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Retail Suppliers Slam Generator's Bid to Recover Costs Not Allowed Under PJM Tariff

May 28, 2014

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Copyright 2010-14 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

The Retail Energy Supply Association has slammed a petition from Duke Energy to recover from PJM load about $10 million in unrecovered costs associated with procuring fuel for potential dispatch during January's cold weather.

Essentially, Duke is seeking $10 million for payments associated with gas that Duke procured to burn in one of its power plants in January 2014 for which it was prohibited from collecting as make-whole payments under the tariff. Duke Energy claims that recovery of the costs would be equitable since in procuring gas it was following PJM "directives" to maintain the plants' availability to be dispatched

However, RESA said that granting the cost recovery, which is not permitted under the current tariff language, "would harm the market, principles of market certainty[,] and market participants such as RESA members who may be forced to pay even more for Balancing Operating Reserve ('BOR') costs if these excess gas costs are recoverable via the BOR than they have already paid."

"Duke's Complaint appears to be that it purchased gas but was not called to generate on January 28, 2014. It seeks to recover the costs of the gas that it purchased but could not use when it was not called to run (less costs that it was able to mitigate). Despite the fact that the Tariff and Operating Agreement expressly do not permit Duke to recover these costs, Duke believes that since it acted in accordance with PJM's directions, PJM should indemnify it," RESA said.

"It is important to keep in mind that PJM has a capacity market and pays capacity suppliers to perform when needed," RESA said. "Capacity is the commitment of a resource to provide energy during a PJM emergency. When a generator commits to supply capacity, it receives a capacity payment whether or not it is called to generate. Of course, within the simple capacity construct, there are a myriad of rules, procedures, and payment variations. The Tariff and Operating Agreement, as well as the implementing manuals detail these rules and obligations. Duke is a sophisticated generator owner, LSE and market participant. It showed its prowess with the rules in January 2014 as it detailed its response to the January weather, both on January 22 and 28, 2014. Duke's Complaint should be denied because there is no justification for compensating Duke under an indemnification scenario or as a waiver of the Tariff and Operating Agreement," RESA said.

"[I]t was Duke's decision to purchase the gas. It was Duke's decision to elect its startup cost recovery means [specifically, use of reference-level market-based costs]. Duke, like all PJM Market Participants, is bound by the Tariff and the Operating Agreement," RESA said.

"[I]f Duke's claim is accepted, every uneconomic decision made by a Generator could be subject to a claim of indemnification," RESA warned.

"[T]here is no concrete problem to be remedied," RESA added. "The PJM Tariff and Operating Agreement worked as intended. There are risks to generators every day, but they are merchants and are able to take advantage of LMPs that, in many instances, reward them. The problem is one of economic compensation and, specifically, Duke's choices in response to the cold weather as well as PJM's contacts. At this time, RESA is not in a position to critique either PJM's or Duke's responses to the crisis. RESA members continue to have a number of questions with respect to the actions that resulted in an approximately $600 million BOR. However, Duke's claims are not compensable because those actions were solely within its control and Duke presumably knew what the PJM Tariff and Operating Agreement allowed. Should Duke want to make more global changes to the functioning of the PJM market during Emergencies or otherwise, it should take its concerns to the stakeholders and seek to effectuate change. There is no identified market flaw that resulted in Dukes economic losses (at least none that Duke has identified). There simply is no identified problem. Duke does not meet this prong of the Commission's standard [for a tariff waiver]," RESA said.

In separately filed comments, the PJM Industrial Customer Coalition likewise said that FERC should deny Duke's complaint and waiver request, "because PJM's directive only required Duke to be available, which is a pre-existing obligation incurred by Duke as a Cleared Capacity Resource in exchange for capacity payments."

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