Fuel Cost Components for Resource Mitigation

1. Fuel Cost Components for Resource Mitigation RCWG Meeting January 25, 2017

2. Fuel Cost Components for Resource Mitigation Why are we discussing this issue? • TAC assignment to WMS to RCWG • Review appropriate treatment of fixed costs such as pipeline capacity charges and penalties • Arose during discussion and approval of VCMRR009 Calculation of the Minimum Requirements Fee at May 26, 2016 TAC meeting • Provide guidance to ERCOT staff and market participants on fuel cost components that can be included in verifiable costs for mitigated offer curves and make-whole payments

3. Fuel Cost Components for Resource Mitigation What's the plan? • Develop guiding principles • Most recent RCWG discussion was to develop guiding principles • Work Plan: • This meeting, review resource mitigation practices of other RTOs/ISOs • Next meeting, review ERCOT practices for resource mitigation • Finalize guiding principles • Develop NPRR/VCMRRs to incorporate any changes

4. Resource Mitigation Practices in other RTOs/ISOs on Fuels Costs • “Short-run marginal cost” is the standard utilized by the other RTOs/ISOs to mitigate resources with market power • In ISO-NE, MISO, and NYISO, referred to as a Reference level calculated by the MM • In CAISO, Default energy bid calculated by the MM • In PJM and SPP, Cost-based offer, submitted by resources • “Short-run marginal cost” most recently re-affirmed in SPP Tariff filings with FERC, with numerous intervenors

5. Resource Mitigation Practices in other RTOs/ISOs on Fuels Costs • PJM and SPP provide more detailed guidance on costs included in “short-run marginal cost” • In the form of guidelines to resources for submitting cost-based offers • Resources in PJM and SPP are required to provide a Fuel Cost Policy • Other Practices • Opportunity cost (for resources with run-time restrictions or fuel limitations) • Adder for Frequently Mitigated resource

6. PJM Fuel Cost Policy Template All costs included in this template shall be short run marginal costs. The short run marginal cost of energy is the incremental cost of producing one more MWh of energy. It includes the cost of fuel, the cost of emissions allowances, volumetric taxes on fuel purchases or subsidies, and consumables for operations that vary in the short run with energy output. Short run marginal costs do not include long term variable, fixed or avoidable costs incurred to maintain the efficiency or availability of the unit, its environmental compliance, or its fuel supply

7. 147 FERC 61,212FERC Order Conditionally Accepting SPP Compliance Filing 27. We find that SPP has complied with the Commission’s directive with respect to section 3.4 of Attachment AF that market participants must provide the Market Monitor with an explanation of the market participant’s fuel cost policy and must indicate whether fuel purchases are subject to a fixed contract price and/or spot pricing and specify the contract price and/or referenced spot market prices. SPP’s proposed additional language relating to fuel transportation and handling costs being limited to short-run marginal costs, exclusive of fixed costs, also complies with the Commission’s finding in the October 2012 Order that offers are to be mitigated to a generator’s short-run marginal costs,35 and finding in the January 2014 Compliance Order that SPP address the treatment of fuel costs. We find that the additional sub-sections SPP proposes to add that relate to emissions costs and Variable Operating and Maintenance costs provide the required explanations of common factors to be included in opportunity costs. Accordingly, we find that SPP has complied with the Commission’s directives and accept these changes.

8. Possible Guiding Principles for ERCOT? • Mitigated Energy Offer Curve shall be the Resource’s short-run marginal cost of producing energy, excluding fixed costs? • Fixed charges for fuel transportation equipment (e.g. pipelines, train cars, and barges) should be excluded ? • Opportunity cost? • Frequently Mitigated resource adder? • ?

9. Appendix

10. SPP Market Protocols – Appendix G G.2.3.6 Variable Fuel Transportation Equipment When calculating the Total Fuel Related Costs, fixed charges for transportation equipment (e.g. pipelines, train cars, and barges) should be excluded. Dollars that represent lease charges are considered fixed charges if the total amount to be paid over a period is fixed regardless of the amount of fuel transported. Should the terms of the lease or transportation agreement be such that there is a fixed charge plus a charge for the amount of fuel delivered, the “charge per unit of fuel delivered” should be included in the Fuel on Board (FOB) delivered cost or in the calculation of the “other fuel related costs” as per the documented fuel pricing policy. The above guideline applies when a Resource, plant, or system is served totally by leased fuel transportation equipment or fuel transportation contracts. When fuel is supplied by both leased and common carrier fuel transportation systems, the common carrier rate should be included in the FOB delivered cost or included in the calculation of the “other fuel related costs” as per the documented fuel pricing policy of each Market Participant.

11. SPP Market Protocols – Appendix G G.2.3.3 Total Fuel Related Cost Total Fuel Related Cost(“TFRC”) is the sum of basic fuel cost, other fuel related cost, emission allowance cost, and variable operation and maintenance (VOM) cost. Total Fuel Related Costs ($/mmBtu)= =basic fuel costs ($/mmBtu) + other fuel related costs ($/mmBtu) +SO2Allowance cost ($/mmBtu) + CO2Allowance cost ($/mmBtu) +NOX Allowance cost ($/mmBtu)+ TFRC VOM ($/mmBtu) The other fuel-related cost components of TFRC may be calculated based on an average of short-run variable costs for each such component for a period of one year or less, reviewed and updated annually, or based on a rolling twelve month average, reviewed and updated monthly. Both the term and the frequency of the other fuel-related costs calculation shall be included in the Market Participant’s fuel cost policy. The TFRC VOM is calculated using an allocated portion of the total VOM calculated under Section G.2.4. Note that the sum of total allocated $ used to calculate TFRC VOM included here, the allocated VOM $ used to calculate Energy Offer Curve VOM under Section G.2.5, the allocated VOM $ used to calculate No-Load VOM under G.2.7, the allocated VOM $ used to calculate Start-Up VOM under G.2.6 and the allocated VOM $ used to calculate Regulation VOM under G.2.10 must not exceed the total VOM $ calculated under Section G.2.4. Total Fuel Related Costs may vary between different Offer parameters to the extent that the differences can be quantified and demonstrated.

12. SPP Market Protocols – Appendix G G.2.3.4 Types of Fuel Costs Basic fuel cost is the commodity cost of fuel calculated as stated in the company’s fuel cost policy. NOTE: Basic Fuel Cost for each Resource type will be addressed in subsequent sections. Other fuel related cost includes the additional incremental components of fuel cost required to operate a generating Resource, such as transportation fees, taxes on fuel and water injection.

13. SPP Market Protocols 8.2.2.3 Mitigation Measures for Energy Offer Curves (4) The Mitigated Energy Offer Curve shall be the Resource’s short-run marginal cost of producing energy as determined by the unit’s heat rate, fuel costs and the costs related to fuel usage, such as transportation and emissions costs (“total fuel related costs”), and variable operations and maintenance costs (VOM) as detailed in the Mitigated Offer Development Guidelines. The formula for Mitigated Energy Offer Curves can be found in Appendix G Section 2.5. (6)(a) For fuel costs, Market Participants shall provide the Market Monitoring Unit with an explanation of the Market Participants’ fuel cost policy, indicating whether fuel purchases are subject to a fixed contract price and/or spot pricing and specifying the contract price and/or referenced spot market prices. Any included fuel transportation and handling costs must be short-run marginal costs only, exclusive of fixed costs.

14. PJM Fuel Cost Policy Guidelines Section 2.3.6 Leased Fuel Transportation Equipment: Leased Fuel Transportation Equipment Cost –Expenses incurred using leased equipment to transport fuel to the plant gate. If expenses are fixed, they must be excluded from fuel cost determination. When calculating the total fuel related costs, fixed charges for transportation equipment (e.g., pipelines, train cars, and barges) should be excluded. Dollars that represent lease charges are considered fixed charges if the total amount to be paid over a period is fixed regardless of the amount of fuel transported. Should the terms of the lease agreement be such that there is a fixed charge plus a charge for every unit of fuel delivered, the "charge per unit of fuel delivered" should be included in the Fuel on Board (FOB) delivered cost or in the calculation of the "other fuel related costs" as per the documented fuel pricing policy. The above guideline applies when a unit, plant, or system is served totally by leased fuel transportation equipment. When fuel is supplied by both leased and common carrier fuel transportation systems, the common carrier rate should be included in the Fuel On Board (FOB) delivered cost or included in the calculation of the "other fuel related costs" as per the documented fuel pricing policy of each Unit Owner. This assumes that the leased fuel transportation equipment would serve base fuel requirements, while common carrier deliveries would change, based on incremental generation changes.

15. RCWGFuel Cost Components in the Fuel Adder Prior RCWG discussion points: • Should the fuel adder include only “incremental” and “variable” costs, to be consistent with the other components of verifiable cost and market power mitigation? • Does the existing VCM language allow inclusion of fixed cost components? • Should Resources be able to recover their costs for providing the fuel supply, transportation and related services required to make the Resource available to the market? • Does including fixed-cost components result in the market bearing the risk and/or cost for Resource fuel contracts? • Should margins from any 3rd party volumes be included in the fuel adder? • Should market participants have visibility to the range of approved actual fuel adders?

16. RCWG Fuel Cost Components in the Fuel Adder Guidance from Nodal Protocols • 4.4.9.4.1 (1)(b) For a Generation Resource with a Commercial Operations Date after January 1, 2004, ERCOT shall construct an incremental Mitigated Offer Cap curve (Section 6.5.7.3) such that each point on the Mitigated Offer Cap curve (cap vs. output level) is the greater of: (i) 14.5 MMBtu/MWh times the FIP; or (ii) The Resource’s verifiable incremental heat rate (MMBtu/MWh) for the output level multiplied by [((Percentage of FIP * FIP) + (Percentage of FOP * FOP))/100 + fuel adder that compensates for the transportation and purchasing of spot fuel as described in the Verifiable Cost Manual], as specified in the Energy Offer Curve, plus verifiable variable O&M cost ($/MWh) times a multiplier described in paragraph (e) below; or … • 5.6.1 (3) These unit-specific verifiable costs may include and are limited to the following average incremental costs:… • 5.6.1 (5) These unit-specific verifiable costs may not include: (a) Fixed costs, which are any cost that is incurred regardless of whether the unit is deployed or not; and (b) Costs for which the QSE or Resource Entity cannot provide sufficient documentation for ERCOT to verify the costs.

17. RCWGFuel Cost Components in the Fuel Adder Section 3 of the VCM under Additional Rules for Submitting Fuel Costs 2. Any Filing Entity that submits an actual fuel adder must provide documentation that establishes the historical costs for fuel, including transportation, spot fuel, and any additional verifiable cost associated with fuel contracts that can be easily differentiated from the standard commodity cost of fuel and clearly attributable to the Resource for the period. The fuel adder for a rolling 12-month period is the difference between the Filing Entity’s average fuel price paid (including all fees) during the period and the fuel price utilized by ERCOT for the corresponding Resource. The Filing Entity shall provide rolling 12-month supporting data to verify total fuel price for all purchased volumes to support the actual Resource fuel consumption. Data to support these costs should include, but are not limited to, accounting ledger entries, invoices, and copies of fuel contracts. In addition, the actual costs used to calculate the fuel adder may include, but are not limited to, the following categories: transportation, deliveries, storage, injection, withdrawal, imbalance, and minimum requirements fees. Other costs not described herein may be included and approved by ERCOT.

18. Fuel Cost Components in the Fuel Adder

19. Natural Gas Cost Components in the Fuel AdderDefinitions - Page 1 of 4

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22. Fuel Cost Components in the Fuel AdderRelated Definitions – Page 4 of 4