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Keeping Up with Recent Changes to PJM Bills

Load Serving Entities (“LSEs”) operating within the PJM footprint likely noticed some new line items on their July monthly bills and while July invoices may have already been paid, it is crucial for LSEs to understand and accurately forecast charges to make informed rate-setting decisions and hit their margin targets.

10 / 15 / 2018 Power Alan Southworth and Justin Kotwicki, Analysts

Load Serving Entities (“LSEs”) operating within the PJM footprint likely noticed some new line items on their July monthly bills and while July invoices may have already been paid, it is crucial for LSEs to understand and accurately forecast charges to make informed rate-setting decisions and hit their margin targets.

The first of these line items is the “PJM Customer Payment Default,” which is associated with the GreenHat Energy, LLC (“GreenHat”) credit default. Essentially, GreenHat bet on location-specific congestion in PJM’s Day-Ahead (DA) energy market that continued to lose value as transmission upgrades were made. The steep losses in the value of their portfolio forced GreenHat to default on their monthly to payments to PJM. Consequently, all other PJM members were responsible to recoup the tens of millions of dollars in losses that GreenHat’s portfolio had accumulated. To that end, there are two cost components based on the following:

1. PJM membership at the time of the default:

  •  Each of the 992 organizations that were PJM members as of June 21, 2018, are charged the same amount (10 percent of the value of the Financial Transmission Rights (“FTR”) Portfolio in default)
  • $1,677 in July and $2,606 in August
  • This portion of the default charge is capped at $10,000 per member

2. Market activity:

  • The remaining 90 percent is assessed to PJM members based on each member’s portion of total market activity
  • GP saw this line item range from approximately $0.05/MWh to $0.15/MWh in July

PJM members can expect to see this line item on their monthly bill until the entirety of GreenHat’s portfolio is settled in June 2021. PJM staff reiterated that they are unable to estimate the total amount of the default allocation assessment but did indicate that it is likely to be in the tens of millions of dollars.

There are also two new line items associated with the Federal Energy Regulatory Commission (“FERC”) docket No. EL05-121-009 for LSEs to look out for:

1. Transmission Enhancement Adjustment:

  • PJM is retroactively applying their revised transmission project cost allocation methodology for the period of 2007 to January 1, 2016, and assessing the associated charges or credits over the course of July 2018 through June 2019
  • GP saw this line item range from a $1.00/MWh credit in Commonwealth Edison (“COMED”) up to a ~$2.00/MWh charge in Potomac Edison Power Company (“PEPCO”) (Maryland)

2. Transmission Enhancement Settlement:

  • This additional pool of money resulted from two Merchant Transmission Facilities (Linden and Hudson Transmission Project) giving up their Firm Transmission Withdrawal Rights. As a result, the related transmission projects were no longer included as part of the Transmission Enhancement line item, so the associated costs and credits were re-allocated to all LSEs in what is referred to as the “Black Box” settlement in the FERC docket.
  • PJM currently plans to assess this component from July 2018 through June 2019, but reserves the right to extend through December 2025
  • GP saw this line item range from a $1.15/MWh credit in COMED up to a ~$3.00/MWh charge in PEPCO (Maryland)

The potential financial impact shown above was specifically for July. Since the membership component of the PJM Customer Payment Default charge and both Transmission Enhancement line items do not depend directly on usage, we actually expect the $/MWh impact to be greater in months with lower usage. In other words, since the allocation of these money pools are based on PJM membership and transmission tags, respectively, we expect seasonality in the effect on unit cost (i.e., supply rate in c/kWh). See Figure 1 below for an illustration of the impact of these new line items when serving a residential account in PEPCO (MD), and COMED (note: usage based on utility load profiles): 
 

PJM Monthly Billing

Figure 1. Monthly $/MWh impact associated new PJM line items when serving residential accounts in PEPCO (MD), and COMED. Monthly usage based on utility-provided load profiles.

The magnitude of the impact of these new line items is significant -- they could eat away at upwards of $10/MWh of expected margin if an LSE is caught off-guard. On the flip side, since the direction of the impact is location-specific, a large credit that is not considered when setting rates could make an LSE suddenly non-competitive. Regulatory exposure is part of doing business in wholesale power markets but identifying and understanding new charges and credits is a critical part of mitigating that regulatory risk. 

The question is, what should LSEs do about these new line items? One option we suggest is to invoke regulatory change clauses if customer contracts include this type of mechanism. This allows an LSE to pass through the relevant charges/credits during a customer's existing contract via a revised rate. Additionally, LSEs may choose to incorporate these charges into their pricing on a go-forward basis when marketing to new customers. Finally, LSEs could simply eat the costs associated with the new charges and hope to remain both competitive and profitable in the face of market changes. We believe there are more sophisticated ways to forecast the dollar impact of the new charge types utilizing regulatory filings and actual PJM bills across multiple LSEs to assess seasonality and magnitude. 

Be sure to contact GP Energy Management to stay ahead of financial impacts before they occur. We are on call to provide an assessment of your PJM bill. Our analysts can help you to understand and accurately forecast charges to make informed rate-setting decisions and to hit your margin targets. Please click here to contact us