On January 18, 2019, FERC accepted PJM Interconnection, L.L.C.’s (“PJM”) proposed revisions to both PJM’s Amended and Restated Operating Agreement and Open Access Transmission Tariff (“Tariff”) designed to allow PJM to stop using certain resources to calculate the frequency regulation (“regulation”) market clearing price and reduce spikes in the clearing price in PJM’s regulation market. FERC found the proposal to be a narrowly-tailored solution to the price spike problem, while noting that broader issues raised in protests regarding PJM’s proposal were beyond the scope of the proceeding and are currently pending before the Commission in other dockets regarding PJM’s regulation market design.

To ensure just and reasonable compensation for regulation service, PJM uses two different types of regulation signals: a traditional signal called RegA, to dispatch slower, sustained-output resources, and a faster signal called RegD, to dispatch faster, dynamic resources, such as battery storage. PJM also uses a “benefits factor” curve in the regulation market-clearing process to reflect the operational relationship between the RegA and RegD signals. Ultimately, resources providing regulation service in PJM are compensated based on three primary components: (i) performance score (how well a resource follows a regulation signal), (ii) mileage (the absolute amount of regulation up and down), and (iii) benefits factor (expected impact on system reliability). According to PJM’s regulation market design, hour-ahead clearing uses a projected locational marginal price (“LMP”), while the actual market clearing price is determined using real-time LMP.

In April 2017, three entities, including Energy Storage Association (“ESA”), filed complaints against PJM for several changes PJM implemented in its regulation market (see April 18, 2017 edition of the WER). On October 17, 2017, PJM filed a package of Tariff revisions to reform its regulation market design (“PJM Regulation Proposal”). In dual orders concurrently issued on March 30, 2018, FERC rejected PJM’s Regulation Proposal and partially granted ESA’s complaint. Specifically, FERC found that PJM’s then-current Tariff failed to include the methodology for calculating the benefits factor and the parameters for governing its RegD signal (see April 9, 2018 edition of the WER). As of this writing, the complaint proceedings (and associated settlement process) and rehearing of FERC’s rejection of PJM Regulation Proposal remain pending.

On November 20, 2018, however, PJM filed a set of “targeted” Tariff revisions to remove the use of “minimally effective resources” (i.e., those RegD resources with a small benefits factor). As PJM explained, differences between the projected LMP and actual real-time LMP can produce scenarios where actual clearing prices are unexpectedly high. Because the benefits and performance factors are in the denominator of the components that ultimately make up the market clearing price, low numerical values can dramatically increase the resulting clearing pricing—a phenomenon that PJM stated it observed at times in 2018. Therefore, as a means of reducing the frequency of the large spikes in the clearing price, PJM proposed to clear only those resources that have a benefits factor of 0.1 or greater.

Various entities intervened and filed comments, including PJM’s Independent Market Monitor (“IMM”) and Public Citizens. The IMM argued PJM’s proposal did not go far enough in preventing price spikes and asserted that the proposal could create incentives for RegD resources to bid zero, or significantly below their actual costs, to guarantee market clearing. Public Citizen also criticized PJM’s stakeholder process and argued that PJM should have provided more regulation market pricing data in support of its filing.

FERC accepted PJM’s November 2018 proposed Tariff revisions establishing a market rule where RegD resources, with a benefits factor of less than 0.1, will not clear in the regulation market. FERC found that PJM’s revisions were narrowly tailored to address a unique occurrence in the regulation market and would have a minimal impact on how the market functioned. FERC similarly found that the comments from IMM and Public Citizen were beyond the scope of PJM’s narrow proposal and were being considered in the broader complaint dockets and docket on the PJM Regulation Proposal.

PJM’s November 2018 proposal went into effect on January 21, 2019. A copy of FERC’s January 18, 2019 order can be found here.