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PJM Seeks to Correct "Windfall" Adder Payments to Mitigated Units -- Costs Already Paid in RPM!
August 27,2014 PJM filed a series of tariff revisions with FERC to revise PJM’s rules related to offer price adders (“FMU adders”) for generation units that are frequently offer capped, referred to as Frequently Mitigated Units PJM said that the tariff changes, "eliminate the unjust and unreasonable status quo that currently exists in which FMU adders act as windfall revenues for most Market Sellers of Frequently Mitigated Units." "Instead, PJM’s proposed revisions will allow FMU adders to serve as an appropriate 'backstop' and provide Market Sellers of Frequently Mitigated Units an opportunity to recover the unit’s going forward costs when they otherwise do not have such opportunity due to the unit’s frequent, mandated mitigation by PJM," PJM said. PJM conceded that as currently designed, the FMU adders allow double recovery of costs, since going forward costs are now designed to be recovered in the Reliability Pricing Model capacity market. It should be noted that the RPM capacity market has been in place, and has allowed for such windfall double recovery, since 2007, but only now -- some seven years later -- is PJM seeking to correct the problem. "[A]lthough the FMU adders were appropriate when they were first approved by the Commission in 2005, as a result several factors, in particular the implementation of PJM’s Reliability Pricing Model ('RPM') in 2006, FMU adders, as they are currently structured, no longer solely cover these going forward costs because such costs are already covered by revenues from other PJM markets, predominantly from RPM. Thus, most Market Sellers that own Frequently Mitigated Units, and that also receive RPM revenues, are currently being compensated above just and reasonable levels," PJM said. "However, because RPM now provides adequate revenues for most Frequently Mitigated Units to recover their going forward costs, the primary justification for needing FMU adders no longer exists for many units. Instead of providing revenue to a Frequently Mitigated Unit when its market revenues are below an amount sufficient to cover its going forward costs, in most cases today FMU adders provide revenues above the amount necessary to cover a Frequently Mitigated Unit’s going forward costs. In fact, in 2013, an IMM analysis concluded that 75% of all Frequently Mitigated Units covered their Avoidable Cost Rate without their Market Sellers receiving FMU adders for those units," PJM said. The key feature of PJM’s proposal to correct this problem, and to ensure Market Sellers are compensated at just and reasonable levels, is that the IMM will examine every Frequently Mitigated Unit on an individual basis every month in order to ascertain whether the Market Seller of the unit is receiving adequate revenues to cover its going forward costs for the unit, and therefore whether or not the Market Seller should be eligible to receive a FMU adder. PJM’s proposed revisions establish this paradigm by specifying that if a Frequently Mitigated Unit receives adequate revenue from all of PJM’s markets during the previous twelve calendar months to cover its going forward costs, the Market Seller for that unit will not be eligible to include a FMU adder for that unit the following month. See More: PJM 206 Filing
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