FERC on Tuesday approved New York regulators’ plan to keep the Ginna nuclear power plant operating but objected to elements that it said encroached on its jurisdiction over wholesale power markets (ER15-1047).
R.E. Ginna nuclear plant Source: Exelon
The commission ruled that the reliability support services agreement between the R.E. Ginna nuclear plant and Rochester Gas & Electric approved Feb. 23 by the New York Public Service Commission was just and reasonable. (See NYPSC OKs Ginna Deal.)
The RSSA is between distribution utility RG&E and Exelon’s Constellation Energy Group, which had threatened to close Ginna because it was losing money. RG&E will charge ratepayers $425 million to $510 million to cover Ginna’s full cost of service, with the final amount determined by Ginna’s revenues from the NYISO wholesale market. The utility also will apply $110 million in customer credits to the contract, making the total price tag as high as $620 million.
A parallel proceeding at FERC reviewed elements of the settlement, but it was suspended in January when it was apparent that most contested items were resolved in the state docket. However, one remaining issue was whether there was a sufficient disincentive for Ginna to prevent it from re-entering the market after the RSSA ended on March 31, 2017.
The environmental group Alliance for a Green Economy (AGREE) had contested that part of the settlement as inadequate.
AGREE says the $20.1 million capital recovery balance Ginna would have to repay if it re-enters the NYISO markets should be netted against RG&E’s one-time settlement payment of almost $11.5 million to Ginna, meaning the plant’s penalty would be only $8.6 million over two years, or 2% of the plant’s revenue.
FERC disagreed.
“The settlement payment represents costs that Ginna will have incurred during the settlement RSSA’s term, but, due to timing, Ginna will not yet have recovered those costs from RG&E by the end of the settlement RSSA’s term,” FERC said. “Therefore, we are not persuaded that Ginna’s recovery of those costs … should be netted against the capital recovery balance in assessing whether the capital recovery balance provides an adequate disincentive for Ginna to return to the NYISO markets.”
The commission ordered changes to elements of the settlement agreement and RSSA that it said could infringe on FERC’s jurisdiction because they allow the New York PSC to approve all aspects of the RSSA, “including the wholesale aspects of the settlement RSSA, and potentially reduce a wholesale rate in the settlement RSSA.”
Under Supreme Court precedent, the commission said, “once [FERC] approves a wholesale rate, a state commission must allow 100% of the wholesale rate to be passed through to customers in the utility’s retail rate design.”
FERC also ordered removal of language related to a reliability-must-run agreement that state officials may approve after the RSSA expires. NYISO is in a separate proceeding before the commission to address RMR concerns in New York. (See FERC Orders NYISO to Standardize RMR Terms in Tariff.)
A state court Friday blocked New York regulators from implementing sweeping new rules over retail electric providers, ordering a show cause hearing April 14 (870-16).
The ruling by the Albany County Supreme Court stayed the first phase of regulations passed by the New York Public Service Commission last month, which would have required retail suppliers to guarantee savings for new customers and those with renewing contracts.
The Retail Energy Supply Association asked the court Thursday to block the rules, saying it was an overreach of the commission’s authority and would effectively eliminate customer choice.
“This is great news for consumers, as it protects their right to freely decide for themselves what energy products offer value,” RESA spokesman Bryan Lee said. “RESA looks forward to working collaboratively with the commission regarding its concerns in a productive way so that consumers retain the right to choose their energy provider and the value-added products and services that come along with such a choice.”
The PSC said the rules, adopted Feb. 23, were put in place to counter deceptive business practices committed by some energy service companies. (See Zibelman: Rules Meant to Enable Markets.)
In its petition for a temporary restraining order, RESA said regulators were panicked by negative press coverage of unscrupulous retailers and rushed the order without giving proper notice or having fully developed procedures.
“The order sends a strong message that the commission and the attorney general’s office cannot be trusted with enforcing the existing consumer protection laws against a small handful of alleged bad actors in the retail energy market,” RESA wrote. “Further, the … order is an unconstitutional legislative act by an administrative agency with an expansive agenda, which has made a sweeping policy decision that monopoly pricing and monolithic commodity offerings in New York’s energy sector are preferable to competition and customer choice.”
Numerous energy service companies (ESCOs) had asked the PSC for a 45-day delay in implementing the rules, saying they were imprecise and that the companies needed more time to comply.
The Public Utility Law Project of New York opposed the extension, saying three related proceedings before the PSC should have alerted the ESCOs that tighter state regulation was coming.
“The reforms instituted by the Feb. 23 order have been foreshadowed for years, and if the ESCO industry chose not to put contingency plans into place, that is unfortunate for them,” PULP wrote. “Meanwhile, mass market consumers have been overcharged, slammed and subjected to numerous other practices that have wrought considerable financial harm upon small commercial and low-income households who have long awaited the consumer protections soon to be in force.”
Public Citizen last week called for a House and Senate investigation into the Commercial Energy Working Group, an industry association the watchdog says appears to be violating federal lobbying rules by not disclosing its membership.
The energy group operates out of the offices of D.C. law firm Sutherland, Asbill & Brennan, which has represented it in filings with FERC, the Commodity Futures Trading Commission, the Securities and Exchange Commission, the Federal Reserve and Congress.
In the second quarter of 2015, the firm reported to Congress $60,000 in lobbying income for the group, but the filing did not list the sources of that income despite a requirement that lobbyists disclose contributions of $5,000 or more, Public Citizen says. Based on records obtained through the Freedom of Information Act, Public Citizen said the group’s members appear to include Vitol, Royal Dutch Shell, NextEra Energy, ConocoPhillips and Hess Corp.
NRC Engineers Urge Fix for Flaw in Most US Reactors
Lochbaum
A group of Nuclear Regulatory Commission engineers is urging the agency to order U.S. nuclear plant operators to fix a problem that lurks in nearly all reactors.
In February, the seven engineers petitioned the agency to order immediate action to address a flaw that puts the reactors at risk of so-called “open phase events” where unbalanced voltage could cause motors to burn out and deactivate emergency cooling systems. Such an event happened at Exelon’s Byron 2 reactor in 2012, shutting down the unit for a week.
Although NRC alerted operators of that event, the agency didn’t require any action. Dave Lochbaum, a nuclear expert and frequent industry critic, said NRC has known about the issue and didn’t push for action. “Why the NRC snatched defeat from the jaws of victory, I don’t know,” he said. By NRC’s own procedure, the agency has until March 21 to respond to the engineers’ request.
The environmental group Delaware Riverkeeper Network is suing FERC, charging that the agency’s oversight process for pipeline projects is “infected with bias” and demanding substantial changes to how the commission works.
The suit alleges that FERC is essentially financed by the industries it oversees through charges and fees. “Because FERC gets its funding from the big companies it is supposed to be monitoring, it has become, perhaps inevitably, a corrupt, rogue agency,” says Maya van Rossum, leader of the Delaware Riverkeeper Network. “That’s why FERC has approved 100% of pipeline projects — literally every single one of them — that it has considered since 1986.”
The suit, filed in U.S. District Court., seeks a declaration that FERC’s approval process is biased and that its funding structure is unconstitutional. The commission said it does not comment on pending lawsuits.
Chief Justice John Roberts on Thursday rejected a request from 20 states to block the enforcement of EPA’s Mecury and Air Toxics Standards.
Michigan and 19 other states asked for a stay or an injunction blocking enforcement of the MATS rule, noting that the court itself last year ruled 5-4 that the rule is illegal.
But EPA said a stay was not necessary as the agency was addressing the parts of the rule the court found invalid. “The requested stay would harm the public interest by undermining reliance interests and the public health and environmental benefits associated with the rule,” the agency said. “The application lacks merit and should be denied.”
Roberts acted unilaterally, without taking the question to the whole court.
The fledgling U.S. energy storage market deployed 112 MW of capacity in the fourth quarter of 2015, more than in 2013 and 2014 combined. According to GTM Research and the Energy Storage Association’s U.S. Energy Storage Monitor 2015 Year in Review, 161 MW were added in 2015, bringing the U.S. total to 221 MW.
The report, broken down into residential, nonresidential and utility segments, notes the last segment continues to be the largest, accounting for about 85% of all new storage. Most of that was deployed in PJM, which saw 160 MW of new storage introduced.
But residential behind-the-meter systems grew at the fastest pace, showing an increase of 405% in 2015.
The Nuclear Regulatory Commission has put Entergy on notice for three apparent violations relating to a leaking storage tank discovered at its Palisades nuclear generating station in Michigan in 2013. The agency sent the company a letter alleging that Palisades deliberately failed to properly document the leak at a safety injection and refueling water storage tank during the event.
Entergy was cited for “willful failure” to document the leak, as well as failure to “perform adequate operability determinations” after the leak and to undertake additional testing of the leak site.
The company said the conditions have been corrected since the incident. “Entergy does not tolerate deliberately failing to follow procedures or falsifying or manipulating data in any way,” the company said.
Feds Move to Drop McClendon Indictment After Fatal Crash
McClendon
Authorities are taking steps to drop the indictment against former Chesapeake Energy CEO Aubrey McClendon, who died hours after the indictment was handed up last week. McClendon was under investigation for alleged bid rigging relating to natural gas leases.
A federal grand jury handed up the indictment Tuesday. McClendon died in Oklahoma City last week when his SUV crashed at high speed into a bridge abutment. That accident remains under investigation.
FERC attended to some housekeeping Friday by putting to rest a rehearing request rendered moot by MISO and SPP’s settlement of their transmission dispute.
SPP-MISO 1,000 MW contractual tie Source: SPP
The commission dismissed MISO’s rehearing request of its December 2014 order approving the RTO’s use of a “hurdle rate” to manage its north-south flows (ER14-2445-002). The commission also dismissed a related compliance filing.
MISO, its Market Monitor and several regulatory agencies and utilities had sought rehearing, arguing that FERC’s order would cause the $9.57/MWh hurdle rate to climb by 4.5 times, rendering MISO’s North-South interface transfers of more than 1,000 MW uneconomical.
“Because the hurdle rate is no longer effective, and in the [December 2014] order, the commission exercised its discretion to not order refunds … there is no need to address the” matters raised by MISO and others, the commission said.
Under the settlement, MISO will pay SPP $1.33 million monthly until February 2017 to cover flows over 1,000 MW passing through MISO’s North-South interface. MISO is temporarily collecting the funds from members through a miscellaneous charge based on market load ratio share while the RTO and stakeholders continue settlement discussions to decide on a long-term cost allocation (ER14-1736).
FERC last week approved a request by CAISO to eliminate from its Tariff a long-suspended provision establishing convergence bidding at scheduling points on the interties into California.
The commission’s order eliminated the prospect that CAISO would reinstate a market mechanism it revoked within months of implementing it in 2011 (ER15-1451-001). At the time, the ISO’s Market Monitor determined that bidding strategies at the interties underpinned a complex scheme to manipulate prices and inflate payouts in other areas of the California market.
CAISO has in recent years explored reviving the mechanism in light of structural changes in Western markets, but it ultimately sought a full repeal based on concerns that illiquidity in 15-minute trading left intertie points vulnerable to gaming.
FERC’s ruling did not affect convergence bidding at points inside the ISO balancing area. At the request of municipal utilities in Anaheim, Azusa, Banning, Colton, Pasadena and Riverside, FERC also directed CAISO to delete from its Tariff an additional reference to virtual bidding in order to avoid ambiguity.
Convergence — or virtual — bidding allows market participants to hedge their physical positions and limit exposure to day-ahead and real-time price differentials. A convergence bid is a purely financial bid implying no obligation to take or deliver electricity. Instead, a market participant buys or sells “virtual” energy in the day-ahead market, a position required to be automatically liquidated in the opposite direction in real time.
Depending on the relative movements in the two markets, the participant either pockets or pays the difference between the two prices. Bidders are not required to control physical resources or serve loads in the ISO, allowing speculators to take positions in the market.
RTOs have adopted convergence bidding under the theory that the practice narrows the gap between day-ahead and real-time prices as traders arbitrage spreads between the two markets. The benefit is a more predictable spot market, protecting utilities from price swings stemming from load fluctuations and unplanned generating outages.
Troubled from the Start
In California, convergence bidding was fraught with problems since CAISO introduced the practice two years after restoring its day-ahead market. A week after implementing the market in February 2011, CAISO suspended bidding at nodes on nine interties linked to the Mountain States region because of a software glitch that risked overscheduling those points in the physical day-ahead market.
That incident was followed months later by the more serious discovery that some CAISO market participants were using virtual supply bids on the interties to offset virtual demand bids at nodes located just inside the state, a gaming strategy that produced no benefit for the physical market and cost the ISO more than $50 million.
(Virtual trades at CAISO’s New Melones intertie are at the center of market manipulation allegations filed by FERC in December. The defendant last week asked FERC to compel CAISO to disclose information about market design flaws (IN16-2). See earlier story, FERC Seeks $2.5M Fine in CAISO Market Manipulation.)
The strategy was facilitated by predictable differences in prices stemming from what the ISO referred to as a “bifurcated” settlement process, with the interties settled at the hour-ahead price and internal points in real time. Shortly after identifying the issue, CAISO suspended bidding at the interties indefinitely — or at least until it could resolve the bifurcation issue.
Liquidity Concerns
That goal would ultimately elude CAISO. While FERC Order 764 — which mandated 15-minute scheduling between neighboring balancing areas — should have helped, the ISO became concerned about declining short-term trading volumes at the interties, which could reintroduce opportunities for strategic bidding. A 2015 report from the ISO’s Market Monitor indicated that “most of the dozens of CAISO interties have no market participants providing economic bids in the 15-minute market and only a few interties have multiple market participants providing such bids.”
CAISO hoped Bonneville Power Administration’s implementation of 15-minute scheduling — synching it with CAISO’s schedule — would boost exports from the Pacific Northwest. But the change had little impact on trading activity.
“The CAISO does not yet understand the causes of this low market liquidity,” the grid operator wrote in an April 2015 filing asking FERC to extend the suspension of convergence bidding on the interties. “Based on informal feedback from market participants, the CAISO believes that some of the possible causes may be neighboring balancing areas not supporting 15-minute schedule changes, difficulty in procuring transmission in 15-minute blocks, an absence of bilateral trading at a 15-minute granularity and reticence of resource owners to adjust their output within the hour.”
According to a report by CAISO’s Department of Market Monitoring (DMM), low 15-minute liquidity could translate into a situation in which convergence bids would first settle at a day-ahead market price that includes intertie congestion, then be liquidated at a 15-minute market price not subject to congestion because of light physical volumes. That would give bidders incentive to profit from the structural differences between congestion prices in the day-ahead market and the 15-minute market.
“Regardless of the causes,” CAISO wrote in its April 2015 filing, “based on DMM’s recent analysis, the CAISO has determined that the existence of such low market liquidity, as evidenced by the lack of economic bids submitted in the 15-minute market, makes it problematic to reinstate intertie virtual bidding.”
ERCOT said last week it continues to expect to have sufficient resources to meet projected peak-demand during the spring and summer, with more than 79,000 MW of generation capacity available.
The Texas grid operator is projecting a spring demand peak of 58,279 MW, a 700-MW increase from last November’s preliminary spring assessment, said Pete Warnken, ERCOT’s manager of resource adequacy, during a March 1 conference call. The revised peak is based on weather conditions from May 2006; the previous estimate used average weather conditions from 2002 to 2014.
Warnken said staff took into account multiple scenarios under a variety of conditions in issuing its Seasonal Assessment of Resource Adequacy (SARA) for this spring. The report includes a new scenario based on low wind power output during peak hours.
ERCOT’s control room Source: ERCOT
ERCOT estimates that even with 9,482 MW of maintenance and forced outages in May, it will still have 11,598 MW of capacity available for operating reserves, well above the 2,300 MW considered acceptable.
The spring forecast is based on expected weather conditions similar to those that occurred in May 2006 and typical seasonal generation outages, based on historical performance. ERCOT expects the spring peak to occur in late May, following completion of most seasonal plant maintenance to prepare for summer’s heat.
“The month of May shows potential for above-normal temperatures, which could lead to an early taste of summer,” said ERCOT meteorologist Chris Coleman.
The grid operator’s latest SARA includes more than 200 MW of installed solar capacity. ERCOT estimates solar resource availability at a 58% capacity factor — or 171 MW — based on its typical performance during peak spring conditions.
ERCOT’s preliminary summer SARA projects a summer peak of 70,588 MW, its first peak above 70,000. The current record is 69,877 MW, set last August.
ERCOT estimates it will have more than 79,000 MW of available generation this summer, including an additional 731 MW of fossil, nuclear and biomass generation from the preliminary spring SARA, 1,068 MW of new gas-fired generation and 723 MW of additional wind energy.
The final summer SARA is scheduled to be released in May.
NV Energy had a smooth integration into the Western Energy Imbalance Market, CAISO said Monday in its fourth-quarter market report.
Department of Market Monitoring (DMM) manager Keith Collins noted that after NV Energy joined the EIM on Dec. 1, Nevada imbalance prices quickly converged with those in CAISO’s broader system, a development that has so far continued into this year. That stood in contrast with the price swings that still beset PacifiCorp’s balancing area, stemming from physical constraints on the system.
“One of the things we noted with the [NV Energy] launch was that the variability [of prices] within the Nevada area was fairly limited,” Collins said.
CAISO attributed NV Energy’s easy adjustment to the high amount of transfer capability between Nevada and California. Limited congestion translates into a freer flow of both imbalance energy and capacity between the balancing areas, avoiding the need to relax CAISO’s flexible ramping constraints in load pockets poorly served by flexible capacity. Relaxation of the constraints ultimately drives up real-time energy prices by forcing relatively fast, efficient units out of the 15-minute energy market queue and into the obligatory market for ramping capacity.
By comparison, flexible capacity issues continue to weigh the EIM’s PacifiCorp East area, with the ramping constraint being relaxed in more than 10% of intervals over the quarter, frequently boosting real-time prices by the maximum $60/MWh adder associated with capacity procurement shortfalls. CAISO did note, however, that relaxations in PacifiCorp East declined during December, reversing the uptrend seen in the previous quarter. While generating units returning from outages likely helped relieve constraints, the DMM suggested that NV Energy’s entry into the EIM might be providing longer-term structural benefits for PacifiCorp.
“The market is more of a regional market with the inclusion of NV Energy because of the increased transfer capacity,” said Collins. “It’s more of a single market.”
Bid Cost Recovery Payments Down
Collins pointed to the decline in bid cost recovery (BCR) payments as the second biggest “theme” of the fourth quarter. CAISO payouts came to $25 million under the market mechanism, compared with $31 million in the third quarter and $25 million during the same period in 2014. BCR payments attributed to residual unit commitments (RUC) fell from $10 million to $3 million quarter over quarter because of decreased payouts to “long-start” units.
“This is a big shift, although virtual supply has played a role,” Collins said.
The DMM report describes the link between the virtual — or convergence — bidding market and bid cost recovery payment volumes, explaining that lower virtual supply volumes in the fourth quarter “primarily” caused the RUC process to commit fewer resources compared with the prior period. The report notes that RUC procurement “appears” to be driven by the need to replace cleared virtual supply bids, which offset physical supply in the day-ahead market.
“Part of that is that renewables tend to be under-scheduled,” Collins said. “Virtual schedules are counterbalancing that.”
The report also showed that real-time commitments accounted for $12 million in BCR payments, in line with historical norms, while day-ahead payments were lower than any fourth quarter since 2011.
Additional highlights from the Market Monitor’s report:
Day-ahead and 15-minute prices declined to the lowest level of the year, with day-ahead peak averaging $33/MWh. December saw both markets fall to their 15-month lows. Collins noted that both loads and natural gas prices continued to trend lower, with the latter hitting 15-year lows.
Price spikes increased in the five- and 15-minute markets but remained “relatively infrequent.” October saw an “unusually high” number of intervals in which prices surged to more than $1,000/MWh because of low day-ahead scheduled load and regional congestion.
Congestion in the ISO was relatively low and had little impact on prices.
The volume of dispatchable import bids in the 15-minute market increased by 19% compared with the third quarter, while export bids jumped 20%. Most 15-minute import-export activity was submitted by small number of entities on three interties — Malin, Palo Verde and Rancho Seco.
Exelon on Monday offered a split D.C. Public Service Commission a “middle ground proposal” in a bid to salvage its acquisition of Pepco Holdings Inc.
In a joint filing, the companies asked the commission to approve either the original settlement negotiated with Mayor Muriel Bowser or the revised proposal outlined by Commissioner Joanne Doddy Fort and supported by Commissioner Willie Phillips on Feb. 26. Commission Chairwoman Betty Ann Kane opposed the revised settlement after voting 2-1 with Fort to reject Bowser’s deal. (See DC PSC: Will OK Exelon-Pepco Deal for Additional Concessions.)
The companies also offered a third alternative: adopting Fort’s revised settlement, while addressing the mayor’s concerns with shielding residential customers from rate hikes. It would give the PSC discretion to use an additional $20 million — which Bowser’s settlement earmarked for smart grid and environmental programs — for rate relief.
The companies did not offer to increase the $72.8 million customer investment fund (CIF) they are offering D.C. to approve the merger.
The deal began to look doubtful last Tuesday as Bowser, the Office of the People’s Counsel and Attorney General Karl Racine announced their opposition to revised terms set out by Fort. D.C. Water followed with its rejection later in the week. (See Exelon-Pepco Deal in Doubt as Mayor, Consumer Advocate Balk at New Terms.)
Together they represent three of nine settling parties that must agree to the new deal in order for it to be approved without further commission action. At issue for all was the reallocation of $25.6 million from the CIF that would have shielded residential consumers from rate hikes until 2019. The PSC voted 2-1 to defer a decision on how to spend the funds until the next Pepco rate case, signaling that it would distribute the money to nonresidential customers as well.
The commission’s Feb. 26 order had required responses from the settling parties by March 11. Exelon and Pepco asked the PSC to rule on their new proposal no later than April 7.
“The joint applicants believe that the commission can address its concerns with the residential customer base rate credit, as well as the settling parties’ concerns with the terms of the [revised settlement], through additional alternative terms which preserve the function of the residential customer base credit and move $20 million in CIF monies from the newly created [Modernizing the Energy Delivery System for Increased Sustainability] pilot project subaccount to a separate customer base rate credit fund.”
The $20 million fund would be spent following Pepco’s next base rate case as directed by the commission, potentially providing commercial customers rate relief or increasing funding for the Low-Income Energy Assistance Program.
“In the event that the commission determines that any or all of the additional $20 million should not be used for these purposes, it could allocate any unused portion of the $20 million to the MEDSIS pilot project subaccount.”
The companies said their proposal “does not prevent the commission from using CIF monies to advance the grid modernization proceedings in [a second docket,] Formal Case No. 1130. Instead, the revised allocation provides the commission with additional discretion over how best to use $20 million of the $72.8 million CIF to advance its competing priorities.
D.C. Councilwoman Mary Cheh (at podium) is joined by other councilmembers and candidates at press conference opposing merger Wednesday.
“It would be tragic if customers lost the $72.8 million CIF and the many other benefits of the merger recognized by the commission and the settling parties because of disputes over how a portion of the CIF should be allocated,” they wrote.
The mayor, OPC and attorney general had no immediate comment on the companies’ revised proposal.
The Power DC coalition immediately asked the PSC to reject it.
“Exelon’s latest filing is another example of the company’s total arrogance and disregard for D.C. residents,” said spokeswoman Anya Schoolman. “The Public Service Commission shouldn’t let Exelon rearrange deck chairs on the Titanic. It is time for D.C. to move on.”
Councilwoman Mary Cheh also signaled her opposition. “We expected that Exelon would try a Hail Mary pass, but from my analysis it doesn’t appear to satisfy requirements set forth by the Office of the People’s Counsel in terms of protections for ratepayers,” she said.
Exelon not Giving Up
CEO Christopher Crane said in a Feb. 3 earnings call that the company would abandon the merger and begin buying back the 57.5 million shares it issued for the $6.8 billion deal if D.C. regulators did not approve it by March 4.
But company officials said Thursday they were delaying the deadline as a result of the PSC’s action Feb. 26.
“March 4 was the date after which Exelon and Pepco Holdings would have the right to stop pursuing the merger, if the Public Service Commission had not acted by then,” Exelon said in a statement. “Because the commission issued its order on Feb. 26, the March 4 date is no longer a trigger, and we are free to stop pursuing the merger if either party so chooses.”
Political Posturing?
Guggenheim Securities analyst Shahriar Pourreza said the fate of the merger may depend on whether Bowser and other officials truly want out of the deal or are playing politics.
“The big swing factor is if the mayor, attorney general and Office of [the] People’s Counsel are politically posturing or if they used Friday as an excuse to get out of this deal,” he told RTO Insider. “If it’s the former, it’s probably workable.” But, he said, “the longer they wait, the more the fundamentals of Pepco deteriorate and … the less attractive this transaction is.”
The PSC said that if all settling parties agree to its offer, the merger will be approved without further commission action. None of the D.C. officials opposing the PSC settlement has proposed a counteroffer.
The acquisition would give Exelon Pepco’s stable regulated income and the crown as the nation’s largest utility. But Pourreza said the deal has “materially deteriorated” over time. In a research note earlier in the week, he said, “We believe there is increasing likelihood Exelon could walk from the deal.”
Pepco ‘in Distress’?
“You kind of wonder if this even makes sense for Exelon,” he said. “There are plenty of single-state regulated utilities that they can go acquire that are not in as much financial distress as Pepco. This is not a healthy utility as a standalone entity.”
The PSC disagrees.
“There is no evidence in the record that Pepco could not continue to perform, and perform adequately and reliably as required by law, absent the … approval of Pepco’s sale to Exelon,” it said in its order Feb. 26. “Indeed, as the commission found in [its August 2015 order in the case], ‘PHI is financially healthy as a standalone company and would continue to be so if the merger is not consummated.’”
The merger already has the blessing of FERC and regulators in Delaware, Maryland, New Jersey and Virginia. They signed on under a “most favored nation” status, meaning in the end, all will be compensated equivalently — a disincentive for Exelon to sweeten the deal further with the district, Pourreza said.
If the merger doesn’t go through, Pourreza said, other suitors might be deterred from trying to purchase Pepco, given the regulatory hurdles D.C. has presented. “I think that these regulators have jeopardized this utility,” he said.
Dividend in Doubt?
On Monday afternoon, Pepco’s stock closed at $24.22, down 20 cents (0.82%) for the day. Exelon’s shares closed at $33.92, up 56 cents (1.68%).
If the merger doesn’t close, Pepco shares could lose $4 to $5 per share, Pourreza wrote. “Given that [Pepco] has been out of a rate case since 2014 and the delays with this merger, [it] has materially deteriorated as a standalone company, in our view.”
That could push its $1.08/share dividend to a 6% yield.
“It’s even questionable if they can support the dividend,” he said. “It’s pretty mind-boggling, the games that these regulators are playing. The agreement that the commission brought on Friday is very workable. I sort of question whether the commission did this because they knew that the settling parties wouldn’t go for this.”
Pourreza said he was at a loss to speculate what more Exelon could offer to salvage the deal, noting that “in a perfect world,” it should be offering less, not more, for Pepco at this point.
“I thought what the commissioners put out was equitable and now all of a sudden this is coming down to the $27 million issue,” he said. “It doesn’t make any sense to me. I tend to think [Bowser, Racine and OPC Sandra Mattavous-Frye] want out of this deal. … This is very abnormal.”
Cheh said the difference between using the fund to insulate ratepayers temporarily, only to have Exelon recoup the difference after four years, and disbursing the money when there is an actual rate case is not dramatic.
That, she said, leads her to think that Mattavous-Frye — an initial opponent of the merger who reversed course to back the mayor’s settlement — used the PSC’s proposed changes as an excuse to back away from the deal.
“Once Mattavous-Frye was out, the mayor was kind of stuck, I kind of think, because what was she going to say, ‘I think it was a good deal?’” Cheh said.
“What was at issue was a power struggle between the PSC and the mayor and who trusts whom,” Cheh said. “The fact that it may be scuttled over who gets to play with this money seems another surprising turn in all of this.”
One sticking point is that the rate relief would be shared with commercial customers, Cheh said. The U.S. General Services Administration, representing the federal government, the largest electricity consumer in the district, opposed the merger until the PSC offered the concession to broaden rate relief.
The settlement would have protected residential ratepayers through Bowser’s four-year term and potential reelection campaign.
“People have been saying all kinds of things,” Cheh said when asked if that might be a factor in Bowser’s insistence on preserving the rate credit. “Now that my rate increase may come right in the middle of your term — if you were the mayor, that’s something you would take into account.”
FERC on Tuesday approved changes to NYISO’s scarcity pricing logic that the ISO says will better reflect the real-time value of demand response (ER16-425).
NYISO implemented its current, ex-post scarcity pricing logic in 2013. The new logic allows the ISO to incorporate scarcity pricing into its real-time optimization. (See NYISO Seeks OK for New Scarcity Pricing Rules.)
“NYISO’s proposal increases price transparency by ensuring consistency between resource schedules and pricing outcomes in real-time when NYISO activates [demand response] resources, thereby reducing the potential for uplift costs,” the commission said.
“NYISO’s proposal recognizes that capacity that is available within 30 to 60 minutes can be dispatched to meet load prior to activating [demand response] resources. Thus, NYISO will procure a greater amount of available operating capacity from the market before relying on [demand response] resources and triggering scarcity pricing than under its existing rules,” FERC added.
As a result of the new logic, the ISO will:
Increase the value of Southeastern New York 30-minute reserves from $25/MW to $500/MW at all times to align the value of reserves with the actual cost of providing them;
Increase in the value of the middle pricing point of the regulation service demand curve (shortages of regulation service greater than 25 MW but less than 80 MW) from $400/MW to $525/MW at all times;
Reduce the target level for Southeastern New York 30-minute reserves to zero during actual or anticipated severe weather conditions (“storm watch events”); and
Increase the New York control area 30-minute reserve demand curve values priced at less than $500/MW to $500/MW, effective in real time during any DR activation.
The changes were supported by the Electric Power Supply Association, the Independent Power Producers of New York and the New York Transmission Owners.
The commission rejected protests by the New York Department of State’s Utility Intervention Unit, saying its concern that NYISO’s filing missed an opportunity to remedy an alleged flaw in its existing scarcity pricing mechanism was beyond the scope of the case.
FERC also rejected the UIU’s argument that the proposal could result in less efficient dispatch of generating resources and higher production costs. “We find that the benefits of increasing price transparency and incorporating scarcity pricing in the real-time market software outweigh such concerns,” the commission said, adding that “additional system changes may be required to further optimize the scarcity pricing mechanism and avoid the potential issues” the UIU raised.
FERC ordered the ISO to submit a compliance filing clarifying tariff provisions differentiating between scarcity events, when it calls on DR, and shortage events, when the market is short of operating, regulation, or transmission reserves.
The changes will become effective once NYISO deploys the required software changes. The ISO expects to complete the work by June 30.
Dynegy and Exelon proposed last week that MISO Zone 4 procure capacity in three-year forward auctions separate from the rest of the RTO.
The two companies — Illinois’ biggest power producers — offered separate proposals that would adopt elements of PJM’s model beginning in 2017. Both proposals were offered during MISO’s Competitive Retail Solution Task Team meeting Feb. 22.
The companies say that MISO’s Planning Resource Auction, currently held about three months before the beginning of a planning year on June 1, isn’t conducted far enough in advance to create a clear price signal. Both claim their proposals would further reliability and boost investments in new and existing power plants.
Exelon Proposal
“The overarching principal of Exelon’s Southern Illinois solution is to adapt PJM’s Reliability Pricing Model (RPM) to Zone 4, while integrating with the rest of MISO as seamlessly as possible,” Exelon wrote in its proposal. The company said the RPM “has proven to be highly successful at maintaining reliability at a reasonable cost to consumers using competition to determine market revenues.”
The company proposes that Zone 4 acquire capacity three years in advance in one-year commitment periods, as in PJM. The 2020/21 Planning Resource Auction would take place in April 2017.
Exelon’s proposal also requests a switch to a downward-sloping demand curve in Zone 4 and mandatory participation for all loads and internal supply in the zone. Exelon also wants “strong performance incentives” for resources that clear the auction.
Dynegy, which also called for use of downward-sloping demand curves, proposed holding four competitive auctions during the first quarter of 2017 to procure capacity through mid-2021. The company additionally proposed that by the first quarter of 2018, MISO would hold a three-year forward auction for delivery during the 2021/22 planning year.
Dynegy said the auction would procure 100% of the zone’s planning reserve margin requirement, based on load forecasts independently verified by a third party.
Participation would be mandatory only for load-serving entities and electric distribution companies in local resource zones with retail choice. Dynegy acknowledged its proposal would primarily affect the generators it purchased from Ameren Illinois in 2013.
Monitor Offers Own Proposal
Independent Market Monitor David Patton said a voluntary forward procurement — a single-year “strip” or a multiyear contract — “could be useful if desired by participants.”
But he said the mandatory forward auctions proposed by Exelon and Dynegy would be less efficient than MISO’s “prompt” procurement in facilitating efficient investment and retirement decisions.
In forward markets such as PJM, Patton said, generation owners must determine whether their older plants will continue to operate for an additional four years — three years plus the planning year. “In prompt procurement markets, old units can operate until they suffer equipment failure and can make efficient decisions to mothball or retire based on the auction.”
Forward markets also do not ensure that new resources offer capacity at prices close to the cost of new entry, he said.
Patton acknowledged that higher capacity prices in PJM have caused increasing levels of capacity exports from MISO. But he said that MISO’s design required “only incremental but meaningful” changes to address the challenges in Zone 4.
He would continue a single PRA for the entire footprint but replace the vertical demand curve with a variable reliability target in the competitive retail area. “Capacity product and obligations should be comparable throughout all of MISO,” he said.
Patton also said adding economic import limits to the existing electrical import limits would create a more efficient mix of resources inside and outside of deregulated markets.
MISO Offers Criteria, No Comment
MISO officials withheld comment on Exelon’s and Dynegy’s proposals, saying they want to consider a second round of stakeholder presentations at the next Competitive Retail Solution Task Team meeting March 7. Once the task team evaluates proposals, MISO will submit a recommendation to the newly created Resource Adequacy Subcommittee.
“We appreciate the dialogue and participation from stakeholders to collaboratively develop a solution,” MISO spokesperson Andy Schonert said. “We continue to study both Exelon and Dynegy’s proposals and look forward to more feedback from stakeholders on this topic.”
MISO released criteria that capacity proposals must meet for consideration, including acknowledgement that nearly all states in the RTO’s footprint are rate-regulated. Any new structure would be required to improve MISO’s ability to ensure sufficient resources, optimize economic use of existing and potential resources and maintain the benefits of MISO membership.
FERC Actions
Meanwhile, FERC continues to mull a number of MISO capacity issues.
On Feb. 25, the commission said it is considering a joint rehearing request by Illinois Attorney General Lisa Madigan and Illinois Industrial Energy Consumers, who are seeking clarification on whether “going-forward costs” used to calculate facility-specific reference levels should include sunk costs (EL 17-50, et al.).
Public Citizen last week called for a House and Senate investigation into the Commercial Energy Working Group, an industry association the watchdog says appears to be violating federal lobbying rules by not disclosing its membership.
Collins pointed to the decline in bid cost recovery (BCR) payments as the second biggest “theme” of the fourth quarter. CAISO payouts came to $25 million under the market mechanism, compared with $31 million in the third quarter and $25 million during the same period in 2014. BCR payments attributed to residual unit commitments (RUC) fell from $10 million to $3 million quarter over quarter because of decreased payouts to “long-start” units.
