The unprecedented spikes in natural gas prices due to the recent harsh winter weather have led FERC to approve temporary yet significant waivers of the pricing rules in the mid-Atlantic and New York organized wholesale electricity markets.

Both the PJM Interconnection and the New York ISO attract the resources to keep supply and demand in balance through hourly auctions in which a single market-clearing price is set.  And both markets have traditionally capped resource bids at $1,000/mega-watt hour as a means of mitigating potential market power.  However, recent gas prices have been so high that the cost of operating some gas-fired generators exceeded the bid cap.  Accordingly, some generators could lose money by running.

FERC recently approved temporary rule waivers requested by the market administrators to address this problem.  For New York, generators may bid higher than $1,000, but any higher bids selected will not set the market price.  Instead, generators with costs higher than $1,000 that are selected in the auction to run will recover the difference in side payments (known as “uplift”).  In granting the waiver, FERC observed that not being able to recoup incremental operating costs “would discourage generators from offering service at a time when they are needed.”  The waiver will remain through February 28, 2014.

For PJM, the fix is more significant.  Cost-justified bids above $1,000 will be allowed and if accepted will set the market price, meaning that all generators, regardless of their bids, will receive a market price above $1,000.  In approving the measure, FERC said its action “will ensure that marginal prices paid by consumers appropriately equal the incremental cost of servicing them, and efficient price market signals — not constrained by a cap — should provide market participants with the information necessary to make informed business decisions, including hedging fuel risk.”  This waiver will remain through March 31, 2014.