[00:00:00] Speaker 08:
Case number 17-1101 at L. New Jersey Board of Public Utilities at L petitioners versus federal intermediary commission.

[00:00:11] Speaker 08:
Mr. Mays for Petitioner Monitoring Analytics, LLC.

[00:00:16] Speaker 08:
Mr. Hall for Petitioner AMP, Inc.

[00:00:19] Speaker 08:
Mr. Vista West Nathan for Respondent First.

[00:00:22] Speaker 08:
Mr. Flynn for Engineer PJM Interconnection, LLC.

[00:00:27] Speaker 07:
May it please the court, I'm Jeff Mays, counsel for the Independent Market Monitor for PJM.

[00:00:35] Speaker 07:
I will speak to the first issue in this case, the definition of congestion revenue and whether congestion revenue includes balancing congestion revenue.

[00:00:45] Speaker 07:
Congestion revenue is created when load pays more for power than generators are paid for power.

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This chart explains congestion revenue.

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On the left side in blue, half the load is served by a local generator that costs $10 per MWh.

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The other half is served by a generator on the white and yellow that costs only $5 per MWh.

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The cheaper generator can only serve part of load because there is a limiting transmission line connecting the cheaper generator to the load.

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The load pays $10 for every MWh even though half the MWh only costs $5.

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The equation in green shows the difference between load payments and total payments to generation as congestion revenue.

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The simple math here is all that matters in this case.

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The math was sound in 1997.

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It remained sound in 2016.

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The contested orders offer no rational opportunity.

[00:01:51] Speaker 06:
Councilman, let me ask you a question at the outset that follows me somewhat.

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If I read the briefs, particularly the government's brief in this case, apparently there is a division of view amongst load serving entities as to whether this present rule helps or hurts.

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Is that correct?

[00:02:11] Speaker 07:
No, that's not correct.

[00:02:13] Speaker 06:
All load serving entities are on your side?

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Load serving entities are on our side.

[00:02:18] Speaker 06:
I beg your pardon?

[00:02:18] Speaker 07:
Load serving entities are on our side.

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All of them?

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Any business that is characterized by being a load service entity is on our side.

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I can't say that none of the financial traders don't have some small-scale operation that would serve them.

[00:02:32] Speaker 06:
No, I'm not talking about financial traders.

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I was puzzled at what the government said that the load service entities actually benefited from its rule.

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Right.

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That's fault.

[00:02:49] Speaker 07:
That's fault and it's right in the mouth.

[00:02:51] Speaker 01:
I'm not sure I understand that because load serving entities are the initial recipients or holders of the ARRs from which the FTRs flow.

[00:03:04] Speaker 01:
And so if the change is something that is intended to increase the value of and decrease the underfunding of FTRs, why is that not something

[00:03:17] Speaker 01:
beneficial to the load serving entities?

[00:03:20] Speaker 07:
Well, because there's no such thing as an underfunding problem the way that the Commission is describing it.

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And the reason is in the math.

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The math shows that LOAD pays $1,000.

[00:03:32] Speaker 01:
But whether there were or not an underfunding problem, if something's bolstering the value of a financial instrument that originates in the hands of the LOAD-serving entities, it's just not clear to me why that would be a detriment to the LOAD-serving entities.

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When the market changed, originally, all LOAD got was FDRs.

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And so that was the only product.

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LOAD got an FDR.

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It entitled it to a return of congestion revenue.

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Then in 2003, the rules changed somewhat.

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And instead of getting an FTR, Load was allocated an ARR.

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Load could do two things.

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Load could continue to take the ARR and convert it to an FTR, at least prior to 2016, and receive a return of congestion revenue in the same manner it always had.

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Its second option was to turn the ARR over to the FTR market and then receive auction revenues

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that resulted from participants buying FTRs in that market.

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And then those buyers of the FTRs then received the uncertain congestion revenue.

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So the problem in the 2016 order is it undermines all of that.

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In particular, we look at first a load serving entity that gets an ARR and then converts it to an FTR.

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Previously, it would get back a portion of congestion revenue that was paid.

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Now, in addition to getting back a portion of congestion revenue that it pays, it also has to pay a negative congestion charge, a negative balance of congestion charge.

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And there's no reason to pay that charge.

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That doesn't benefit load at all.

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In the FTR market of the- So that's your key fight above all else, is that the, you don't want the load serving entities to be liable for

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the real-time congestion charges.

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That's correct.

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That is it.

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That's the economic fight.

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That's the economic fight.

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You know, I wasn't really expecting there to be a link between the other case and this case, but just as Judge Garland said in reference to the other case, if you have a cash register, you can't pay more out at the Senate.

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That's the fundamental thing going on in this case.

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The cash register is congestion revenue.

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The congestion revenue, it's not a flaw in the market that congestion revenue comes about.

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It's from the normal operation of LMP markets.

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It's because you're... Did you deny the proposition that over the last five years or so, the amount of money in the pot to pay the FDRs has diminished?

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No, as a mathematical matter, the math is always right.

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The math always produces congestion revenue at some level.

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The level of congestion revenue depends on how much power is obtained from the cheaper generators that are on the other side of constraint and how much power is obtained from the local generators on the north side of the constraint.

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That's what produces congestion revenue.

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As a matter of- How can there be- I'm a little puzzled.

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How can there be a disagreement over how much money is in the pot

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to distribute to the FDR holders?

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There should be no disagreement.

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But there is.

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A lot of confusion has been spread about the nature of congestion revenue and what it is.

[00:06:52] Speaker 01:
And one of the arguments that... You can finish your sentence.

[00:06:56] Speaker 07:
I'm sorry.

[00:06:57] Speaker 07:
One of the confusing arguments is one that the commission references, which is the idea they're a hedging product.

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They're not a hedging product.

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They're not a hedging... They've been called an offset.

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And so you could loosely use the word hedge

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to mean the same thing as offset, to mean that when load pays $1,000, it gets back the congestion revenue, in this case $250.

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That's an offset to what it pays, $1,000.

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But it's not a hedge.

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It's not a risk management product.

[00:07:24] Speaker 07:
But there has become some confusion about the nature of congestion revenue and ARRs to associate them with financial derivative risk management type products, and that's not what they are.

[00:07:37] Speaker 01:
And Mr. Mays, I was under the impression that you were challenging the exclusion of the balancing congestion from FTRs.

[00:07:49] Speaker 07:
Well, the exclusion of balancing congestion from the calculation of total congestion revenue.

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There are two stages to the markets.

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There's a day ahead market and a real-time market.

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And in the day ahead market, it determines day ahead congestion revenue.

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Then things change.

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Generator availability changes, transmission constraints changes, low levels change, and so you have a balancing market that gets the final answer.

[00:08:12] Speaker 07:
The final answer is determined, you know, there's, in that balancing market, you have balancing congestion revenue.

[00:08:18] Speaker 07:
That revenue can be positive, negative, or, okay, there could be no change.

[00:08:24] Speaker 01:
Typically negative, no?

[00:08:26] Speaker 07:
In recent years, it's been negative.

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In the early years, it was positive.

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In either case, it's just an adjustment to the total revenue collected.

[00:08:34] Speaker 01:
To the extent that an FTR includes the balancing congestion, it would seem to be a kind of a hedge.

[00:08:43] Speaker 07:
I don't know what risk would be a hedged against.

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I mean, if you mean it is an offset, it's an offset to what load pays.

[00:08:50] Speaker 07:
in terms of it's $1,000 in the location.

[00:08:53] Speaker 01:
Well, if I'm a utility and I have fixed contracts based on the day head market and I'm expecting to receive power at a certain price and then in the real time market, there are obstacles to my getting that and I have to pay more, then that's something that

[00:09:18] Speaker 01:
is an extra cost.

[00:09:19] Speaker 01:
It's unanticipated.

[00:09:20] Speaker 01:
It's not going to be covered by the contracts.

[00:09:23] Speaker 07:
No, that's not really how it works, because the load always pays $1,000.

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And so that's not changing.

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Now, if load wants to get a risk management product against congestion pricing, it can go get a financial derivative, and it can do that voluntarily in their markets that would allow it to manage those risks.

[00:09:42] Speaker 07:
But FDRs don't provide protection against congestion price.

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If you pay a lot of money to the generator in the blue zone, that's money that the generator gets.

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And so there's not going to be any congestion revenue coming back to you from that payment because there is no money.

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The only money that can come back to you is when you pay more under a locational marginal price than what it costs to pay the generator in the cheaper zone.

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And so that money comes back as an offset.

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The reason it does that, the policy behind it is not hedging.

[00:10:14] Speaker 07:
It is to duplicate in L&P markets the same service that was received in the prior regulatory regime, which was firm transmission service.

[00:10:23] Speaker 06:
Why do you care what the label of hedging or not?

[00:10:26] Speaker 06:
Why is that relevant to the lawsuit?

[00:10:28] Speaker 07:
It's only relevant to the confusion.

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I was asked the question, why is it that there's a disagreement?

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And it's the confusion that has, I think, been distraceable to the use of this term, hedging, and misuse of it.

[00:10:39] Speaker 06:
Well, in any event, I'm sort of puzzled.

[00:10:41] Speaker 06:
I'll ask counsel for the government why there's this disagreement as to whether or not there's a shortfall in the distribution for FTRs at the end of the process.

[00:10:53] Speaker 07:
Right.

[00:10:54] Speaker 07:
There is no shortfall.

[00:10:55] Speaker 07:
What they mean, what they will tell you, this is what FERC will look to, is something called the total, what is it?

[00:11:05] Speaker 07:
an allocation mechanism that is used to determine, because once you have load getting all the congestion revenue, you have to allocate it among various load serving entities.

[00:11:17] Speaker 07:
And so there is a process to allocate those rights among different load serving entities.

[00:11:21] Speaker 07:
So the target allocation, the term I'm looking for,

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That is part of the formula that is used to allocate the money to different loads.

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And so the sum of the target allocations can be different from total congestion revenue.

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It could be higher, lower, or the same.

[00:11:39] Speaker 07:
But that's not underfunding.

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That's just a target that's used to allocate the money.

[00:11:43] Speaker 07:
You think the target is just mistaken.

[00:11:46] Speaker 07:
The target is mistaken, and the target is mistaken because there is a very difficult problem that PGM faces that we've been working on, and that is that in the day-head market, to make the market more efficient, you want that target allocation to be close to what goes on in real time.

[00:12:03] Speaker 07:
That's a lot of hard work.

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I mean, that includes getting the weather prediction right, the load prediction, all of that.

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And so PGM is under a lot of pressure to make it

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its markets more efficient by getting that target allocation closer to real time.

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But that requires real hard work.

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One way to avoid that work is to just take negative balancing congestion and assign it to load, and your problem magically disappears.

[00:12:26] Speaker 07:
But it doesn't, because what it ends up doing is, I mean the net result really, is that load subsidizes speculative activity in the FDR market.

[00:12:34] Speaker 06:
Yes, Tony, I didn't quite understand that in your brief.

[00:12:37] Speaker 06:
Why, it seems to me your basic argument is between

[00:12:41] Speaker 06:
As you see it between the low serving entities and the speculators in the financial market.

[00:12:49] Speaker 06:
That's right.

[00:12:50] Speaker 06:
Why is that?

[00:12:52] Speaker 06:
What is your fight with them and why?

[00:12:54] Speaker 07:
Well, what the FDR market does, and I was mentioning before,

[00:12:57] Speaker 07:
the development over FDRs, the way all bouncing congestion replicas are allocated, and how that moved to the ARR model.

[00:13:05] Speaker 07:
And with that one thing, the load could continue as it always had and have an FDR, or it could go to the auction.

[00:13:10] Speaker 06:
And there... Right.

[00:13:11] Speaker 06:
That's ARR gives an ARR gives them the option.

[00:13:14] Speaker 07:
Right.

[00:13:14] Speaker 07:
It does.

[00:13:15] Speaker 07:
And so the other side of that transaction is someone who says, I'll take the uncertain congestion revenue and I'll make a fixed payment in this market for that product, and then that money will flow to the LSEs.

[00:13:27] Speaker 07:
Right.

[00:13:28] Speaker 07:
So fundamentally, that's an exchange of a fixed payment for a speculative payment about what will happen.

[00:13:34] Speaker 07:
The speculation isn't bad.

[00:13:35] Speaker 07:
It's necessary to make the FGR market work.

[00:13:38] Speaker 07:
The speculation is necessary to make any of the derivatives markets work.

[00:13:41] Speaker 06:
I'm with you so far.

[00:13:42] Speaker 06:
What's that?

[00:13:42] Speaker 06:
I'm with you so far, so go ahead.

[00:13:44] Speaker 07:
So that's why it's speculative activity.

[00:13:48] Speaker 07:
Now, in doing the allocation mechanism, there's this target allocation, which we've already understood is not about... That's sort of your assumption.

[00:13:55] Speaker 06:
The target allocation is your assumption.

[00:13:57] Speaker 06:
Is there assumption in the beginning of how much electricity will flow over what period of time, right?

[00:14:04] Speaker 07:
Right.

[00:14:04] Speaker 07:
It's an assumption, and it's pretty much known to be wrong.

[00:14:06] Speaker 07:
It's known to consistently not predict the level of capability that will actually be in the system in the real time.

[00:14:12] Speaker 06:
So that's your view.

[00:14:14] Speaker 06:
They should just change the target allocations and then there wouldn't be a shortfall.

[00:14:18] Speaker 07:
Right.

[00:14:18] Speaker 07:
We should improve, we should improve modeling.

[00:14:20] Speaker 07:
And I'm, you know, it's a very hard effort.

[00:14:22] Speaker 07:
There's always going to be.

[00:14:22] Speaker 06:
But that assumes a certain efficiency of the capability of the transmission lines themselves, doesn't it?

[00:14:31] Speaker 07:
Right.

[00:14:32] Speaker 07:
It assumes in day and day.

[00:14:33] Speaker 06:
And if you raise your target allocation too high, then you don't have, you may not have the capacity.

[00:14:41] Speaker 06:
to move electricity on the grid.

[00:14:44] Speaker 07:
That's correct, but the talk of allocation really doesn't – it's really not part of what the message are going to make the markets work.

[00:14:50] Speaker 07:
It's just part of how to allocate the rights amongst load, because it's hard to attribute congestion to a particular actor in a network market model.

[00:15:00] Speaker 07:
And so that's really its only role.

[00:15:02] Speaker 07:
And while it would be, you know, the reason why it would be better to have it more accurate is more accurate information earlier is better for markets, but you don't actually need it.

[00:15:10] Speaker 07:
And so what really needs to happen is the congestion revenue has to go back to load and it needs, in the day ahead market when speculators come in, what their role is to buy an FDR based on what they think total congestion revenue will be.

[00:15:27] Speaker 07:
So they are the ones that are supposed to be taking on the risk, that there will be differences in the target allocation ways of the risk, that whatever the day-ahead results will be and whatever the real-time results will be, because that's what produces the congestion revenue.

[00:15:42] Speaker 07:
And so that's the very risk that they're supposed to be taking on yet.

[00:15:45] Speaker 01:
And you argue that they should retain the balancing congestion as part of FTRs.

[00:15:54] Speaker 01:
And I think FERC responds that when allocation of congestion has been part of FTRs, it's just led to load serving entities indirectly paying in terms of reduced ARR allocations.

[00:16:05] Speaker 01:
And they base the new order on trying to respond to that.

[00:16:11] Speaker 07:
Right.

[00:16:11] Speaker 07:
That's a very misleading argument.

[00:16:13] Speaker 07:
And the reason why.

[00:16:14] Speaker 07:
is that in order to make target allocations closer to congestion revenue, VJM took a unilateral action.

[00:16:22] Speaker 07:
and that UNRWA action was to reduce the allocation of ARRs to load.

[00:16:27] Speaker 07:
So less of the system that load paid for by paying for transmission charges is now being allocated to load.

[00:16:33] Speaker 07:
That artificially boosts the FDR price, but it means load gets less of the system it pays for.

[00:16:38] Speaker 07:
It means it gets less total ARR rights.

[00:16:41] Speaker 06:
Does this have anything to do with their decision to reduce the, reduce

[00:16:52] Speaker 06:
the return for LSEs who are operating transmission lines on a legacy basis that aren't really being used.

[00:17:06] Speaker 07:
If I recall, I think that issue was one that PJM proposed as one of its solutions, if I've got you right, that it was one of the solutions it proposed, and that's part of the other issue that will be addressed by the other councilmen.

[00:17:19] Speaker 06:
Are they connected?

[00:17:21] Speaker 06:
Are these issues connected?

[00:17:23] Speaker 07:
There is some connection, but, you know, we have a, you know, there's a whole separate issue with just how the allocation works and how you, you know, because the problem, one problem in the FD

[00:17:33] Speaker 07:
our market that, fortunately, is not part of this case, and it's confusing, but that is that the allocation metric uses paths, the contract paths, to do the allocation, and that really isn't accurate in a network model.

[00:17:45] Speaker 07:
It's the source of a lot of mischief.

[00:17:47] Speaker 07:
It's something we're working hard to correct.

[00:17:49] Speaker 07:
But it is an allocator, and so you have to allocate it some way.

[00:17:53] Speaker 07:
That's the way it's done.

[00:17:54] Speaker 07:
We think there are better ways, but we don't really think that that's an issue in this case.

[00:17:58] Speaker 07:
That's another problem to fix.

[00:18:00] Speaker 01:
Is it accurate, Mr. Mason, to say that other regional markets, FTR-like instruments, do not include balancing congestion?

[00:18:10] Speaker 07:
Well, I know the ISO in New England does it the pre-1960 way.

[00:18:14] Speaker 07:
They do it the correct way.

[00:18:15] Speaker 07:
They calculate total congestion as the day ahead congestion plus real-time congestion.

[00:18:20] Speaker 01:
I thought that the briefing said that several other regional ISOs don't, and I just wondered if that's the case, how could it be not just unreasonable to calculate FTRs based only on the day ahead congestion revenues?

[00:18:37] Speaker 07:
The reason it wouldn't be just and reasonable is because the math here, there's no reason after a load is paid for power LMP to impose a charge for negative balancing congestion that basically exceeds the money in the cash register.

[00:18:51] Speaker 07:
That can't be just and reasonable anywhere.

[00:18:53] Speaker 01:
They're basically double charging.

[00:18:56] Speaker 07:
Yeah, basically you've paid for power and suddenly this artificial charge.

[00:19:00] Speaker 07:
And what is that charge about?

[00:19:01] Speaker 07:
I want to go back to the other question.

[00:19:03] Speaker 07:
Why are they paying this charge?

[00:19:05] Speaker 07:
They're taking this charge because there's this FDR market where they exchange that risk of uncertain payout for a fixed payout, and the parties that have bought that uncertain payout now feel that that risk should be subsidized if this arbitrary metric target allocation isn't met.

[00:19:26] Speaker 07:
And so the very benefit of the transaction in the FTR market to make that change of uncertain to a certain payment is lost because now there's this unhedgeable, you know, I want to use the word unhedgeable.

[00:19:40] Speaker 01:
Right, because didn't you just say earlier that if somebody wanted to hedge against that, they could buy a market?

[00:19:45] Speaker 07:
I mean, if you want to hedge it... They could buy an instrument to... If you want to hedge it, you have to go to a financial derivatives market, one that wouldn't be regulated by FERC.

[00:19:54] Speaker 07:
And so, and you can't hedge, you can't hedge L&P, you just go to a different market.

[00:19:59] Speaker 06:
Counsel, what are your basic legal arguments?

[00:20:02] Speaker 06:
Well, the basic legal argument... It's fair to say that you argue that the change of the

[00:20:12] Speaker 06:
policy on this by FERC was arbitrary and capricious?

[00:20:18] Speaker 06:
Right.

[00:20:18] Speaker 07:
It's arbitrary and capricious.

[00:20:21] Speaker 07:
But also, there's the original.

[00:20:23] Speaker 06:
All right.

[00:20:23] Speaker 06:
That simply means unreasonable, which coincides with the reasonable statutory definition, isn't it?

[00:20:31] Speaker 06:
Yes.

[00:20:32] Speaker 06:
So the only question is whether they're reasonable.

[00:20:34] Speaker 06:
Well, there's an additional.

[00:20:36] Speaker 06:
And you say they're unreasonable.

[00:20:39] Speaker 06:
Why?

[00:20:39] Speaker 06:
Because they've changed from an old system

[00:20:43] Speaker 06:
without adequate explanation?

[00:20:45] Speaker 07:
No, it's unreasonable because they have chosen to regulate by LMP markets.

[00:20:52] Speaker 07:
LMP markets operate a certain way.

[00:20:54] Speaker 07:
They produce congestion revenue.

[00:20:56] Speaker 07:
There is a policy that has not changed.

[00:20:59] Speaker 07:
In fact, sites in their brief that says that we want to duplicate firm transmission in the LMP market as it existed previously.

[00:21:06] Speaker 07:
But what they don't apparently appreciate is that the only way to do that is to return balancing congestion to load.

[00:21:13] Speaker 07:
and not to do what they've done, which is have this totally additional charge placed on top of L&P.

[00:21:20] Speaker 07:
That just makes no sense.

[00:21:21] Speaker 07:
And that's one of the reasons why we're here, is that this really just goes to a core issue of how L&P markets should properly work.

[00:21:28] Speaker 01:
I'm sorry, you can finish your answer.

[00:21:34] Speaker 07:
So if we mess this up, then nothing but problems are going to build on top of it because a core mechanic of L&P will be wrong.

[00:21:42] Speaker 06:
Why isn't this just a policy decision?

[00:21:45] Speaker 07:
The policy decision was to have LMP markets, which was taken in 1997.

[00:21:50] Speaker 06:
I'm sorry, I can't hear you, Castle.

[00:21:52] Speaker 07:
There was a policy decision.

[00:21:53] Speaker 07:
FERC does not have to regulate through competition.

[00:21:56] Speaker 07:
FERC does not have to approve LMP markets.

[00:21:58] Speaker 07:
But in 1997, they did on the basis of extensive expert testimony that explained all of this and how this math works.

[00:22:06] Speaker 07:
And it explained that the purpose of FDRs was to continue to provide firm transmission service to load in the new LMP design.

[00:22:14] Speaker 07:
It explained that balance of congestion is an offset to LMP payments, and that congestion revenue should be returned to load.

[00:22:22] Speaker 07:
And then for 18 years, the Commission implemented that policy.

[00:22:29] Speaker 07:
And in 2012, there was a complaint, and that complaint asked that balancing congestion be charged to load, and the Frick said no.

[00:22:36] Speaker 07:
Then the complaint was filed again in 2013.

[00:22:40] Speaker 07:
Frick said no again with prejudice.

[00:22:42] Speaker 07:
Then in 2015, Frick considered all the evidence again and on hearing confirmed its initial order and said that balancing is not unjust and unreasonable.

[00:22:52] Speaker 07:
But then they changed their mind.

[00:22:54] Speaker 06:
Why is it unreasonable?

[00:22:56] Speaker 06:
I don't understand.

[00:22:57] Speaker 07:
Because they did not change.

[00:22:58] Speaker 07:
The only reason that they give for changing their mind was change in circumstances.

[00:23:03] Speaker 07:
And there is no change in circumstances.

[00:23:05] Speaker 07:
There is no change.

[00:23:07] Speaker 07:
And for one thing, in 2012 and 2013 and 2015, you had the same, the thing they call revenue adequacy was there.

[00:23:15] Speaker 07:
And they explained in those orders that FDR should be valued by the market.

[00:23:21] Speaker 07:
And they were correct.

[00:23:22] Speaker 07:
And they haven't explained anything that's changed.

[00:23:24] Speaker 07:
Nothing changed.

[00:23:25] Speaker 07:
and they were right the first time, and so there's no change.

[00:23:27] Speaker 01:
The second change is... Mr. Mayes, I still don't understand your answer to my very first question, which is why the load-bearing entities object to something when it affects the value of a product that is initially allocated to them.

[00:23:47] Speaker 01:
In other words, if the idea is to prop up the value of FTRs, the FTRs, you can keep them.

[00:23:56] Speaker 01:
trade them into the market.

[00:23:58] Speaker 01:
If they're going to be artificially given more value because the balancing congestion is peeled away, then that's a benefit that you're going to get, no?

[00:24:09] Speaker 07:
Prior to 2016, that would be right.

[00:24:12] Speaker 07:
Prior to 2016, if I converted my R to an FDR, then I would get my share of congestion revenue.

[00:24:18] Speaker 07:
Now, as a result of the contested orders, if I convert my ARR to an FTR, I get a share of congestion revenues, but then a new charge comes along and charges me negative balancing congestion.

[00:24:32] Speaker 07:
And that charge appears out of nowhere, and I'm not helped by the increase in FTR.

[00:24:36] Speaker 01:
But you have an increased FTR payment that is boosted by the absence of that congestion balancing.

[00:24:46] Speaker 01:
presumably helping you offset the cost of the congestion balancing that's no longer being paid through the FTR mechanism.

[00:24:53] Speaker 07:
The boost in the increase in FTR value doesn't help, and part of it is that, you know, PJM continues to underallocate ARRs, so it's a price quantity.

[00:25:04] Speaker 06:
Wait a minute, why doesn't the increase in the value of the FTR help you?

[00:25:09] Speaker 06:
I don't understand that.

[00:25:11] Speaker 07:
It doesn't help because there's another charge that's placed on top of L&P and that all you would expect to get back.

[00:25:19] Speaker 06:
But wait a minute.

[00:25:19] Speaker 06:
If the, what my colleague was pointing out, if the FTR, which you could hold,

[00:25:24] Speaker 06:
increases in value because of what FERC's done.

[00:25:27] Speaker 07:
I'm sorry.

[00:25:28] Speaker 07:
One thing is that the increase in value does not occur to the entitlement to congestion revenue.

[00:25:33] Speaker 07:
There's no increase there.

[00:25:34] Speaker 07:
No change.

[00:25:35] Speaker 07:
So if I take an AR, convert it to an FDR, I get no money back because of the change in value.

[00:25:41] Speaker 07:
There's no change in value.

[00:25:42] Speaker 07:
All I get is the allocation of the congestion revenue.

[00:25:46] Speaker 07:
That's all I get.

[00:25:47] Speaker 07:
I get nothing.

[00:25:48] Speaker 07:
The only change in value that occurs is in the FDR market.

[00:25:52] Speaker 07:
And that is, you know, those LSEs that don't just convert to the FDR, but go to the market and say, we'll get the auction revenues.

[00:26:00] Speaker 06:
Using their option advantage under the AAR.

[00:26:03] Speaker 07:
Right.

[00:26:03] Speaker 07:
Well, they get ARRs.

[00:26:05] Speaker 07:
Yeah.

[00:26:06] Speaker 07:
And so they're not getting FDR revenues anymore.

[00:26:11] Speaker 06:
Well, if you get an AAR, you have an option, don't you?

[00:26:16] Speaker 07:
No, all you get is the auction revenues now.

[00:26:19] Speaker 06:
I thought I understood you had a choice.

[00:26:22] Speaker 06:
Once you had an AR, you had a choice of taking an FTR or going to the auction room, one or the other.

[00:26:27] Speaker 07:
Right.

[00:26:27] Speaker 07:
You get one or the other.

[00:26:28] Speaker 06:
Well, then you could take the FTR.

[00:26:30] Speaker 07:
Right.

[00:26:30] Speaker 07:
If you take the FTR, there's no change in its value.

[00:26:34] Speaker 06:
Yes, I understand that.

[00:26:35] Speaker 01:
Well, except to the extent that its value is, or its payment is increased because the balancing congestion has been, obligation to deal with the balancing congestion has been taken out of it.

[00:26:50] Speaker 07:
If you take the FDR, there's no change in payment.

[00:26:52] Speaker 07:
If I just convert my AR to an FDR, there's no change.

[00:26:56] Speaker 01:
No change from what to what?

[00:26:58] Speaker 07:
There's no increase in payment because FDRs are valued more in the FDR market.

[00:27:03] Speaker 07:
Think of the FDR market as a secondary market.

[00:27:05] Speaker 01:
So an FDR is an obligation and a benefit.

[00:27:11] Speaker 01:
So you have an FDR, and if congestion revenue is positive, you're going to get a share of that, right?

[00:27:21] Speaker 07:
That's right.

[00:27:22] Speaker 01:
And then typically, as I understand from the examples in the briefing,

[00:27:29] Speaker 01:
the same-day market also has some congestion balancing, typically in recent years negative, and that also becomes

[00:27:40] Speaker 01:
part of what the FTR takes on board.

[00:27:43] Speaker 01:
And so they're going to get less of the positive congestion revenue because some of us have, they have an obligation vis-a-vis the congestion balancing, right?

[00:27:54] Speaker 07:
Right.

[00:27:55] Speaker 07:
And load isn't entitled to more than the congestion revenue it pays.

[00:27:59] Speaker 07:
So that's right.

[00:28:00] Speaker 01:
Right.

[00:28:00] Speaker 01:
Nobody is.

[00:28:01] Speaker 07:
FTR is.

[00:28:02] Speaker 07:
Because it would make no sense for load to get paid more than congestion revenue either.

[00:28:07] Speaker 01:
Right.

[00:28:08] Speaker 07:
And so on that side of the equation, it's just congestion revenue.

[00:28:12] Speaker 07:
And I don't think it's really an obligation or a benefit.

[00:28:15] Speaker 07:
It's just an offset.

[00:28:16] Speaker 07:
It's just money that's owed back to load.

[00:28:19] Speaker 07:
And they should not pay this crazy charge that has nothing to do with returning congestion revenue to load.

[00:28:25] Speaker 01:
Maybe the confusion in part is, is there a, so presumably this would only apply to not yet issued FTRs?

[00:28:34] Speaker 01:
It's not going to change

[00:28:36] Speaker 01:
Like, is there any retroactivity problem here?

[00:28:38] Speaker 07:
Is that part of what... I don't think there's a... It's going... We're concerned about just a fundamental change to LMP.

[00:28:44] Speaker 07:
And right now, this rule is in effect.

[00:28:49] Speaker 07:
Right now, you know, more money is being diverted away from load that should get congestion revenue back into other parties.

[00:28:55] Speaker 06:
That's, you know... Were you a moment ago suggesting that the...

[00:29:00] Speaker 06:
The instrument is worth less or could be worth less to you if you got it directly.

[00:29:07] Speaker 06:
The LMP is worth, could be worth more in the auction market than it is if you direct receive it from PNJ.

[00:29:30] Speaker 06:
In the market if you take your ARR and you say I'll take revenues and the ARR is the option right allowing you to keep the the LMP or FTR will you stop talking about LMP you're getting the FTR Keep the FTR of selling Right.

[00:29:52] Speaker 06:
Well, are you suggesting that if you just hold it?

[00:29:57] Speaker 06:
It would not increase in value in accordance with our analysis, but it could increase in value in the auction market.

[00:30:05] Speaker 06:
Is that what you're pointing to?

[00:30:06] Speaker 07:
Right.

[00:30:07] Speaker 07:
It could raise auction revenues if the FDR gets more money.

[00:30:12] Speaker 07:
But you're still at a disadvantage.

[00:30:15] Speaker 07:
What should happen is if I sell my ARR to the FDR holder, it should exchange the rights that I would have had from the FDR.

[00:30:22] Speaker 07:
But instead, unlike the buyer of the FTR, you know, I get the auction revenues, but I also pay the balancing negative reduction charge.

[00:30:32] Speaker 07:
The FTR holder doesn't have to pay that.

[00:30:34] Speaker 01:
But presumably you would get a higher price for that FTR under the new regime because the market knows that

[00:30:43] Speaker 01:
the FTR holder doesn't have to pay the balancing congestion.

[00:30:47] Speaker 01:
And so the question is, if the market's working properly, why isn't that the case?

[00:30:51] Speaker 01:
And given that you're the original holders of the ARR with the option to keep or sell the FTR and that the market should reflect the increased price of the FTR once the balancing congestion is taken out of it, why isn't it a wash for you?

[00:31:08] Speaker 07:
It's not a wash because a lot of load isn't participating in that auction so it doesn't get that benefit.

[00:31:14] Speaker 01:
Because they're keeping the ARR?

[00:31:17] Speaker 07:
Because they convert their ARR directly to an FDR and they don't get any auction revenue.

[00:31:22] Speaker 06:
That's their choice.

[00:31:24] Speaker 06:
That's their choice what's so puzzling to us.

[00:31:26] Speaker 01:
That's what's puzzling to us.

[00:31:28] Speaker 01:
That's their choice.

[00:31:28] Speaker 01:
If the whole point of this reform is to boost the market price of FTR and the market is doing better than the non-market holder of FTR or cashier in of FTR, then why wouldn't that make you want to move into the market?

[00:31:50] Speaker 07:
Boost in the price of FDRs does flow some additional money back to those loading entities that are allocated in AR.

[00:32:00] Speaker 07:
As a result of these rules, you know, they've been allocated less.

[00:32:04] Speaker 06:
Is that your basic objection that the allocation of AARs has changed

[00:32:12] Speaker 06:
to disadvantage certain legacy transmission lines?

[00:32:16] Speaker 07:
That's really a side objection.

[00:32:18] Speaker 07:
The real objection is the mechanics of L&P and that artificially boosting the value of FDRs doesn't make sense.

[00:32:28] Speaker 07:
It's much better to let the market do the valuation of FDRs.

[00:32:32] Speaker 07:
because that's what the market's there for.

[00:32:34] Speaker 07:
This is an artificial intervention, part of it restricting supply, part of it by taking part of congestion revenue, the part that's negative, and taking it out of the calculation and allocating more congestion revenue than actually exists.

[00:32:47] Speaker 07:
And that all comes at the expense of load, and load is worse off when that happens, even if there is some increase in the auction revenues in the auction.

[00:33:00] Speaker 05:
Any other questions?

[00:33:01] Speaker 01:
I just have one other question, and that's about these allocation issues.

[00:33:07] Speaker 01:
The September 15th order mentions that the reforms that PGM proposed to address revenue adequacy had raised allocation issues.

[00:33:20] Speaker 01:
And so that's one of your, you're saying that's a side issue?

[00:33:26] Speaker 07:
One of the changed circumstances that the commission looked at was PJM's unilateral decision and a misguided decision to begin restricting ARRs that it allocated, which harms load because they get less of the system that they're entitled to.

[00:33:42] Speaker 07:
And instead, it does have this boosting effect of the, you know, that we discussed.

[00:33:49] Speaker 07:
But that was a mistake.

[00:33:53] Speaker 07:
And it was unilateral.

[00:33:54] Speaker 07:
And FERC – well, PJM, when it made its filing, it said, the markets have become unjust and unreasonable because we did this.

[00:34:02] Speaker 07:
And we agree with PJM.

[00:34:04] Speaker 07:
The action, the unilateral action that PJM took was – did have an unjust and unreasonable result.

[00:34:09] Speaker 07:
And so we think the reasonable response of FERC to that might have been to order PJM not to do that.

[00:34:15] Speaker 07:
That policy that PJM admitted was unjust and unreasonable.

[00:34:19] Speaker 07:
That would have been rational.

[00:34:20] Speaker 07:
Instead, they looked entirely away from the issues that this pleading concerned, which were all about how to fix the allocation problem and not to change the fundamental mechanic of L&P that determines balancing congestion revenue, and instead ordered that this equation be changed and said that we're going to add this new charge for negative balancing congestion on top of what load pays for L&P.

[00:34:46] Speaker 01:
One thing that's a little unclear to me is that the order says that FTR values are based solely on congestion revenues in the day ahead market, but that FTRs are funded based on revenues from both the day ahead and real-time market.

[00:35:04] Speaker 01:
And what's not clear to me is why isn't the fix for that to let the market set FTR values

[00:35:11] Speaker 01:
to account for both markets rather than to take out of FTR funding the balancing from the same day market, real time market.

[00:35:24] Speaker 07:
Well, to the extent the order said that, it wasn't describing the actual way it works.

[00:35:29] Speaker 07:
They weren't describing L&P and congestion revenue, which is part of this two-stage market design.

[00:35:35] Speaker 07:
There was a decision in 2003 that made some description like that that I saw quoted in the briefs, but that was describing the model that we think is the right model.

[00:35:46] Speaker 07:
So it was a mistaken description.

[00:35:49] Speaker 07:
And the fact that they chose this arbitrary allocator to be the day-ahead-based target allocation just doesn't change the fact that we're only talking about an allocation mechanism, and we're not talking about a mechanism that should determine the size of congestion revenue, which is the only money that should fund FDR payouts.

[00:36:09] Speaker 05:
All right, are there further questions?

[00:36:12] Speaker 05:
Okay, thank you.

[00:36:15] Speaker 05:
Mr. Hall, you have seven minutes.

[00:36:34] Speaker 03:
May it please the Court, my name is Garrett Hall.

[00:36:37] Speaker 03:
I represent American Municipal Power Inc.

[00:36:40] Speaker 03:
and I am going to address the next two issues, thankfully the only two remaining issues.

[00:36:46] Speaker 03:
These issues relate to what PJM had actually proposed in its initial filing that underlies the two decisions that are at issue in this case.

[00:36:59] Speaker 03:
In contrast, what Mr. Mays was addressing was the remedy that the Commission had adopted and in the process, or at the same time, rejected the two proposals that PJM had put forth and that I'm going to discuss.

[00:37:18] Speaker 03:
So the first of these is the portfolio netting issue.

[00:37:21] Speaker 03:
And the portfolio netting issue has to do with positive FTRs and negative FTRs.

[00:37:30] Speaker 03:
Positive FTRs correlate to an actual flow of energy on the transmission system and over a congested path.

[00:37:42] Speaker 03:
And in contrast, the negative FTRs are essentially a speculative interest instrument that is held typically by financial participants in the market.

[00:37:57] Speaker 03:
It has a purpose.

[00:37:58] Speaker 03:
It does facilitate some more FTR allocations.

[00:38:05] Speaker 06:
Make clear what the negative FTR does.

[00:38:09] Speaker 03:
So the negative FTR

[00:38:12] Speaker 03:
I guess it's best to compare it to the positive FTR.

[00:38:14] Speaker 03:
In the case of the positive FTR... We know the positive FTR.

[00:38:18] Speaker 03:
Okay, so the holder is receiving, in that case, a payment when there's activity on that path.

[00:38:27] Speaker 03:
And so in the case of the negative FTR, that holder of that negative FTR is paying into the pool of funds that are used to fund the FTRs.

[00:38:40] Speaker 01:
That's the only thing I understand about it because in a locational marginal price market, the way that I understand from the papers in this case, there is congestion revenue.

[00:38:56] Speaker 01:
It's a positive.

[00:38:58] Speaker 01:
So I don't see where there's a negative FTR.

[00:39:02] Speaker 01:
If the whole point of the FTR as an instrument is because

[00:39:08] Speaker 01:
generators offer power into a market at varying prices and the market clearing price is going to be higher than the price at which certain generators are willing to deliver power, then there's going to be this revenue where that's the difference between the price of some offers and the market clearing price.

[00:39:28] Speaker 06:
Am I correct in the negative is a situation where the price at the sink is lower than it is at the source?

[00:39:38] Speaker 06:
Is that the point?

[00:39:39] Speaker 03:
That's a true statement, but I don't think that was Judge Pollard's point.

[00:39:45] Speaker 03:
Hers, I think, is more fundamental, and that is she wants to know what is the origin of this animal.

[00:39:51] Speaker 03:
And so, by way of elaborating, everything that you said, Judge Pollard, is correct.

[00:39:58] Speaker 03:
That is how the FTR comes to be.

[00:40:01] Speaker 03:
But layered on top of that allocation of FTRs and that market for FTRs, that volume of FTRs,

[00:40:08] Speaker 03:
is an additional volume of positive FTRs that are facilitated by the auctioning off of negative FTRs.

[00:40:16] Speaker 03:
So this is basically incremental to what the real capability of the transmission system is, and it's essentially an artificial FTR in a sense.

[00:40:28] Speaker 03:
It has negative value in relation to the positive FTR that it corresponds to.

[00:40:35] Speaker 01:
And it's not a creature of congestion balancing.

[00:40:40] Speaker 03:
I didn't hear your question.

[00:40:41] Speaker 01:
I said it's not a creature of congestion balancing.

[00:40:45] Speaker 03:
I guess, in my view, I don't think that it's directly related to congestion balancing in the sense that the positive FTRs that are allocated up to a level that reflects the actual capability of transmission system.

[00:41:04] Speaker 03:
It's something beyond that.

[00:41:07] Speaker 03:
But it does exist, and so probably debating its origin isn't maybe the best use of the next couple minutes.

[00:41:13] Speaker 03:
But what I would like to explain a little bit is the nature of the problem with the netting of these two instruments against one another.

[00:41:23] Speaker 03:
And the problem revolves around which parties hold them and

[00:41:30] Speaker 03:
and the effect of the netting on the different parties and how the parties are holding those FTRs.

[00:41:37] Speaker 03:
If the parties happen to be holding positive FTRs in a portfolio that includes negative FTRs and they're allowed to net against them, they can avoid some of the payment obligations that would normally be corresponding

[00:41:53] Speaker 03:
with the negative FTRs or in the reverse scenario, they can be avoiding the effect of an underfunding, a so-called underfunding of FTRs by essentially getting more value for the positive FTRs that they have in their portfolio.

[00:42:12] Speaker 03:
And this situation is usually associated with the financial market participant.

[00:42:17] Speaker 03:
A load serving entity generally doesn't hold what the commission in its orders has described as a speculative, maybe with a positive value, speculative negative FTR.

[00:42:30] Speaker 03:
So the load serving entities, the entities that have an obligation to serve customers and therefore the customers are the ones who are disadvantaged by this treatment.

[00:42:43] Speaker 06:
So if you were to eliminate the under the order, the netting, you would make what?

[00:42:51] Speaker 06:
You would make speculation.

[00:42:53] Speaker 06:
much less desirable, is that correct?

[00:42:55] Speaker 03:
Not necessarily, there was some argument in that vein and really sort of you're I think getting to the crux of the legal issue here which is whether FERC properly explained or fully explained, reasonably explained the decision that it made and our view is that it did not.

[00:43:17] Speaker 03:
For recognizing the problem, there's basically no factual dispute here in terms of what the problem is, I don't think.

[00:43:25] Speaker 06:
I'm not sure I understand what the problem is.

[00:43:28] Speaker 06:
I don't understand why netting is not sort of an obvious way of handling the market.

[00:43:37] Speaker 03:
Well, there's some form of netting no matter what, and that happens at the end of the day.

[00:43:40] Speaker 03:
It's really a question of the timing of the netting.

[00:43:42] Speaker 03:
Is the netting done within the portfolio, or is it simply a function of the settlement process?

[00:43:49] Speaker 03:
And so if these two instruments had exactly the same value, the timing wouldn't matter.

[00:43:58] Speaker 03:
Here, they do have different value because of this payout ratio.

[00:44:02] Speaker 03:
And so if you have a portfolio and you have one instrument that has an obligation to pay and another that has a right to receive revenue, the right to receive revenue is prorated based on the level of funding that's available, the obligation to pay,

[00:44:23] Speaker 03:
shouldn't be because there's no payment, so why should it be getting the benefit of a shortfall?

[00:44:30] Speaker 06:
Oh, I see.

[00:44:32] Speaker 06:
You want the negative characters to pay through the nose.

[00:44:37] Speaker 06:
They're not supposed to get any benefit from purchasing positive FTRs.

[00:44:45] Speaker 03:
Not exactly, Your Honor.

[00:44:47] Speaker 03:
Pretty close.

[00:44:48] Speaker 06:
The problem that we see is the sort of... You really want to eliminate the value of negative.

[00:44:56] Speaker 03:
Well, the value, you know, taking the FERC's view is that the value will be properly set in the auction, presumably either way.

[00:45:04] Speaker 03:
And that's one of our problems with the explanation for the decision is that FERC recognized the

[00:45:12] Speaker 03:
issue, if you don't want to call it a problem, the scenario where the load serving entities are receiving for their positive FTRs an amount that's less than the portfolio holder does.

[00:45:26] Speaker 06:
So the result of your position would be the elimination of negative FTRs.

[00:45:32] Speaker 03:
We're not taking that position.

[00:45:34] Speaker 06:
No, but economically wouldn't that happen?

[00:45:37] Speaker 03:
Would that happen?

[00:45:38] Speaker 03:
Yeah.

[00:45:39] Speaker 06:
Is that your desirable objective?

[00:45:42] Speaker 03:
No, it isn't the desirable objective of my clients, and I don't think that that would necessarily happen.

[00:45:48] Speaker 03:
It's possible that those negative FTRs would receive less value in the auction process, but I don't think that they would go away.

[00:45:56] Speaker ?:
I see.

[00:45:58] Speaker 03:
Other questions?

[00:46:00] Speaker 05:
All right.

[00:46:01] Speaker 05:
I'm sorry.

[00:46:04] Speaker 05:
We'll hear now from the first.

[00:46:14] Speaker 02:
Good morning, honored to be here on behalf of the Commission.

[00:46:18] Speaker 02:
So if I can just briefly touch on a couple of the concepts that came up with respect to this netting rule, and then I'll turn back to the many questions on the issue of balancing congestion.

[00:46:31] Speaker 02:
George Pillard, you asked the question about the point of the negative financial transmission rights, also known as counterflour rights.

[00:46:41] Speaker 02:
The point of these rights, I think it's a little confusing to refer to them as positive and negative.

[00:46:46] Speaker 02:
I mean, the way to think about that is that they're opposite payment streams.

[00:46:50] Speaker 02:
If you recall, you probably don't recall this from our brief, but the way in which PJM limits

[00:46:56] Speaker 02:
the number of the rights that are available is based on the physical capability of the various transmission lines.

[00:47:03] Speaker 02:
So if you can imagine a very simple example where you have a line that from point A to point B that supports 100 megawatts of financial transmission rights, that is the maximum number of rights that that line can hold.

[00:47:17] Speaker 02:
The only way to get more, so for example if there's demand of

[00:47:22] Speaker 02:
Let's say 125 megawatts.

[00:47:25] Speaker 02:
The only way to support that additional 25 megawatts of demand for positive or prevailing flow of financial transmission rights is if someone else comes in and says, I will buy the counter flow or negative value right for that 25 megawatts.

[00:47:40] Speaker 02:
Because the net there is zero.

[00:47:44] Speaker 02:
Because remember, the way positive value rights work is

[00:47:48] Speaker 06:
Now tell me why somebody would buy the negative if the likelihood of transmission was only 100.

[00:47:57] Speaker 02:
Well, because I think that if you're acquiring the negative right, if you think about it in terms of the auction, you are receiving the auction price and you are paying the expected value of congestion.

[00:48:15] Speaker 02:
So if you're a party interested in buying counter flow or negative value rights, what that means is you're making a calculation or a bet that you think that what you're going to receive

[00:48:26] Speaker 02:
in terms of the auction price, is going to benefit you more than what you have to pay, okay?

[00:48:33] Speaker 02:
So remember, if you're acquiring a positive financial transmission rate, you are paying the auction price, and then in return, PJM is going to pay you the value of congestion in the day ahead market.

[00:48:46] Speaker 06:
Well, I had that question earlier, whether the negative FTR was essentially a situation where the price

[00:48:55] Speaker 06:
at the sink was less than the price of the source.

[00:49:01] Speaker 06:
Is that what happens?

[00:49:02] Speaker 02:
That's exactly right.

[00:49:04] Speaker 02:
And so the only way that PJM is going to, part of the reason they have this physical limit is we are not going to pay positive value rights more than the congestion that we expect to receive.

[00:49:16] Speaker 02:
But so if they're, in my example, the 25 megawatts of additional positive rights,

[00:49:22] Speaker 02:
In that scenario, there's no additional funding that PJM has to come up with in terms of congestion.

[00:49:28] Speaker 02:
So whatever PJM owes to that additional 25 megawatts of positive rights is being covered and paid by the negative right holders who are paying the 25, who are acquiring the 25 megawatts of negative or counter-floor.

[00:49:41] Speaker 02:
So that's the point of it.

[00:49:42] Speaker 01:
It essentially- But I think, I mean, maybe Judge Silverman's content with the answer to his question, but why would anybody buy that?

[00:49:50] Speaker 01:
And why is it even something that FERC can regulate if it doesn't correspond to any actual physical value?

[00:50:01] Speaker 02:
Well, I think the point that, I mean, first of all, it's not as if there are certain market participants who acquire certain kinds of rights and others that only acquire.

[00:50:12] Speaker 02:
So it's not as if financial speculators are the only ones acquiring counterflow rights.

[00:50:17] Speaker 02:
We know from our record that load serving entities do, in fact, acquire counterflow rights.

[00:50:22] Speaker 02:
They do it to create different sort of hedges within their portfolios.

[00:50:29] Speaker 02:
As I mentioned before, the counter-floor rights don't affect the funding levels.

[00:50:34] Speaker 02:
This is something that I think all market parties in this proceeding have agreed at some point before the commission that negative value counter-floor rights are actually beneficial to the market because, as I mentioned before, they enable additional demand for positive value prevailing floor rights to be supported.

[00:50:54] Speaker 02:
It allows for a more robust trading of the marketplace.

[00:50:57] Speaker 02:
Each negative FDR allows the creation of a positive.

[00:51:02] Speaker 02:
Exactly.

[00:51:03] Speaker 02:
The only way you can get negative rights is if the capability on that particular financial transmission right pathway is full.

[00:51:12] Speaker 02:
So that's why I use the example of the 100 megawatt pathway because it allows you more than that.

[00:51:19] Speaker 02:
I'll turn quickly to the issue of – there's been quite a bit of – quite a few questions on this issue of what the benefit or harm is to load serving entities from the real-time costs that have been referred to as balancing congestion.

[00:51:35] Speaker 06:
The point of PJ – What do you do with this basis argument that the entire premise of FERC's opinion is wrong?

[00:51:42] Speaker 06:
There is no diminution

[00:51:45] Speaker 06:
in the value of the FDRs at the end of the process.

[00:51:50] Speaker 06:
So there's plenty of money to pay them off.

[00:51:53] Speaker 02:
Well, I think that's based on some sort of theoretical idea that there's no such thing as underfunding.

[00:51:59] Speaker 02:
I mean, we know for a fact that that's not true.

[00:52:01] Speaker 02:
That's not how the market operator has ever viewed this marketplace.

[00:52:04] Speaker 02:
They come up with a report on a regular basis that shows how much revenue has been collected from congestion-related price differences in the day ahead market.

[00:52:17] Speaker 02:
We know for a fact that... I thought I understood him to say it had to do with the target allocation.

[00:52:22] Speaker 02:
Yeah, and the way that PJM defines target allocation is by reference to day ahead energy market prices.

[00:52:27] Speaker 01:
That's really the question.

[00:52:29] Speaker 01:
And this is in your opinion, FTR values are determined solely based on congestion price differences in the day ahead market.

[00:52:37] Speaker 01:
Why?

[00:52:38] Speaker 01:
I mean, if we have these two kinds of congestion that have to be dealt with, and what we're looking for is some kind of instrument to smooth the bumps for load,

[00:52:52] Speaker 01:
it would seem to be that the real-time market is at least as important to include in those instruments.

[00:52:58] Speaker 01:
And it just seems artificial that FTA values would be determined based on only the day ahead market.

[00:53:04] Speaker 02:
Well, I think part of the problem there is that the way these products have been defined from the outset, which is not before the score.

[00:53:10] Speaker 02:
This is a product that's existed in PJM for almost 20 years.

[00:53:14] Speaker 01:
And it has included congestion balancing.

[00:53:17] Speaker 01:
Well, we are in fact in the course of a redefinition of this product now.

[00:53:21] Speaker 02:
Well, I mean, I think what PJM tried to argue here is that there is a difference and inconsistency between how the products are valued or priced versus how they are settled or paid out.

[00:53:35] Speaker 02:
And what that means is that the way the product is valued or priced is based on the market's expectation before the auction.

[00:53:43] Speaker 02:
By whom?

[00:53:44] Speaker 02:
I thought the market was supposed to price them.

[00:53:47] Speaker 02:
The market is pricing them with respect to the auction.

[00:53:50] Speaker 02:
That is that the market is making an expectation of what the congestion-related price differences will be in the day ahead market.

[00:53:58] Speaker 02:
As a result of the issue of real-time costs or balancing congestion, it's not just

[00:54:04] Speaker 02:
The way these rights are paid out is not just based on day ahead energy market price differences, which is what this product was created.

[00:54:12] Speaker 02:
We have commission precedent on that.

[00:54:14] Speaker 02:
PJM has said that in the record, that the point of this product was to offer a hedge against congestion related prices in the day ahead market.

[00:54:20] Speaker 02:
But as a result of the consistent underfunding, the underfunding being the real time, the largest contributor of underfunding I think in our record,

[00:54:29] Speaker 02:
is that those real-time costs are the biggest source of that.

[00:54:32] Speaker 01:
What's your best site for that, that the largest source of underfunding in the market is?

[00:54:38] Speaker 02:
So there's a number of sites in the record.

[00:54:43] Speaker 02:
So for it, I can give you the commission order sites first, and then we can go to the record as well.

[00:54:48] Speaker 02:
In the orders, JA 472 paragraph 96, as well as JA 887 paragraph 75,

[00:55:00] Speaker 02:
And what the commission was relying upon there was, there's a report by, there's an analysis that PJM did in one of its filings in this record.

[00:55:08] Speaker 01:
So you say there in paragraph 96 that the inclusion of balancing congestion in the FTR settlement process has been a leading cause.

[00:55:15] Speaker 01:
of FTR revenue inadequacy.

[00:55:18] Speaker 01:
And do you have any data or studies to support that?

[00:55:21] Speaker 02:
Absolutely.

[00:55:22] Speaker 02:
So if you turn to, there's a couple different places.

[00:55:25] Speaker 02:
There is JA 839 to 840.

[00:55:29] Speaker 02:
And this is a filing by PJM.

[00:55:33] Speaker 02:
And what it essentially, there's a chart on, I think it's, yeah, so the chart is on page JA 840.

[00:55:39] Speaker 02:
What it's depicting there is levels of funding for financial transmission rights

[00:55:45] Speaker 02:
when those real-time costs are taken out of the funding for financial transmission rights versus when they're kept in.

[00:55:55] Speaker 02:
So the top graph there shows that we're mostly at 100% when those real-time costs are not taken out of funding for financial transmission rights.

[00:56:08] Speaker 02:
I'll just point out that there hasn't really been a dispute in the record that

[00:56:14] Speaker 02:
those real-time costs, balancing ingestion, is a large source of underfunding of financial administration rights.

[00:56:20] Speaker 02:
I think they dispute the concept of whether underfunding exists in the first place.

[00:56:24] Speaker 01:
Right, and I'm sort of mystified by that, because my understanding of how a market is supposed to work is that you wouldn't keep period after period expecting to get funded at a level that corresponds to only one element of the risk that your instrument

[00:56:44] Speaker 01:
is actually representing.

[00:56:47] Speaker 01:
And I just don't understand that.

[00:56:48] Speaker 01:
Why these would be valued consistently based on the day ahead market when in fact they end up being paid based on the day ahead in the real time market.

[00:56:57] Speaker 01:
I just, I don't understand that.

[00:56:59] Speaker 02:
Sure, and I think that that is the central problem that PJM was trying to deal with because as a result of those real time costs being taken out of the value.

[00:57:07] Speaker 02:
No, no, no, no, no.

[00:57:08] Speaker 06:
What my colleague is asking is a question that puzzles me too.

[00:57:11] Speaker 06:
Why the devil

[00:57:13] Speaker 06:
doesn't the auction price reflect in the past the fact that the real time was balanced at the end?

[00:57:23] Speaker 06:
I mean, if you're buying the FDR on the market, you have to think about, well, gee, what happens if a tree falls?

[00:57:32] Speaker 06:
And we can calculate the risk of that.

[00:57:35] Speaker 06:
And therefore, that should be reflected in the price.

[00:57:39] Speaker 06:
So I think both of us, the puzzle is why

[00:57:43] Speaker 06:
doesn't the price at the auction reflect the risk of daily balancing or real-time balancing?

[00:57:51] Speaker 06:
Well, so I want to be clear about that.

[00:57:52] Speaker 02:
It absolutely does affect the price.

[00:57:54] Speaker 06:
Is that the same question you are counseling?

[00:57:55] Speaker 06:
Yes.

[00:57:56] Speaker 02:
So it absolutely does.

[00:57:58] Speaker 02:
The value at auction is affected by those real-time costs in the sense that the market has an expectation of underfunding, and that's depressing the price at the auction.

[00:58:09] Speaker 06:
And I think this gets to... But that's assuming the conclusion.

[00:58:11] Speaker 06:
Why does the market assume underfunding?

[00:58:14] Speaker 06:
Why doesn't the market assume if we pay the price, it'll be adequate funding?

[00:58:19] Speaker 02:
I don't get it.

[00:58:20] Speaker 02:
What's wrong with the market?

[00:58:22] Speaker 02:
That's what I don't care.

[00:58:23] Speaker 02:
Well, I think that the market is assuming underfunding because the last few years have shown that there is underfunding in this.

[00:58:31] Speaker 05:
So the underfunding is a representation of the risk of what's happening in the real-time market.

[00:58:38] Speaker 02:
That's exactly right.

[00:58:39] Speaker 05:
And I think that this... So it's a proxy for that.

[00:58:41] Speaker 05:
So that is the way in which the market is doing exactly what Judge Silverin is asking.

[00:58:44] Speaker 02:
Yes, that's exactly right.

[00:58:46] Speaker 02:
And I think that this goes to the question of... But why?

[00:58:49] Speaker 06:
Why would the market underfund?

[00:58:50] Speaker 06:
Why wouldn't the market fund them?

[00:58:53] Speaker 06:
Which is so puzzling to me.

[00:58:55] Speaker 02:
This is a consequence of the way that the rules existed in PGM for how these products were

[00:59:02] Speaker 02:
And I think that's the problem that he's trying to get at.

[00:59:05] Speaker 02:
Maybe the intervener can answer that question.

[00:59:07] Speaker 02:
Well, I think that – let me try to get to the question that's been asked that is related to this about benefit or harm to the load-serving entities from this issue of the real-time costs.

[00:59:20] Speaker 02:
I think I started mentioning this before.

[00:59:23] Speaker 02:
The central problem here that PJM was trying to address was funding levels for financial transmission rights.

[00:59:28] Speaker 02:
As a result of these real-time costs, as a result of this underfunding of financial transmission rights, there's really three ways in which load serving entities are harmed.

[00:59:36] Speaker 02:
They're harmed because they get less congestion revenue, they're harmed because they get less auction revenue, and they're harmed because there are few auction revenue rights in them.

[00:59:43] Speaker 02:
Let me briefly explain that.

[00:59:46] Speaker 02:
As you mentioned before, I think, Judge Silverman,

[00:59:47] Speaker 02:
You're correct that load serving entities absolutely have a choice between whether they keep the auction revenue that comes from auction revenue rights or whether they convert it to get congestion revenue from financial transmission rights, and that happens all the time.

[01:00:01] Speaker 02:
We know for a fact that load serving entities absolutely do that.

[01:00:03] Speaker 02:
They absolutely take advantage of holding financial transmission rights.

[01:00:08] Speaker 02:
The approach that PJM had taken prior to the orders on review to address the funding issue and was motivated because there was not a stakeholder consensus on a broader set of reforms was, among other things, to

[01:00:23] Speaker 02:
cut the allocation of certain types of auction rights.

[01:00:28] Speaker 02:
What that meant, as we explained in our brief, is that fewer, as they're called, stage 1B auction rights are available.

[01:00:33] Speaker 02:
So if you're a load serving entity that would normally get stage 1B rights, there's a pretty good chance you're not getting that revenue.

[01:00:39] Speaker 02:
So as I mentioned, those are the three ways in which load serving entities are harmed by the funding issues in PJM.

[01:00:50] Speaker 01:
Let me get at this a different way.

[01:00:53] Speaker 01:
Is there a function of the market, the FTR market, whether when it includes balancing congestion or as now excluding balancing congestion, that is supposed to trigger investment in transmission or transmission reliability,

[01:01:14] Speaker 01:
And is part of the desire to separate the two separate kinds of congestion related to that?

[01:01:26] Speaker 02:
I think that I'm not sure how much the financial transmission right market is intended to spur investments in reliability.

[01:01:37] Speaker 02:
I mean, I think the way that that sort of gets looped into this is the issue of the highest priority auction rights, which are called stage 1A auction rights, because as you may recall from the record in the briefs, those are the only auction rights that must be allocated.

[01:01:53] Speaker 02:
And so if there's not enough

[01:01:55] Speaker 02:
If system conditions don't support all the requested Stage 1A rights, then PJM has to sort of rerun their model of how the transmission system functions to make sure they can accommodate them.

[01:02:09] Speaker 01:
Or there are fewer Stage 1A ARs, right?

[01:02:13] Speaker 01:
I mean, that's the whole thing about updating the basis for calculating those rights.

[01:02:20] Speaker 01:
No.

[01:02:21] Speaker 02:
Are you referring to the proposal, the 1.5% demand proposal?

[01:02:25] Speaker 01:
No, the alternative that they adopted about.

[01:02:27] Speaker 01:
about updating them?

[01:02:28] Speaker 02:
So, yeah, so I think that the concern, and I think a lot of this is motivated by the sort of cost shifts that had happened between various auction right holders, because the Stage 1A folks are going to get their auction rights no matter what PJAM needs to, under its rules, rerun the system to accommodate all this.

[01:02:48] Speaker 02:
That can crowd out the other folks, the Stage 1B and Stage 2 auction right holders.

[01:02:54] Speaker 02:
And so part of what was motivating

[01:02:57] Speaker 02:
PGM here was to preserve the value of those products as a hedge against congestion because by addressing the largest source of underfunding of those rights, it strengthens the market for that product.

[01:03:10] Speaker 02:
It has an effect on auction revenues.

[01:03:13] Speaker 02:
And I think we've mentioned this in our briefs and the commission's orders has mentioned this as well.

[01:03:18] Speaker 02:
Why is it that no load service?

[01:03:28] Speaker 06:
serving entities are on your side.

[01:03:32] Speaker 02:
I don't think that's true.

[01:03:33] Speaker 02:
I believe that there's at least one load serving entity that's part of the intervener's group, PSE&G.

[01:03:39] Speaker 02:
Oh, I see.

[01:03:39] Speaker 02:
So I don't think it's fair to say that all load serving entities necessarily agree with the petitioners on this.

[01:03:46] Speaker 02:
I mean, I got to emphasize that I think the commission here was trying to make sure that

[01:03:51] Speaker 02:
this product was working the way it was designed and that's to provide priority to load serving entities.

[01:03:58] Speaker 02:
I don't think anyone disputes the idea that load serving entities should be the beneficiary of congestion revenue to hedge against congestion related costs.

[01:04:07] Speaker 02:
But the way that PJM designed that market to work in the first place was that the way they get congestion revenue is through those products.

[01:04:15] Speaker 02:
And so these orders are intended to preserve the value of those products as they were intended.

[01:04:23] Speaker 06:
One final question.

[01:04:25] Speaker 06:
What is your response to their basic argument that there is no underfunding?

[01:04:30] Speaker 06:
That's an illusion.

[01:04:34] Speaker 02:
I don't think there's support for that at all.

[01:04:36] Speaker 02:
I mean I think that the Commission accepted PJM's explanation here that

[01:04:42] Speaker 02:
There is such a thing as underfunding.

[01:04:44] Speaker 02:
And the way PJM has always defined the funding issue is by reference to day ahead energy market prices.

[01:04:51] Speaker 06:
And so if... Well, I understand the argument is if the target allocation is proper, there's no underfunding.

[01:05:00] Speaker 06:
Isn't that what I heard them argue this morning?

[01:05:03] Speaker 02:
So I think that... I mean, the way I understood it from their briefs was that there's... I didn't understand it from the briefs.

[01:05:10] Speaker 02:
I understood it from this morning.

[01:05:12] Speaker 02:
So the way it seems to be expressed in the briefs was this idea that financial transmission rights holders are not entitled to full funding of those rights.

[01:05:22] Speaker 02:
And by full funding, I mean the target allocation being the difference in day ahead energy market prices due to congestion times however many rights they hold.

[01:05:31] Speaker 02:
The problem with that is that

[01:05:34] Speaker 02:
even if the tariff doesn't require 100 percent funding of those rights, that's a goal that PJM has set out to accomplish.

[01:05:41] Speaker 02:
What it was trying to do here was make sure that the product was working as intended and excluding the largest source of underfunding.

[01:05:50] Speaker 02:
I think this idea of

[01:05:51] Speaker 02:
Underfunding being logical and possibility of there's no such thing of the numbers are always right It's just I mean, that's not how the market operator has defined this product and how it works.

[01:06:00] Speaker 01:
So It seems like they've defined the product in two conflicting ways They've defined the product as valued based on the day ahead market and as funded based on the two markets together and I

[01:06:12] Speaker 01:
I mean, petitioners say that making load bear the costs of balancing congestion is just against the whole premise of the day ahead market.

[01:06:20] Speaker 01:
If you're load and you have to provide for customers, you want to lock in a price 24 hours in advance.

[01:06:26] Speaker 01:
And if you have to pay then, over and above that,

[01:06:31] Speaker 01:
for the cost of real-time balancing, then you've basically made the day ahead price rise after the fact.

[01:06:38] Speaker 01:
Why is that a way to run a market when the whole original purpose, I thought, of these FTRs was to protect the predictability for load?

[01:06:52] Speaker 02:
So first of all, you are right that there is this inconsistency between the valuation versus the funding or settlement.

[01:06:58] Speaker 02:
I think that's the problem BJM was trying to address in the first place.

[01:07:01] Speaker 01:
And I think one of the questions is whose problem is that?

[01:07:04] Speaker 02:
Right.

[01:07:06] Speaker 02:
So the problem here is that you have to look at not just who is paying those real-time costs, but what the purpose of moving those costs out of the financial transmission right equation is.

[01:07:19] Speaker 02:
And I think what PJM was trying to do here was make sure that

[01:07:23] Speaker 02:
there's as much funding as possible for financial transmission rights.

[01:07:28] Speaker 02:
The reason for pulling out those costs, I mean I've already mentioned that they were the largest source of underfunding for financial transmission rights.

[01:07:35] Speaker 02:
The commission pointed out that there's no, you couldn't trace back the, because there's many causes of those real-time costs.

[01:07:41] Speaker 02:
It can't be traced back to any particular

[01:07:43] Speaker 02:
market segment or cause, it's basically any time conditions in the day ahead market are different from the real time market and that can happen from a variety of circumstances.

[01:07:54] Speaker 06:
Is this the key, excuse me for interrupting, is this really the key of the whole thing?

[01:08:00] Speaker 06:
That you, FERC and PMG, yes I think both, have decided that this cost, this daily, this real time cost

[01:08:13] Speaker 06:
which is not attributable to anybody is under your normal rules stuck with the transmission owners.

[01:08:25] Speaker 02:
I think that's exactly right, and I think you're getting to the issue of cost causation, which is where I was going.

[01:08:29] Speaker 02:
The records show that there's not any specific cause or market segment that causes these costs.

[01:08:36] Speaker 02:
There's not any specific segment of the market that's the sole beneficiary.

[01:08:40] Speaker 02:
The record reflects that these costs have system-wide benefits.

[01:08:43] Speaker 02:
That's not something anyone has disputed.

[01:08:46] Speaker 02:
under long-standing Commission policy, the Commission applied those costs broadly to all customers on a pro rata basis.

[01:08:52] Speaker 02:
That's something this Court has affirmed the Commission doing in the past.

[01:08:55] Speaker 01:
It's odd to say they have system-wide benefits.

[01:08:57] Speaker 01:
This is what I had the question about.

[01:08:59] Speaker 01:
Are these markets intended to signal or trigger any kind of ameliorative investment?

[01:09:06] Speaker 01:
I mean, one would think

[01:09:07] Speaker 01:
That's the whole point of having a market, and that where real-time costs are high, that there would be an opportunity for somebody to bring those down and benefit from bringing those down.

[01:09:21] Speaker 01:
what any of these reforms are going for.

[01:09:24] Speaker 02:
I think the problem is that the real time costs, there's really sort of the undercurrent that differentiates the day ahead costs that can be reflected in the market versus the real time costs is that one set of costs is predictable and the other set of costs is not.

[01:09:44] Speaker 01:
One set of costs is not a problem.

[01:09:46] Speaker 01:
It's a revenue that the system skims off

[01:09:50] Speaker 01:
of rate payers, and then everybody is popular because everybody wants a piece of it.

[01:09:57] Speaker 01:
I mean, that's not a problem.

[01:09:58] Speaker 01:
The problem is in the real-time market, where there are actual in-the-world impediments to the delivery of power at the negotiated price, and everyone's tearing their hair out, and no one wants to take responsibility.

[01:10:11] Speaker 01:
And so you've taken the gravy train and said, well, let's just have the FDRs deal with that.

[01:10:17] Speaker 01:
And the real difficulty, we'll say, well,

[01:10:20] Speaker 01:
you know, assign that to load, because end of the day, we assign everything to load.

[01:10:27] Speaker 01:
And I just don't see the logic of sort of apples and oranges of trying to, you know, make the FTR market more attractive.

[01:10:36] Speaker 01:
But just because something else that PGM did to try to do that made a mess.

[01:10:42] Speaker 01:
I mean, it doesn't seem like the kind of change circumstances that

[01:10:45] Speaker 01:
an agency usually relies on.

[01:10:48] Speaker 01:
They made a mess doing it in a different way.

[01:10:50] Speaker 01:
They'll keep making a mess, so let's let them do this so that they stop making those other messes.

[01:10:56] Speaker 02:
Well, so I think that the mess has existed for quite some time.

[01:10:59] Speaker 02:
And I think that, as I mentioned before, it is PJM's goal to try to fund these rights as best as it can.

[01:11:06] Speaker 02:
And so I think from PJM, I mean, I'll let PJM's counsel speak for PJM, but from what I could take from the record,

[01:11:13] Speaker 02:
PJM didn't view it as an option to throw up its hands and say, well, there's nothing we can do about these real-time costs.

[01:11:18] Speaker 02:
I think that what they decided was that, as you put it, nobody can take responsibility for those real-time costs.

[01:11:26] Speaker 02:
The way that typically plays out in other commission contexts is if you can't assign a cause or beneficiary, you can spread it to the market broadly.

[01:11:34] Speaker 02:
And by ensuring that the product itself, and by the way, I don't think

[01:11:39] Speaker 02:
Well, the way that the commission has typically defined this product and its orders is that it is by reference to day ahead market prices.

[01:11:46] Speaker 02:
So if you keep the settlement of the product

[01:11:50] Speaker 02:
consistent with the way it's valued in the day-ahead energy market, that's going to strengthen the product because there's greater funding levels, and that's going to help the entire market in terms of more congestion revenue, greater auction prices, and that will only benefit everyone who participates in this market, first and foremost, load-serving entities.

[01:12:10] Speaker 02:
All right.

[01:12:10] Speaker 05:
You're long over.

[01:12:11] Speaker 05:
Let's hear what PJ says on this.

[01:12:12] Speaker 02:
Thank you very much.

[01:12:33] Speaker 04:
Paul Flynn from PJM.

[01:12:36] Speaker 04:
Let's start with balancing congestion.

[01:12:38] Speaker 04:
You can raise that higher.

[01:12:39] Speaker 04:
Thank you.

[01:12:42] Speaker 04:
Let's start with balancing congestion.

[01:12:45] Speaker 04:
This is essentially a cost allocation issue.

[01:12:47] Speaker 04:
You have a set of costs in the real-time market.

[01:12:51] Speaker 04:
There is a mismatch between compensation in our real-time market, which is what FERC found in paragraph 79 of the rehearing order.

[01:13:00] Speaker 04:
that is actually not necessarily related to generation and load.

[01:13:06] Speaker 04:
They said this is what we've called balancing congestion is not necessarily congestion at all.

[01:13:13] Speaker 04:
And Ferg said that in paragraph 79 of the re-earning order and in the initial order I'd refer you to paragraphs 83 through 85 where they summarize the PGM position that lays that out.

[01:13:28] Speaker 04:
Okay?

[01:13:29] Speaker 04:
So this was a cost allocation question, and the issue is, was it reasonable for it to take these real-time market costs and say it's not appropriate to put those entirely on FTR holders?

[01:13:42] Speaker 04:
And instead, we're going to spread them more broadly.

[01:13:44] Speaker 04:
And that... You said what?

[01:13:45] Speaker 01:
Spread them more broadly, which is what you do when you spend... Why isn't the FTR market a very broad spreading?

[01:13:52] Speaker 01:
In fact, it's a market.

[01:13:55] Speaker 01:
It would be broader than allocating them to load.

[01:13:58] Speaker 04:
The FTR holders is not congruent with all load, okay, because again, many load serving entities are allocated these auction revenue rights in recognition of their payment for the transmission system, and they simply keep them.

[01:14:19] Speaker 04:
And so what they get as a result of being allocated those rights is when we auction off all the financial transmission rights that the system can tolerate,

[01:14:28] Speaker 04:
in this market that you've been referring to.

[01:14:30] Speaker 06:
What percentage of the instruments are held by the load service entities instead of put up for auction?

[01:14:45] Speaker 04:
It is a vast majority.

[01:14:47] Speaker 04:
I don't have a specific, I don't have a specific percentage for you, but the vast majority of loan-serving entities do choose to hold, because the reason they have that, the reason we created that, is to provide them a more steady revenue stream.

[01:15:02] Speaker 04:
Because again, what they're getting is instead of the daily gyrations of congestion as it changes from hour to hour, what they're getting is someone else is assessing, oh,

[01:15:15] Speaker 04:
Here's what I think those gyrations will be, and I am willing to pay this amount of money for a financial transmission right in the auction.

[01:15:25] Speaker 04:
And that steady stream of money goes to the load-serving entities.

[01:15:29] Speaker 04:
We created it so that they could have that certainty, and they like that certainty, and they take advantage of it, most of them.

[01:15:35] Speaker 04:
But you were absolutely right in your earlier comments that load-serving entities always have the right

[01:15:40] Speaker 04:
to simply take the auction revenue rate, which is megawatts between a source and a sink, and turn it into a financial transmission rate, and go ahead and ride the congestion as it changes through the day.

[01:15:53] Speaker 04:
So, FERC in allocating this imbalance in compensation in the real-time market, as we read it, they advance three reasonable grounds for doing that.

[01:16:06] Speaker 04:
Number one, this gets to your point about day ahead,

[01:16:09] Speaker 04:
and basing this on the day.

[01:16:13] Speaker 04:
It has long been the case that financial transmission rates in PJM, since they were first created, were based on real-time market prices.

[01:16:23] Speaker 04:
Why is that?

[01:16:25] Speaker 04:
Real-time market prices reflect everything that a seller can think of that may affect activity the following day.

[01:16:36] Speaker 04:
So by definition,

[01:16:39] Speaker 04:
what happens in real time is something they couldn't expect.

[01:16:43] Speaker 04:
Now, people could be sophisticated, maybe you could say, well, tack on a standard deviation or two, just to account for that.

[01:16:50] Speaker 06:
Is it fair to say that essentially the contested issue in this case is whether the real-time congestion costs should be taken out of the

[01:17:07] Speaker 06:
market, the open law market, and put to the load serving entities.

[01:17:17] Speaker 06:
Now, that could have an economic impact of several different ways to load serving entities, but that's essentially what's happened.

[01:17:27] Speaker 04:
Yes, on the balancing congestion issue, the question is a cost allocation question of should we take these dollars that we refer to as balancing congestion in the real time market, which is compensation.

[01:17:37] Speaker 04:
for short.

[01:17:38] Speaker 04:
And instead of the current rule of saying all the FTR holders pay that, instead spread it over a much larger denominator of all low.

[01:17:48] Speaker 04:
Because again, what gives rise to this?

[01:17:51] Speaker 04:
It is the actions that PJM has to take in real time to keep the system operating.

[01:17:56] Speaker 04:
And it's also where there frankly is a mismatching compensation in the real time market.

[01:18:01] Speaker 04:
And pinning all of that, FERC was saying that, pinning all of that on

[01:18:07] Speaker 04:
the FTR rights holders seems excessive.

[01:18:11] Speaker 04:
They're not the sole beneficiaries, the language they use.

[01:18:14] Speaker 01:
Basic question.

[01:18:15] Speaker 01:
You said the broader, spreading it more broadly across load.

[01:18:20] Speaker 01:
So load all have ARR, and therefore the rights to FTR.

[01:18:26] Speaker 01:
And some more actors in the market, in the FTR market, also have FTR.

[01:18:31] Speaker 01:
So it seems to me if you want to spread those costs broadly,

[01:18:35] Speaker 01:
you would spread them through the FDR market, because that's all of the load, and then the investors, right?

[01:18:42] Speaker 01:
If you're talking about spreading.

[01:18:43] Speaker 04:
Except what you're doing is indirect, okay?

[01:18:46] Speaker 04:
Because it wouldn't be, right now, it's only going to the FDR holders.

[01:18:51] Speaker 04:
Now, to answer your earlier question, it comes back indirectly to harm the auction revenue rights holders, because, as you were surmising,

[01:19:01] Speaker 06:
The price is lower.

[01:19:04] Speaker 06:
The price is lower.

[01:19:04] Speaker 04:
Yes, I am going to put in what FERC referred to as an imprecise risk premium into my FTR auction bid.

[01:19:12] Speaker 04:
Okay, this may... And FERC found that to be economically inefficient.

[01:19:16] Speaker 04:
That's a paragraph 79, paragraph 80.

[01:19:20] Speaker 04:
And so, yes, you could redesign the entire system and say, let's have a system in which we want people to assess

[01:19:31] Speaker 04:
that unknowable risk.

[01:19:32] Speaker 04:
We've put everything we know in the day ahead, and now we've got, by definition, the unknowns in the real time.

[01:19:38] Speaker 04:
Let's force those unknowns.

[01:19:40] Speaker 04:
Let's keep those unknowns in the bids for the financial transmission rights.

[01:19:45] Speaker 04:
And FERC said, no, that's not economically efficient.

[01:19:48] Speaker 04:
It's distorting what's happening, what

[01:19:51] Speaker 04:
That financial transmission right was always intended for and to be good at, which was a hedge against day ahead congestion.

[01:19:59] Speaker 04:
We define what we are trying to do.

[01:20:02] Speaker 06:
Our tariff says the goal.

[01:20:05] Speaker 06:
You certainly have increased the values of the FDR by the RU FERCATS, but at the price of sticking the low service entities, and this is what my colleague was concerned about,

[01:20:17] Speaker 06:
for an extra charge for real-time balance.

[01:20:23] Speaker 06:
Is that fair?

[01:20:26] Speaker 04:
It is spread broadly to load and export.

[01:20:28] Speaker 06:
Well, I don't know why it's spread broadly.

[01:20:30] Speaker 06:
I have the same problem my colleague does.

[01:20:32] Speaker 06:
I don't understand why hitting all the LSEs with the charge for real-time balancing spreads it more broadly than it would be if it was a charge

[01:20:45] Speaker 06:
part of the cost for the FTRs in the broad market.

[01:20:50] Speaker 06:
I don't understand why hitting the LS.

[01:20:52] Speaker 06:
I can understand a different argument which is the LSEs after all own the transmission system and this is a cost we can't allocate to anybody so under our normal law rules we stick the customers with the cost.

[01:21:09] Speaker 06:
I can understand that point.

[01:21:10] Speaker 06:
I don't understand them more broadly.

[01:21:13] Speaker 01:
I have a question that I think might help clarify this.

[01:21:18] Speaker 01:
If I keep an ARR, then I get the congestion revenue from the day ahead market that corresponds to that?

[01:21:33] Speaker 01:
No.

[01:21:33] Speaker 01:
No.

[01:21:35] Speaker 04:
You're a load serving entity.

[01:21:37] Speaker 04:
We allocate you auction revenue rates based on your historic usage of the system and on your load.

[01:21:44] Speaker 04:
And you get the auction revenue rates.

[01:21:46] Speaker 01:
I get auction revenue.

[01:21:48] Speaker 01:
So when people bid on FTRs, I'm going to get a chunk of that.

[01:21:52] Speaker 04:
You're going to get the steady stream of dollars.

[01:21:55] Speaker 04:
that people bid into the FTR market instead of the variation in congestion.

[01:21:59] Speaker 04:
Now, they are anticipating congestion when they put in those offers, but they're taking the risk on the gradations in it.

[01:22:05] Speaker 04:
And what we're saying is we also... I'm sorry, go ahead.

[01:22:09] Speaker 01:
I'm just going to say, so ARR holders and FTR holders, be the FTR holders, load serving entities or others, all those groups

[01:22:21] Speaker 01:
all whatever the auction is encompassing, whether it's encompassing only congestion revenue or also balancing congestion, they all are allocated that in an equivalent way.

[01:22:36] Speaker 01:
Indirectly for the auction revenue rates.

[01:22:38] Speaker 01:
Right.

[01:22:39] Speaker 01:
Because the auction revenue was affected.

[01:22:42] Speaker 01:
Because the auction revenue was affected by what the nature of the revenue that's included in an FTR is.

[01:22:49] Speaker 04:
It's affected by what they bid into the auction.

[01:22:52] Speaker 04:
And so they will use that, what FERC referred to as the imprecise risk premium, to try and factor in the unknowables into that offer.

[01:22:59] Speaker 04:
Right.

[01:23:00] Speaker 04:
And FERC found that was inappropriate, that it was distortive.

[01:23:04] Speaker 04:
Now, we've done this on Day Ahead for a long time.

[01:23:08] Speaker 04:
We've done what on Day Head?

[01:23:11] Speaker 04:
We have based the value of financial transmission rights on Day Head since we established financial transmission rights.

[01:23:19] Speaker 04:
And as I said, part of that is because we are used to having most of our settlements in the Day Head market, and those are the things people can anticipate by definition.

[01:23:27] Speaker 04:
And so that is reflected in a number of tariff provisions that have been in our tariff for quite some time.

[01:23:34] Speaker 04:
the idea that the goal is to return through FTRs the congestion that is under expected conditions.

[01:23:46] Speaker 04:
That's the language we use in Section 7.5.

[01:23:48] Speaker 04:
And so that again is expected conditions.

[01:23:53] Speaker 04:
Now, no one proposed to change those rules.

[01:23:57] Speaker 04:
You can scour the FERC

[01:23:59] Speaker 04:
initial rehearing order for them responding to an argument like you heard here today of, oh, there's no such thing as underfunding.

[01:24:07] Speaker 04:
Oh, you shouldn't set your target allocation on day ahead rates.

[01:24:11] Speaker 04:
And the target is set specifically on day ahead.

[01:24:14] Speaker 04:
This idea of the target, which defines underfunding, is specifically in the tariff set on day ahead.

[01:24:18] Speaker 04:
FERC never responded to an argument that said you shouldn't do that because no one made it.

[01:24:22] Speaker 05:
All right, is there another question from the bench?

[01:24:25] Speaker 05:
Do you have a question?

[01:24:26] Speaker 05:
Thank you very much.

[01:24:28] Speaker 05:
I know there's no time left.

[01:24:29] Speaker 05:
Mr. Mays, you're almost 30 minutes over.

[01:24:31] Speaker 05:
I'll give you one minute to respond.

[01:24:35] Speaker 07:
Thank you, Your Honor.

[01:24:36] Speaker 07:
And the main thing I think I would like to respond to is the only remaining question I think that was in this case about, at least from the perspective of the questions that I received, and that is that you mentioned the gravy train and the FDR market.

[01:24:50] Speaker 07:
And I think it's worth pointing out.

[01:24:52] Speaker 07:
You were talking about the decision to keep the FDR or whether to go to the FDR market and get the auction revenues.

[01:24:59] Speaker 07:
So one thing that should be understood is that the FDR markets have always been consistently profitable.

[01:25:06] Speaker 07:
This means that the money that load gets out of the FDR market in the form of the auction revenues is less.

[01:25:13] Speaker 07:
than the money that the FDR holders are getting.

[01:25:16] Speaker 07:
And so when you talk about underfunding under any understanding, you're not talking about a situation where the FDR holder paid less for the FDR and then doesn't get a larger payout from the market.

[01:25:28] Speaker 07:
They consistently get a larger payout of congestion revenue.

[01:25:33] Speaker 07:
The only question is they don't get as much payout as they would like because the balancing congestion revenue is included.

[01:25:42] Speaker 07:
And so, from the perspective, and I don't want to get into the mind over that.

[01:25:45] Speaker 05:
It's cool, because you're now over a minute.

[01:25:47] Speaker 05:
Are there any further questions?

[01:25:49] Speaker 05:
Thank you.

[01:25:50] Speaker 05:
Mr. Hall, you deserve a half a minute, since you had half of the time available originally.

[01:25:56] Speaker 05:
So let's see what you can do in a half a minute.

[01:25:58] Speaker 03:
All right.

[01:25:58] Speaker 03:
In half a minute, Your Honor, only one thing to respond to, and that was the question regarding

[01:26:07] Speaker 03:
the under allocation of ARRs and the driver behind that and that really gets to the legal issue with the ARR allocation question.

[01:26:17] Speaker 03:
PJM identified itself in its filing that the predominant problem driving down

[01:26:26] Speaker 03:
the ARR allocations in Stage 1B was their own choice to model very conservatively certain transmission outages.

[01:26:35] Speaker 03:
And so our argument is that by not addressing that sort of root cause and acknowledging there was a problem and finding some alternative solution to it that didn't really address what was happening, that's where the commission committed error.

[01:26:52] Speaker 03:
Okay.

[01:26:52] Speaker 05:
Are there any further questions?

[01:26:54] Speaker 05:
No.

[01:26:54] Speaker 05:
Thank you very much.

[01:26:55] Speaker 05:
We'll take the matter under submission.

[01:26:56] Speaker 05:
We'll take a brief break before the next case.