On January 8, 2019, FERC approved revisions to the PJM Interconnection, L.L.C. (“PJM”) Tariff and Operating Agreement regarding the use of transmission constraint penalty factors in its market operations. PJM’s filing responds to new market transparency requirements set out in Order No. 844, the result of FERC’s rulemaking addressing uplift cost allocation and transparency in Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”). In accepting PJM’s proposed revisions, FERC found the revisions would provide transparency regarding PJM’s transmission constraint penalty factor procedures and also produce more transparent and appropriate pricing and investment signals that correspond to an underlying transmission constraint.

In Order No. 844, FERC determined that a lack of transparency with respect to transmission constraint penalty factors could lead to unjust and unreasonable rates where market participants are not able to discern their impact on Locational Marginal Prices (“LMPs”) (see April 25, 2018 edition of the WER). As such, FERC ordered RTOs and ISOs to include in their respective tariffs: transmission constraint penalty factor values; the circumstances, if any, under which the transmission constraint penalty factors can set LMPs; the procedure, if any, for temporarily changing the transmission constraint penalty factor values; and, a requirement to provide notice of such a temporary change to market participants as soon as practicable.

FERC accepted PJM’s proposed revisions over three concerns raised by PJM’s Independent Market Monitor (“IMM”). First, FERC declined to require PJM to include a specific deadline for providing notice of changes to transmission constraint penalty factor values, as suggested by the IMM, and found PJM’s commitment to provide the information as soon as practicable was consistent with Order No. 844. Second, FERC disagreed with the IMM that PJM should not use its constraint relaxation logic in limited circumstances for market-to-market coordinated constraints because of potential price divergence concerns. FERC found that it is appropriate to provide PJM flexibility to use its constraint relaxation logic in limited circumstances and only upon mutual agreement with the adjacent RTO for market-to-market coordinated constraints. Finally, FERC found it unnecessary to require that default transmission constraint penalty factor values explicitly take into account other system constraints like RTO-wide reserve penalty factors, as the IMM argued, rather than being based only historical evidence. FERC did, however, encourage PJM to work with its stakeholders to continue to explore areas for improvement in its methodology to calculate default transmission constraint penalty factor values.

A copy of the order is available here.