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Bad Day at Black Oak

Beware even the best of attempts at apportioning grid rights and costs.

Fortnightly Magazine - October 2006

requirements of transmission-owning utilities (TOs), or should regulators equalize rates across a broad multi-state area, using a postage-stamp pricing method, or one of a number of other methods, commonly known as “Highway-Byway.” (FERC Docket No. EL05-121, initial decision issued, July 13, 2006, 116 FERC ¶63,007, briefs on exceptions filed through Sept. 15, 2006.)

Each of these cases, in all their complexity, boils down to a simple inquiry. Is the transmission network a public asset, with costs that must be apportioned on principles of equity? Or, rather, is transmission an instrument of commerce, to be priced so as to maximize trade?

FTRs: Just DFAX, Ma’am

Civil War history buffs will know Chambersburg as the “Day-1” entry point for the rebel army as it marched toward its ill-fated rendezvous with federal troops at the Battle of Gettysburg. For our purposes, however, the problem has to more to do with “Day 2”—the so-called “Day-2” wholesale power markets operated by regional independent transmission system operators (ISOs) and regional transmission organization system operators (RTOs), of which PJM is one. More to the point, however, Chambersburg finds that to gain transmission access for its power imports, it must rely largely on the Beddington-Black Oak transmission line (hereinafter “Black Oak”), notorious as one of the most heavily congested flowgates in the PJM system, if not the worst. PJM also has included Black Oak as one of its scarcity pricing regions, meaning that locational marginal prices (LMPs) can exceed the bid cap under certain prescribed situations. This fact, according to the complaint, helped create LMPs in excess of $2,000 on May 30 at the related Grand Point node, no doubt leading other market participants to review their hedge protection against congestion on the line.

In fact, PJM acknowledges that region-wide load growth, together with increased loop flows, plus an increase in demand to hedge congested paths such as Bedington-Black Oak, led to a substantial increase (6,000 MW) in ARR nominations earlier in 2006.

Thus, when ARRs become over-subscribed, forcing PJM to cut back (prorate) ARR nominations to achieve that single combination of simultaneously feasible source/sink pairs yielding the maximum total of auction revenues, it looks first to curtail those ARRs nominated across the key choke points, such as Black Oak. In that way, PJM ensures that the congestion revenues it earns from the differentials in LMPs on actual wholesale transactions in its spot energy market will prove sufficient to pay off the hedging rights claimed by holders of FTRs.

On the face of it, PJM’s ARR allocation appears discriminatory as applied to Chambersburg, though it apparently was conducted according to the letter of the tariff.

The PJM tariff prorates ARRs “in proportion to the MW-level requested and in inverse proportion to the effect on the binding constraints. In practice, PJM prorates excess ARR nominations by reference to the power supply distribution factor (DFAX), which denotes what proportion of a given transaction must flow over a given constraint or grid feature. Each ARR is treated equally. Thus, given a line with a 30-MW capacity, and two separate requests for ARRs worth