Pennsylvania is proposing to tax virtual electricity trades across the PJM grid.
The tax could affect electricity trades as far west as Illinois and Michigan. PJM manages the electricity grid in 13 states and the District of Columbia.
The tax is one of a number of new taxes in a massive budget bill that is in the final stages of the legislative process and is expected eventually to be signed by the governor to plug a $2.2 billion hole in the state budget.
The bill would impose a 5% tax on the “gross transaction amount” of affected trades. PJM would collect it from the person initiating the trade. The tax would be paid at financial settlement.
The tax would affect three types of hedging transactions: decrement and increment transactions, and up-to-congestion transactions.
All the transactions are “virtual” trades, meaning they are settled financially rather than with physical delivery.
A decrement transaction is a cleared offer to supply electricity in the day-ahead market at a price that is no higher than the locational marginal price or “LMP” at the time the offer is made. An increment transaction is the same thing, but where the LMP exceeds the offer price.
The LMP is the price of another megawatt hour of electricity at a particular location. The price takes into account the difficulty of moving electricity to the location given congestion in different parts on the grid.
An up-to-congestion transaction is a hedge against the gap between LMPs in two locations.
All the transactions take advantage of differences in expected and actual prices in the day-ahead electricity market. They are a way of shedding risk that the prices will vary. They are done not just by electricity traders, but also by independent generators, utilities, municipalities and other PJM market participants.
Joseph Williams, an expert on electricity trading in the Norton Rose Fulbright Washington office, said the tax is certain to end up in litigation. States normally can only tax income that is earned in the state. Both the electricity and the traders in this case may be outside Pennsylvania.
Roughly $2.7 billion in virtual financial transactions were carried out in PJM in 2016. Traders say the tax would have exceeded the profit margin on 87% of 2016 trades.