On February 20, 2018, FERC approved PJM Interconnection, L.L.C.’s (“PJM”) proposal to, among other things, (1) eliminate biddable points at zone nodes, certain generator nodes, certain aggregate nodes, and individual load zones for Increment Offers (“INCs”) and Decrement Bids (“DECs”) and instead align the eligible trading points for INCs and DECs with nodes where generation, load, or interchange transactions are settled, or at trading hubs where forward positions can be taken; and (2) allow trading of Up-to-Congestion transactions (“UTCs”) at hubs, residual metered load, and interfaces, but not at individual nodes.

In its filing, PJM explained that virtual transactions include INCs, DECs, and UTCs. PJM further explained that market participants can use virtual transactions to arbitrage price differences between the day-ahead and real-time markets and hedge exposure to physical positions. PJM stated that, by allowing market participants without physical assets to compete with asset owners and load serving entities, virtual transactions mitigate market power and contribute to the efficient operation of its energy markets. However, PJM explained that under its current market design, certain bidding points were not located where the settlement of physical energy occurs or forward positions can be taken, and it was unclear how virtual transactions at certain bidding points benefit PJM’s energy market.

Accordingly, PJM proposed to eliminate biddable points at zone nodes, certain generator nodes, certain aggregate nodes, and individual load zones for INCs and DECs. Instead, PJM proposed to align the eligible trading points for INCs and DECs with nodes where either generation, load, or interchange transactions are settled, or at trading hubs where forward positions can be taken. In doing so, PJM explained that these changes would facilitate competition between INCs and DECs and physical assets at locations where the injections and withdrawals created by the INCs and DECs in the day-ahead market are most likely to physically occur in the real-time market. PJM also argued that, without these changes, market participants will continue to experience increased financial exposure due to discrepancies between the day-ahead and real-time market models. As a result, PJM argued that systematic differences between day-ahead and real-time provide a revenue opportunity for virtual transactions without providing convergence between the day-ahead and real-time markets.

In addition, PJM proposed to limit UTCs to hubs, residual metered load, and interfaces, but not at individual nodes. In support, PJM reasoned that (1) UTCs create a divergence in either the source or sink location in 90 percent of occurrences, (2) UTCs cannot consistently and accurately drive commitment, dispatch, and pricing consistence between the day-ahead and real-time markets because UTCs have no real-time equivalent, and (3) UTCs’ computational complexity can increase the day-ahead solution time.

In approving PJM’s proposal, FERC stated that the proposed alignment for INCs and DECs more closely mimics the resources that physically operate the system in real-time. In addition, FERC found that PJM’s proposal may improve market efficiency because there is no load, generation, or physical settlement at the nodes that PJM proposed to eliminate for INC and DEC transactions, and that it was unclear how transactions at these nodes can drive price convergence between the day-ahead and real-time markets. With respect to PJM’s UTC proposal, FERC found that limiting eligible bidding points to hubs, residual metered load, and interface (1) will minimize false arbitrage opportunities for certain UTCs, (2) may align day-ahead and real-time transmission constraint profiles, (3) should reduce the solution time for the day-ahead market, and (4) will better drive price convergence between the day-ahead and real-time markets. Thus, FERC found the proposal was just and reasonable and not unduly discriminatory or preferential.

A copy of FERC’s order is available here.