A power trading practice detected last month by PJM Interconnection that spiked power prices and sent loop flows higher by more than 3,000 MW, did not violate the grid operator’s market rules, and instead was the result of flawed incentives for market participants who were attempting to maximize the price they received for power, the head of PJM’s market monitoring unit (MMU) said last Tuesday.

PJM last month moved to correct a power trading practice because of the “large and growing discrepancy” between contract and actual power flows at its interfaces with AEP and Dominion Virginia Power. PJM was subjected to loop flows in excess of 3,000 MW, which distorted congestion prices and could have required transmission loading relief (TLR) steps. TLRs curtail transactions that cause loop flows that could overload the transmission system. PJM’s MMU subsequently launched an investigation into whether market participants may have engaged in any untoward activity.

PJM on July 19 issued a policy that all power sale transactions to or from two North American Electric Reliability Council regions west of PJM would be assigned the price at the PJM-AEP interface regardless of the contract path. The two regions are the East Central Area Reliability Coordination Agreement and the Mid-America Interconnected Network Inc. The policy was authorized by the PJM Operating Agreement, which states that pricing for sales into PJM should be based on “appropriate flow analysis.”

In a conference call with reporters on Tuesday, Joe Bowring, manager of PJM’s MMU, detailed the findings of his office’s probe into the trading activity. The MMU posted the full report on its findings on PJM’s web site at www.pjm.com.

“No one was violating our rules,” Bowring said, although he refused to divulge the names of any market participants that engaged in the activity that was examined by the MMU. “Our intention is not to identify any particular participants engaged in the transactions,” he said. “We don’t really think that would productive at this point.” He also declined to give the exact number of players that executed the transactions in question.

“Parties were responding to price signals,” Bowring said. He said that the PJM-Dominion Virginia Power interface price was higher than the PJM-AEP interface price “and given the fact that outside of an LMP [locational marginal pricing] model, the price you get paid is based on contract path rather than actual path, I think that participants were engaging in rational behavior.” In other words, Bowring said that market participants were trying to maximize the price they receive. “The issue was that the incentives were wrong, and that’s really the problem that we fixed.”

Bowring acknowledged that if PJM had allowed the activity in question to continue unabated “there would have been reliability implications.” At the same time, he underscored the point that reliability in PJM’s system “was never at issue here.” Rather, the trading activity came down to an economic issue “and the economic issue was that price signals were telling people to do exactly the opposite of what they should have been doing.”

Moreover, he said that in taking a closer look at the activity, “it became clear that there had been a recurring pattern and that it actually made sense to act, not only because of the emerging issue on that day [July 19], but also because the pattern had been developing for a while [and] was clearly not a one-time or short-term issue.” PJM “saw a pattern of divergence probably most significantly starting in the middle of June in both prices and flows at the two interfaces,” Bowring noted.

Bowring said that PJM’s goal is to solve this problem in a “more sophisticated manner by actually doing LMP pricing based on the source of each transaction.” He said that the grid operator has changed the incentives “so that the problem will not continue.” In addition, PJM has identified a “slightly more detailed, complex fix going forward which will do the pricing in a manner about as consistent as we can get with LMP pricing before we extend the LMP model.”

PJM’s MMU chief also noted in the conference call that his office contacted FERC on July 19 “as the events were unfolding.” The Commission “made it very clear” that PJM should contact FERC staff “whenever we see any issues that are significant. The issue at hand rose to that level.” William Hederman, head of the newly formed Office of Market Oversight and Investigations at FERC, also received a copy of the report issued by PJM on Tuesday.

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