitted recovery of actual fuel costs incurred in the generation of electricity and only for electricity generated during the authorized period of January 24 through February 10," OPSI said.
"We are concerned, based upon information provided by PJM's Market Monitor, that some generators may be requesting recovery of natural gas 'costs' that they did not in fact experience, but rather which represent simply a published 'spot' cost of natural gas though the generator's actual acquisition costs were well below the spot level. We understand that certain generators also may be asserting that such published cost levels give rise to recoverable 'opportunity costs' associated with the difference between lower-cost contract gas actually burned and this published spot market price," OPSI said.
"In our view, a published spot market price is not a legitimate cost of natural gas acquisition unless it was actually paid. If the spot price was not paid, it may not be recovered under FERC's January 24 Order. Furthermore, we do not believe that the difference between a published spot market price and a lower actual gas contract cost constitutes a recoverable opportunity cost. Generators should not be permitted to profit from sale of contracted gas supply which is then replaced with higher cost spot gas supply to achieve higher PJM market prices. This letter is also to advise you of OPSI's strongly held view, supported by the PJM Market Monitor, that a 10% non-cost adder permitted under your Manual 15 costing method is not permitted under FERC's January 24 Order (see PJM Market Monitor Petition for Clarification and Reconsideration, etc., in Docket ER14-1144-000, at pp. 2-3, filed January 29, 2014)," OPSI said.
"Similarly, FERC's February 11 Order granted PJM's request that these high natural gas costs be permitted to set the energy market clearing price at levels above the $1,000 per MWh price cap after that Order's effective date. OPSI strongly asserts that only actual and legitimate natural gas costs, not market price indices and non-cost adders, can be accepted as the basis for setting an above price cap clearing price," OPSI said
"We strongly urge you to ensure rigorous scrutiny of each make-whole payment request made under FERC's January 24 Order and any price offer exceeding the $1,000 offer cap submitted pursuant to the February 11 Order, and that PJM strictly limit any authorization of either uplift payments or cost-based offers from marginal units that result in system energy clearing prices above the $1,000/MWh cap to actual, legitimate natural gas acquisition costs incurred during the generation of electricity as provided in FERC's Orders," OPSI said.
"We appreciate your attention to this matter of importance to the electric consumers of the OPSI states and look forward to hearing from you soon. Prior to providing payments under these FERC Orders, we request that you provide us a detailed explanation of how natural gas costs will be determined to implement FERC's January 24 and February 11 Orders, including a description of each separate component of fuel cost proposed to be permitted recovery for all units receiving uplift payments and for the marginal unit setting clearing price in the post February 11 period and why it is considered to be a 'cost' based item," OPSI said.
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March 12, 2014
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Reporting by Paul Ring • ring@energychoicematters.com
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