The Pennsylvania PUC, often touted by "merchant" generators as being "enlightened" when its comes to competitive markets (for the PUC's opposition to ratepayer-backed capacity contracts in Maryland and New Jersey), has slammed a proposal to increase the energy offer price cap in PJM to $1,800/MWh this winter, with such offers allowed to set LMP.

Let's see how quickly generators change their tune on the enlightenment of the Pennsylvania PUC, as the PUC warns of negative impacts on retail competition from PJM's sought price cap increase.

"PJM's proposal could result in unwarranted volatility in prices experienced by retail customers that participate in Pennsylvania's electric generation choice program as was the case in the winter of 2013/2014. Volatility creates stress for PJM's load serving entities and could increase potential credit requirements that can contribute to higher costs to consumers and weaken competition – particularly for non-integrated market participants," the PUC said (emphasis added).

The PUC gave additional reasons for opposing the increase in the price cap as follows:

• Market power exists during peak winter demand periods. Allowing energy prices above the $1000/MWh energy offer cap confers additional opportunity on dominant generators to further leverage the market to enhance existing market power advantages.

• PJM experienced serious deficiencies in generator performance during the 2013/2014 winter. These issues are currently being addressed in a recent PJM filing at FERC at Docket No. ER15-623 wherein PJM is proposing changes to how capacity is offered into the auction process. Among other changes, PJM's proposal would impose additional performance obligations and penalties on generation resources. PJM's revision to the energy offer cap serves to only lessen incentives for multiple unit PJM generators to perform on peak since non-performance could be leveraged across other operating units to enhance energy market revenues.

• Generator resource concerns over cost recovery can be addressed effectively and fairly through recovery of all legitimate bids above $1000 through out-of-market make-whole payments consistent with PJM's first waiver filing, which was approved by FERC in ER14-1144-000. The MMU report covered the period January 24 to February 11, 2014. In that Report, the IMM concluded that, for January 28, 2014, there were only seven units belonging to three different market participants in three PJM control zones which had cost-based offers at the $ 1,000 per MWh cap that initially requested payment in this docket, of which three units withdrew their requests prior to the date of this report. The requested waivers were for an additional $583,774 in compensation. Based on the IMM's calculation of actual cost-based offers using actual fuel costs, observed heat rates, and removal of the 10 percent adder, the IMM recommended that the total additional make whole payments that should be paid to these units is $9,118.43.

• During the second waiver period, the Independent Market Monitor's own review of the 49 day period from February 11, 2014 through March 31, 2014 indicated there were no energy offers submitted with incremental curve components above $1000/MWh nor were there any Locational Marginal Prices (LMP) above $1000/MWh as a direct result of the waiver granted at FERC Dkt. 14-1145-000. Further, the IMM determined that none of the units with offers identified with operating rates greater than $1000/MWh ran during the period of the second waiver, none of the offers directly affected energy market prices and none of the offers resulted in uplift payments.

• Actual experience has demonstrated the need to review all such bids for validity above $1000. The MMU Report of March 26, 2014 clearly demonstrated the need to carefully review these very high energy bids. Specifically, the report documented efforts by generators to overstate actual natural gas costs and overstate actual heat rates. All seven of the units requesting waivers for January 28, 2014 purchased gas for less than the estimated price on which their cost-based offers were based and five of the seven had better heat rates than submitted, with the result that the actual cost per MWh of producing power was less than reflected in their original offers. Furthermore, the April 30, 2014 report noted that the IMM is investigating the offer behavior of several units and would take appropriate actions consistent with Attachment M of the PJM tariff. This further emphasizes the need for IMM review of all offer caps above $1000 before permitting recovery of these costs in uplift.

• PJM only cites to one cost-based offer (at $1,724/MWh) as justification for the request to increase the energy offer cap. Selection of a single data point representing an offer price over a few hours should not justify the relief requested. An offer cap of $1000/MWh is an extremely high offer. An offer cap of $1800/MWh is even more extreme. PJM should provide more detailed support to justify its requested relief. As already cited above, actual experience, even during the extreme 2014 winter period, did not demonstrate any substantive need to fundamentally change the existing $1000 offer cap. Additionally, the veracity of this $1,724 bid has not been verified.