FERC Order 1000 Upheld — UPDATE

By Rich Heidorn Jr.

WASHINGTON — A federal appellate court Friday upheld the Federal Energy Regulatory Commission’s landmark Order 1000, rejecting arguments from those who claimed FERC exceeded its authority and those who complained it didn’t go far enough.

A three-judge panel for the D.C. Circuit Court of Appeals unanimously rejected challenges to FERC’s jurisdiction and claims that allowing competition in transmission development will harm reliability, saying it found them “unpersuasive.”

The 97-page order by Judges Thomas B. Griffith, Nina Pillard and Ann Wilson Rogers was a complete vindication for the commission and a shutout for challengers.

The ruling responded to challenges from 45 petitioners and considered input from 16 intervenors. The main threat to the order came from challengers in the Southeast and West who alleged the commission exceeded its authority under the Federal Power Act in requiring that public utility transmission providers participate in regional transmission planning, and in eliminating incumbent transmission providers’ monopoly on building and running transmission.

The court found that FERC had authority under Section 206 of the FPA to require:

Transmission providers participate in a regional planning process;
Removal of federal rights-of-first-refusal provisions “upon determining they were unjust and unreasonable practices affecting rates;” and
The allocation of the costs of new transmission facilities based on forecasted benefits.

In addition, the court found that:

There was “substantial evidence of a theoretical threat to support adoption of the reforms” in Order 1000;
FERC “reasonably determined that regional planning must include consideration of transmission needs driven by public-policy requirements;” and
FERC “reasonably relied upon the reciprocity condition to encourage non-public utility transmission providers to participate in a regional planning process.”

FERC Chairman Cheryl LaFleur said she was pleased with the ruling. “Our nation needs substantial investment in transmission infrastructure to adapt to changes in its resource mix and environmental policies,” she said in a statement. “Order No. 1000 is critical to the commission’s efforts to support efficient, competitive and cost-effective transmission.”

Order 1000, issued in July 2011, changed the process for planning and paying for new regional and interregional transmission lines. It also allows independent developers to compete with traditional utilities in building new lines.

The ruling was not a surprise for those who attended oral arguments in the case in March. The judges questioned attorneys seeking to overturn the order far more aggressively — and interrupted them far more often — than they did when responding to FERC’s attorneys. (See Appellate Court Skeptical of Order 1000 Challengers.)

Below is a summary of the issues raised by the challengers and the court’s response.

MANDATORY REGIONAL PLANNING

Petitioners led by the South Carolina Public Service Authority alleged the commission lacks authority to mandate transmission planning because the FPA only allows FERC “to regulate existing voluntary commercial relationships.” As precedent, the petitioners cited the D.C. Circuit’s 2004 ruling that invalidated FERC’s attempt to change the composition of the California ISO board of directors.

The court said Order 1000 was justified by the commission’s concern that a lack of competition would lead to higher costs for new transmission needed to address environmental, economic and reliability concerns.

“Reforming the practices of failing to engage in regional planning and ex ante cost allocation for development of new regional transmission facilities is not the kind of interpretive ‘leap’ that concerned the court in CAISO but rather involves a core reason underlying Congress’ instruction in Section 206” to remedy unjust or unreasonable rates and practices, the court said.

Petitioners embraced a “false premise” that commission-mandated transmission planning is new, the court said, citing prior commission Orders 890 and 888.

The judges also said the challengers mischaracterized “mandated transmission planning as mandating binding commercial relationships.”

The allegation that Order 1000 interferes with state regulation of planning “poses a closer question,” the court acknowledged. “But while petitioners’ argument is not without force, relevant precedent” supported FERC, the court ruled, saying “the commission possesses greater authority over electricity transmission than it does over sales.”

‘THEORETICAL THREAT’ BASIS FOR ORDER 1000

Opponents said the commission failed to provide evidence needed to justify the rule and that it was improperly seeking to change already just and reasonable planning practices.

The commission justified Order 1000 on the “theoretical threat” that “the narrow focus of current planning requirements and shortcomings of current cost allocation practices create an environment that fails to promote the more efficient and cost-effective development of new transmission facilities.”

The court said the challengers “misconceived the nature of the commission’s evidentiary burden.”

It backed FERC’s conclusion that Order 890 was insufficient to ensure just and reasonable rates because it did not require transmission providers to consider regional transmission alternatives that might be more cost effective than solutions identified in local transmission plans.

The challengers’ contention that FERC had failed to recognize that electric transmission is a natural monopoly “misconceives the basis for the competitive benefits predicted by the commission,” the court said. It cited antitrust literature that concludes that competition for a natural monopoly can be beneficial.

“Even in a naturally monopolistic market, the threat of competitive entry (e.g., through competitive bidding) will lead firms to lower their costs, which thereby generally lowers cost-based utility rates,” the court said.

REMOVAL OF FEDERAL RIGHTS OF FIRST REFUSAL

Public Service Electric and Gas and other incumbent transmission owners contested Order 1000’s requirement that utilities eliminate from their tariffs and agreements certain rights of first refusal (ROFR). ROFRs give incumbents the option to construct any new transmission facilities in their service territory, even those proposed by third parties.

Continuing ROFRs would discourage non-incumbents from identifying cost-efficient projects, resulting in the development of transmission facilities “at a higher cost than necessary,” the commission said.

The challengers said the commission should be required to provide evidence that existing ROFRs were adversely affecting rates. Such evidence did not exist, they contended, because awarding projects to non-incumbents would mean the loss of economies of scale and scope.

The incumbents also contended that eliminating ROFRs would undermine reliability because non-incumbents might lack the financial backing or technical expertise to complete essential projects on time.

The court said FERC properly addressed reliability concerns by continuing ROFRs for projects that would be located entirely within a utility’s service territory and would not be subject to regional cost allocation.

The challengers also said there was only a tenuous relationship between the incumbents’ monopolies and rates. As a result, they contended, FERC lacked authority to remove them under Section 206, which is limited to practices “affecting” a rate.

The court again made a distinction between Order 1000 and the CAISO case cited by opponents.

“The relationship between rights of first refusal and rates is far more direct than the relationship between corporate governance and rates. Nothing suggests that replacing the members of a board will necessarily affect rates. … The challenged orders here provide what was lacking in CAISO: an economic principle that directly ties the practice the commission sought to regulate to rates.”

The court also rejected arguments that differences between the FPA and the Natural Gas Act (NGA) undercut FERC’s jurisdiction.

While the NGA contains a provision analogous to FPA Section 206 that gives the commission authority to regulate practices affecting rates, it also contains a separate provision expressly authorizing the commission to regulate the construction of natural gas pipelines. The FPA does not include a similar provision regarding construction of electric transmission.

The court said it found the petitioners’ argument “unconvincing,” concluding that Section 206 does not “unambiguously” limit the commission’s authority.

“We think that the commission’s reading of Section 206 is reasonable. Petitioners give us no persuasive reason to think otherwise,” the court ruled. “…The challenged orders take great pains to avoid intrusion on the traditional role of the states.”

The court also rejected complaints that the ROFR removal violates the Mobile-Sierra doctrine, which presumes that freely negotiated wholesale-energy contracts are just and reasonable unless found to seriously harm the public interest.

Some petitioners argued that the commission unlawfully deprived them of their rights of first refusal without first making the finding required to rebut the Mobile-Sierra presumption. The court said FERC had committed to hearing the petitioners’ Mobile-Sierra arguments when it reviews the new tariffs utilities must file to comply with Order 1000.

COST ALLOCATION

Order 1000’s cost allocation rules came under fire from both sides, with some challengers accusing FERC of overstepping its authority, and ITC Holdings and others urging stronger measures.

The court said the commission had used a “light touch” in requiring that the costs of new transmission are allocated to beneficiaries while leaving the details to transmission providers.

ITC contended Order 1000 is inconsistent with the commission’s cost causation principle because it required interregional transmission lines to be approved by each transmission planning region in which the line is located.

The commission acknowledged that its rule “may lead to some beneficiaries of transmission facilities escaping cost responsibility because they are not located in the same transmission planning region as the transmission facility.”

FERC said it went this route because “allowing one region to allocate costs unilaterally to entities in another region would impose too heavy a burden on stakeholders to actively monitor transmission planning processes in numerous other regions.”

The court said it would not second guess the commission’s compromise. “The commission’s balancing of the competing goals of reducing monitoring burdens and adopting policies that ensure that cost allocation maximally reflects cost causation is wholly reasonable under the deferential review we accord in rate-related matters.”

PUBLIC POLICY REQUIREMENT

FERC faced three challenges to its requirement that transmission planners account for federal, state and local laws and regulations, such as renewable portfolio standards.

One faction said FERC exceeded its authority while a second said FERC should have required transmission planners to consider the needs of load serving entities. A third said the rule was too vague, leaving transmission providers unable to determine what is required of them.

“None [of the arguments] is persuasive,” the court ruled, saying they were based on misunderstandings of the rule.

The court said those challenging FERC’s jurisdiction “seem to argue that the commission can only exercise authority to promote goals specified in the FPA and that the public-policy mandate cannot be justified with respect to any of those goals.”

“This argument misunderstands the nature of the mandate. It does not promote any particular public policy or even the public welfare generally. The mandate simply recognizes that state and federal policies might affect the transmission market and directs transmission providers to consider that impact in their planning decisions.”

RECIPROCITY

The commission was also attacked from two sides for its requirement that non-public utility transmission providers that want access to a public utility’s transmission lines must participate in transmission planning and cost allocation. Non-public utilities, such as municipal utilities and rural cooperatives, are not subject to Section 206 of the FPA, and thus not directly covered by Order 1000.

One group of challengers said the commission lacked justification for expanding the reciprocity conditions of Orders 890 and 888 to include planning and cost allocation. The Edison Electric Institute said the commission should have mandated the participation of non-public utilities in planning and cost allocation.

“Both contentions miss the mark,” the court said, saying the commission’s conditional requirement for non-public utilities had “a reasoned and adequate basis.”

The reciprocity condition in Order 1000 “is fundamentally the same [as that required by Orders 888 and 890]. … The current orders simply apply that principle to transmission planning and cost allocation,” the court continued.

“The commission provided an adequate justification for that change — namely, that non-public utilities that take service from public utilities will benefit greatly from the reforms announced in the Final Rule, because ‘a well-planned grid is more reliable and provides more available, less congested paths for the transmission of electric power in interstate commerce.’”

August 12, 2014

Combined-Cycle Model’s Cost, Benefit Uncertain

By Rich Heidorn Jr. and William Opalka

PJM is hesitating on plans to introduce more sophisticated modeling of combined-cycle plants because of an inability to quantify potential savings and reports of escalating prices.

Currently, a combined-cycle plant must be entered into eMKT as either a combustion turbine or steam unit. Neither option captures its true capabilities, which can vary greatly based on unit configurations and use of duct burners.

PJM has been considering spending about $1 million on software from Alstom that it believes will give it more flexibility. But PJM’s Tom Hauske told the Operating Committee that PJM and the Market Monitor have been unable to quantify savings to justify the software purchase.

Joel Luna of Monitoring Analytics said the model would result in more efficient use of combined cycles with multiple configurations, allowing PJM to decide the optimal configuration depending on expected load and system conditions. It also would make the most of the peaking segment of PJM’s combined-cycle plants by allowing operators to make better decisions about how to schedule such units based on their technical parameters.

Luna said the result will be greater operational flexibility, more accurate pricing and reductions in uplift and production costs.

In 2013, there were 291 instances in which operators ran a combined-cycle plant at its minimum load for its entire operating interval — suggesting inefficient use of PJM resources.

If better software could reduce those start costs by half, Hauske said, it would produce savings of $2.4 million. “That’s not a firm number,” he cautioned.

“We have reasonable qualitative reasons [for making the change],” said Mike Bryson, executive director of system operations. “We’re a little concerned that we don’t have great quantitative stuff.”

“If we can’t quantify the savings, are we going to spend $1 million?” Luna asked stakeholders.

“A million would be worth spending,” answered Dave Pratzon of GT Power Group, which represents generators. Pratzon said he was concerned by reports that the Southwest Power Pool has reportedly put their purchase of the Alstom software on hold because of costs rising as high as $4 million.

But he added, “If we thought we had a good solution for $1 million, I think it would be worth doing.”

Duke’s Ken Jennings agreed, saying less efficient modeling inhibits the ability to regulate system frequency.

SPP spokesman Tom Kleckner said SPP had planned to implement the software in November 2015, but there were concerns about the potential cost, which led the board two weeks ago to ask for further study. “The board wanted to have a more detailed cost-benefit analysis,” he said. SPP declined to discuss specific cost figures.

Hauske said PJM is unaware of any region using the Alstom software, although he said MISO is considering a June 2015 implementation.

A MISO spokeswoman said yesterday that the software program is under review but denied plans for a 2015 deployment.

“If the evaluation demonstrates positive prospects, MISO will work with stakeholders to develop a detailed design and implementation plan,” MISO said in a statement. “At this stage, we haven’t purchased any production level product, and there is no current plan of implementing this enhancement in 2015.”

Bryson noted that PJM’s Aug. 1 white paper stressed the need for flexibility. “That’s another reason to keep it on the table,” he said.

August 12, 2014June 15, 2023

Dooms-Lexington to be Out Through Winter

The Dooms-Lexington 500-kV line in Virginia will begin an extended outage next month and through winter to accommodate a rebuild of the 40-mile span.

The rebuild (Regional Transmission Expansion Plan project b1908) was ordered to prevent overloads on the line following the retirements of Chesapeake Units 1-4 and Yorktown Unit 1 generators.

The line will be out of service from Sept. 8 through June 5, 2015, returning to service for summer 2015 and then going offline again from Sept. 7, 2015 through Dec. 31, 2015.

To avoid limiting the output of the Bath County pump storage hydro plant, a special protection scheme (SPS) will be armed as needed to trip the Bath County generating and pump units on the loss of the Bath County-Valley 500-kV line. An existing Bath County “thermal” SPS will continue to be used as needed.

The project will also cause a potential thermal constraint on Valley transformer 1 for loss of the Dooms-Valley or Cloverdale transformers. Low voltages are possible from the loss of Bath County-Valley.

PJM authorized continuing work through the winter to reduce the overall outage duration by at least six months and coordinate it with other RTEP outages: the Cloverdale-Lexington 500-kV line in 2016 (AEP); the Cunningham-Elmont 500-kV line in 2016/2017; the Dooms-Cunningham 500-kV line in 2018; and the Mt. Storm-Valley 500-kV line in 2019/2021.

PJM planners identified no reliability issues during the winter outage. The rebuild is expected to be completed by June 2016.

August 12, 2014June 15, 2023

PJM UTC Case Likely Headed to Court After FERC Notice

By Rich Heidorn Jr.

FERC Moves on Case that Figured in Bay Nomination

utc — Norman Bay, with Richard Gates looking on, at his Senate confirmation hearing responding to questions about his handling of the Powhatan case.

In 2009, a Ph.D. electrical engineer turned energy trader shared with a suburban Philadelphia portfolio manager a seemingly unbeatable way to make money trading in the PJM market. The key was a poorly designed market rule that overcompensated up-to-congestion (UTC) trades with rebates for transmission line losses.

It was so easy, portfolio manager Kevin Gates said later, that “a monkey throwing darts at a dartboard” could have made money.

Gates feared PJM would realize its mistake before long. But in the meantime, he told his investment partners, they “should drive a truck through that loophole.”

That they did. By ramping up volumes on UTC trades that had little or no underlying risk, they made $4.7 million over five months in 2010 before PJM asked the Federal Energy Regulatory Commission to change the rule.

Four years later, the profits have shrunk, as Gates and his partners have spent more than $1.5 million on lawyers and consultants fighting a FERC investigation.

Last week, FERC staff issued a Notice of Alleged Violations against Gates and his partners, setting the stage for a showdown in a case that some critics say illustrates the excessive zealousness of FERC’s Office of Enforcement under former Director Norman Bay. The notice was filed the day after Bay was sworn in as the commission’s fifth member.

The facts, for the most part, are not in dispute. Thus the case will turn on legal interpretations: Were Gates’ trades riskless, and thus improper, “wash” trades, as FERC contends, or permissible “spread” trades? Did FERC provide proper notice that seeking profits through the line-loss rebates alone was improper? And if FERC thought it had a strong case, why did it wait nearly four years to bring it?

The following account of the case is based on records released by Gates and interviews with some of the principals.

Investment Fund Expands into Energy

Kevin Gates and his identical twin Rich manage private investment funds from an office in the Philadelphia suburb of West Chester, Pa. In 2008, the brothers met Houlian “Alan” Chen, who had emigrated to the U.S. in 1995 after receiving his doctorate degree in power engineering from Tsinghua University in Beijing.

Chen worked for about 10 years as a power analyst for several energy companies, creating models to forecast power prices, before forming his own investment fund in 2007.

Chen mostly traded up-to-congestion trades. UTCs, which load-serving entities use to hedge congestion risk, earn or lose money based on price changes between the day-ahead and real-time energy markets at individual pricing nodes. UTC traders profit if the difference between DA and RT prices is in the direction bid by the trader and the difference was large enough to cover the costs of scheduling the transactions.

Soon after meeting them, Chen began trading on behalf of the Gates brothers and their investors, who wanted to expand their investment options. Chen typically invested $4 of the Gates’ group cash for every $1 of his own.

Chen changed his trading strategy after he began receiving rebate payments, or transmission loss credits (TLCs), in October 2009.

Transmission Line Losses

PJM charges those moving power on its grid a fee to account for line losses — energy lost as heat during transmission. PJM’s method treated every transmission as if it were the last transmission in the system. Because this charged each buyer for the most problematic transmission at the time, it collected far more than actual losses.

As a result, PJM won FERC approval for a mechanism to refund the overcollections to traders, the Marginal Loss Surplus Allocation (MLSA). (See Split Decision for Financial Traders on PJM Line-Loss Collections.)

Although UTCs don’t involve the movement of physical energy, UTC traders then had to reserve transmission service for each transaction, making them eligible for the line-loss rebates.

Chen discovered the rebates were far more than what he had paid for line losses and thus a potential source of profits. After several months of this found money, Chen and his investors began increasing the volume of their trades in February 2010. They were among a handful of traders who PJM says netted $19 million in unjust profits through the rebates.

Paired Trades

To profit on the rebates and limit the risk of loss due to the DA-RT price differences, Chen made paired trades, buying a day-ahead position in MISO and selling it at a point in PJM, while doing the same thing in the opposite direction.

At first, Chen chose an A-to-B, B-to-C trading formula, choosing “A” and “C” nodes whose prices closely tracked each other, such as Mount Storm, W.Va., site of Dominion’s largest coal-fired generator, and Greenland Gap, W.Va., the location of a Dominion wind farm 11 miles to the east. One of his favorite trades was Mount Storm to the MISO interface paired with MISO to Greenland Gap.

Had he and the Gateses continued this pattern, FERC might not be pursuing him now.

But on May 30, 2010, Chen and his partners were shocked when the UTC between MISO and Greenland Gap unexpectedly spiked and the Mount Storm-MISO trade that was intended to offset it failed to move.

Chen’s trades lost almost $180,000 on the change in price spreads. The $18,000 in scheduling costs was offset by the $22,000 in line-loss rebates, resulting in a net loss of more than $176,000.

Chen told Kevin Gates that the large volume of his trades may have contributed to the divergence between the two legs, saying “I suspect the trades we put on affected the day-ahead model runs.”

As a result, Chen changed his strategy, frequently dropping the A-to-B, B-to-C formula for a simple A-to-B, B-to-A round trip.

Assuming both legs of the matched pair cleared, this eliminated the risk of any price difference between the two trades. And that, said FERC, made them improper “wash” trades — transactions that involve no economic risk, no net change in ownership and serve no legitimate business purpose.

FERC had encountered wash trades before. Its investigation of market manipulation in the California and Western energy markets in 2000 and 2001 found that several energy trading companies, including Enron, had engaged in wash trades to create the illusion of liquidity and affect price indices to which contracts are linked. Although the commission then had no regulations on wash trading, such trades were prohibited in markets regulated by the Commodity Futures Trading Commission.

Moving the Market

In their preliminary findings, FERC staff told Chen and Gates that their large trading volumes “adversely affected the whole PJM market.” They cited a discussion between Chen and the other investors in which they acknowledged that their volumes were “moving the market.” A Gates associate complained that “we are trading too much and are bumping up against volume” and suggested they “scale back.”

Between February 2010 and early August 2010 — when PJM asked FERC to approve Tariff changes to close the loophole (ER10-2280) — Chen, Gates and their partners acquired 620,000 MWh eligible for the rebates, turning a $4.7 million profit. The rebates were large enough to cover the scheduling and transmission costs in more than 80% of the hours in which Chen used the identical pair strategy, according to FERC.

Legal Debate

Chen and the partners say their trades were not wash trades because they had a legitimate business purpose: Chen and his investors were making money on the trades.

They also faced the risk that one of the legs might not clear and they would be exposed to the DA-RT price differences. That would occur if the price spread they bet on was too low.

FERC rejects that argument, saying that Chen always bid a spread higher than historical experience for his selected nodes and usually bid at the maximum $50/MWh. The matched trades, FERC said, “never failed to clear.”

FERC’s authority to police market manipulation, which was expanded in the 2005 Energy Policy Act, largely mirrors the Securities and Exchange Commission’s trading rules.

The commission said Chen’s trading was similar to the conduct that the SEC and the Third Circuit Court of Appeals found illegal in the Amanat case, in which a trader seeking to collect rebates based on trading volume used a computer program to enter thousands of sham trades that bought and sold the same securities within a very short time period.

Gates and Chen countered with an affidavit from former SEC attorney Richard Wallace, who said that “trading for the purpose of collecting a rebate is considered a lawful and recognized practice in the securities markets.” When the SEC changed rules to prevent rebate-seeking trading, Wallace said, it did not seek to punish the traders who took advantage of the old rules.

FERC also rejected claims that Chen had no notice that profiting from the rebates alone was improper.

In the 2008 Black Oak Energy case, in which the commission confirmed the basis for PJM’s distribution of the refunds, staff said the commission sought to avoid a market rule in which “arbitrageurs can profit from the volume of their trades.”

Chen’s attorney, John N. Estes III, reads the Black Oak case far differently. In his response to the staff’s preliminary findings, Estes said that while the commission acknowledged the risk of arbitrageurs profiting from trading volume, it never said it was improper to do so.

“To conclude otherwise would fundamentally alter the obligations of market participants,” Estes wrote. “Rather than make decisions consistent with existing price signals, Enforcement’s theory of this case expects them to second-guess whether or not certain aspects of the Commission-approved markets are ‘appropriately’ functioning, and then adjust to their behavior accordingly.”

The investors’ attorneys also said their clients made no attempt to conceal their trading strategy. Thus there was none of the “fraud, artifice or deceit” typical of true market manipulation.

FERC said Chen and Kevin Gates were aware that their trading strategy carried regulatory risk.

“It really concerns me if PJM ever reverts back to those days without [transmission loss credits] or the TLC calculation was/is incorrect and we have to pay back all or some of the TLC refunds, we are going to be in big trouble,” Chen said in a message to Gates.

Gates responded: “[i]f you’re really concerned, then I’m really, really concerned” and suggested they “contact a law firm, the FERC or PJM to try to get more insight into this issue.”

They never did so, FERC says.

Estes said Chen’s trades “added value” to the PJM markets by contributing to price discovery and, “to the extent they caused day-ahead prices to move closer to real-time prices, they promoted market efficiency. They cannot be considered ‘wash’ transactions because they made money and because there was always a nonzero risk that Dr. Chen would be exposed to real-time price spread changes.”

Investigation Begins

FERC began investigating Chen and his partners in August 2010, after being alerted by PJM. Chen had stopped his round-trip trading immediately after receiving a call from PJM Market Monitor Joe Bowring on Aug. 2, 2010.

Over the next three years, Chen and his partners responded to FERC data requests and sat for depositions while their lawyers sparred with FERC’s attorneys and provided affidavits from an economist and an attorney supporting their position.

After one deposition, according to Kevin Gates, a FERC attorney told his lawyer, “He’s a businessman. He should know it’s cheaper to settle than to fight this.”

One company that engaged in similar trades, Oceanside Power, did go that path, agreeing to settle the charges against it by disgorging profits of $29,563 and paying a fine of $51,000 (IN10-5).

But Gates and Chen refused.

In October 2011, FERC said a charging decision was “imminent,” according to William M. McSwain, attorney for the Gates brothers.

FERC did not act, however, until August 2013, when FERC staff delivered a 28-page “preliminary findings” letter summarizing why they thought Chen’s trades were improper. Attorneys for Chen and Gates rejected the arguments and reiterated their demand that FERC end the investigation.

FERC refused.

Gates Goes Public

Frustrated, Kevin Gates began planning a publicity campaign to make the case that he and his partners had been unfairly hounded by FERC.

On Jan. 30, President Obama nominated Bay, then director of FERC’s Office of Enforcement, to fill the seat of former FERC Chairman Jon Wellinghoff.

A month later, Gates went public, launching a website that included much of the correspondence between FERC and the investors’ attorneys and written and video testimonials from an all-star cast including Harvard professor William Hogan and Susan J. Court, Bay’s predecessor as FERC enforcement chief.

FERC critics rallied in support of Gates and Chen, saying the case illustrated the agency’s overzealousness. Former FERC general counsel William Scherman cited the case in a Wall Street Journal op-ed published days before Bay’s Senate confirmation hearing.

FERC Gets More Teeth

When manipulative schemes by traders at Enron and other power marketers roiled the Western energy markets in 2000-01, FERC’s enforcement staff consisted of 20 lawyers in the Office of General Counsel. The maximum penalty FERC could impose was $10,000 per violation per day.

In the 2005 Energy Policy Act, Congress granted FERC expanded authority to police manipulation and increased its maximum penalties to $1 million per violation per day.

FERC’s enforcement unit is now staffed with about 200 economists, accountants, auditors, former traders and attorneys, including former prosecutors.

Under Bay, a former U.S. Attorney, FERC has issued orders demanding more than $1.1 billion in penalties and disgorged profits in market manipulation cases.

At Bay’s Senate confirmation hearing in May, the Gates brothers were sitting in the row behind him. Richard was on camera, over Bay’s shoulder, during the entire two-hour hearing as several Republican senators pressed the nominee to address Scherman’s criticism that Bay was driving Wall Street banks out of energy trading with heavy-handed enforcement tactics.

Bay survived the onslaught and was sworn in last Monday. On Tuesday, FERC issued a “Staff Notice of Alleged Violations,” the commission’s first public acknowledgement of the investigation. Later last week, staff sent the Gateses’ attorney a “1b 19” letter notifying them that staff would recommend the commission seek penalties.

(Although FERC’s preliminary findings challenged $4.7 million in profits the investors made between February and August 2010, the notice issued last week cites only trades made after June 1 on behalf of Chen and the Gateses’ Powhatan Energy Fund.)

De Novo

While most of FERC enforcement cases that become public are quickly settled, Chen and Gates vow that won’t happen in their case. Thus the next step will likely be a commission vote on whether to issue an Order to Show Cause.

If he can’t persuade the commission to drop the case McSwain said, the case will end up in a U.S. District Court.

It would be the third case contested in a de novo court review, joining pending cases involving Barclays bank and Richard Skillman.

Barclays is in federal district court in California, fighting an order that it pay a $453 million fine and disgorge $35 million in unjust profits over alleged manipulation of California and other western power markets. In Maine, energy consultant Richard Silkman is challenging a $1.25 million penalty. One central point of contention is how broad the federal court’s review should be, with FERC arguing for a narrow interpretation. (In addition, BP is challenging a $28 million penalty before a FERC administrative law judge.)

Members of the energy bar say those cases, along with the Chen/Gates case, will help to clarify questions about the limits of the FERC’s expanded enforcement authority.

Their attorneys say Chen and the Gates brothers are looking forward to their day in court.

“If we end up in federal court we start from scratch,” McSwain said in an interview. “It’s the first time we have a neutral decision maker.”

August 12, 2014

PJM MIC OKs Settlement, Credit Changes

The Market Implementation Committee approved several changes recommended by the Market Settlement and Credit subcommittees regarding data submission deadlines and credit requirements.

Power Meter and InSchedule

One set of changes, which will be effective June 1, 2015, would extend the deadlines for electric distribution companies (EDCs) to submit Power Meter and InSchedule data to address problems with reporting output for non-utility generators. The delay will allow a higher percentage of actual load data to be reported in InSchedule, particularly for EDCs with smart meters, and reduce the reconciliation adjustments.

Power Meter deadlines would be extended by an hour:

Monday – Thursday Operating Days: Next business day @ 4 p.m. Eastern Prevailing Time (EPT)
Friday – Sunday Operating Days: Monday @ 4 p.m. EPT

InSchedule deadlines would be extended by a day:

Monday – Thursday Operating Days: Two business days @ 4 p.m. EPT
Friday – Sunday Operating Days: Tuesday @ 4 p.m. EPT

Meter correction data deadlines would be extended by one month. The change would allow more time for generators and EDCs to gather data, improving accuracy of submitted corrections and reducing or eliminating later bilateral adjustments. PJM also would gain additional time to process and include the meter corrections in the bill.

In addition, load reconciliation data will be considered in balancing operating reserve (BOR) for deviation calculations. The change will affect all participants with BOR deviations. Load reconciliation billing would be performed under the current 60-day schedule.

Capacity Charge Reconciliation

The MIC also approved a change to provide relief for Pennsylvania EDCs squeezed by PJM and Pennsylvania Public Utility Commission deadlines.

PJM requires EDCs to upload their Peak Load Contribution (PLC) and Network Service Peak Load (NSPL) data to eRPM 36 hours prior to the operating day. The Pennsylvania PUC issued an order in April requiring that EDCs switch customers to new energy suppliers within three business days of notification of the switch. Under the PUC’s previous rules, it took 11 to 40 days to switch electric suppliers.

The new rule gives EDCs only one day to update their records to recognize the change and correct the PLC and NSPL values, raising the possibility of retail suppliers receiving inaccurate capacity charges.

The revised schedule retains PJM’s 36-hour-advance submission deadline but allows corrections to be made until noon the next business day.

Virtual Transactions Credit Requirement Reduced

As a result of improved cleared data availability under the eCredit system, the MIC approved a reduction in the credit requirement for virtual transactions to two days (one day of submitted bids for next market day plus one day of cleared bids) from four days (submitted bids for upcoming market day plus cleared bids for three prior days).

Also changed was the definition of credit available for virtual transactions, which would no longer include “billed” profits. The Credit Subcommittee said such profits cannot be depended on for recovery of transaction losses, because they are being committed to payout at the time a loss would be discovered.

August 12, 2014June 15, 2023

CPV Md. Plant Goes Forward Despite FERC Ruling

By Michael Brooks

cpv — St. Charles site construction (Source: CPV)

Competitive Power Ventures plans to begin major construction next month on its 661-MW combined-cycle plant in Maryland despite an unfavorable ruling last week from the Federal Energy Regulatory Commission.

FERC rejected CPV’s request that it declare the company’s contracts with regulated utilities in New Jersey and Maryland “just and reasonable.” CPV filed the request in early June, believing that FERC’s approval would nullify appellate courts’ determinations that the contracts violated FERC’s ratemaking powers. (See Rebuffed By Courts, CPV Seeks FERC End-Around.)

Instead, FERC said, “In considering whether the rates, terms, and conditions in a contract are just, reasonable and not unduly preferential or discriminatory under the FPA, the contract must first be a valid contract.” As the contracts had already been found invalid by the courts, FERC rejected the filing.

CPV announced Friday that it has obtained financing from 15 lenders, led by GE Energy Financial Services, for the $775 million St. Charles Energy Center in the Southern Maryland community of Waldorf.

CPV Chief Financial Officer Paul Buckovich told The Baltimore Sun that the costs are much higher than if the company had come to lenders with the original contracts. “The financing is much more expensive and less beneficial to sponsors and ultimately to the ratepayers,” he said.

CPV has already begun preliminary site work on the Waldorf site. The plant will be built under a “medium-term contract financing” that will require CPV to refinance five years after starting operations. The arrangement is similar to that used to build CPV’s Woodbridge, N.J., plant, which is also under construction.

CPV had sought to build two plants supported by contracts with utilities in Maryland and New Jersey. Each contract was based on a benchmark amount; if CPV’s capacity revenue was less than this amount, the utilities would pay CPV the difference. If the revenue was more, CPV would pay the utilities.

The utilities were forced to sign the contracts by each state’s public utilities commission, which led to them filing lawsuits.

August 12, 2014June 15, 2023

PJM: Eliminate Synchronized Reserve ‘Windfall’

PJM last week proposed eliminating some generators from the calculation of Tier 1 synchronized reserves, along with an unintended “windfall” the Market Monitor says those units receive in compensation.

Under a proposal outlined to the Market Implementation Committee last week, PJM’s market clearing engine would assume no synchronized reserve contribution from nuclear, wind, solar, batteries and certain hydro units that PJM says cannot be counted on to provide the service.

Although the clearing engine would set those resources’ synchronized reserve contribution to 0 MW, the generators would be credited for reserves they do provide in a spinning event.

The rule change also would eliminate a rule that requires PJM to pay Tier 1 resources when the non-synchronized reserve price rises above zero. Under the revision, only those resources that can “reliably provide” synchronized reserve service would receive that compensation.

“We’re paying Tier 1 a lot of money — in fact, a huge amount of money” for unresponsive resources, Market Monitor Joe Bowring said. “There’s no reason to do it.”

PJM’s 1,375-MW synchronized reserve requirement is equal to the largest contingency in the RTO. Tier 1 resources — online units following economic dispatch that are only partially loaded and thus able to increase output within 10 minutes — provide most of the needed reserves.

Tier 2 resources such as demand response and combustion turbines — which are capable of providing reserves within 10 minutes and have cleared the synchronized reserve market — make up any shortfall.

Realistic Estimates

PJM currently estimates Tier 1 resources based on the difference between units’ bid-in parameters (EcoMax) and economic dispatch points, rather than on explicit offers from resources, making it prone to errors. If PJM overestimates the Tier 1 resources available, it won’t procure enough Tier 2 resources.

“We have to make sure we have realistic estimates of what resources can increase output and what couldn’t be relied on,” explained Stu Bresler, vice president of market operations.

Wind units typically operate at their maximum capacity — but that is dependent on weather conditions, Bowring noted. “You have to be able to know [the extra output is] there, and you can’t do that with wind, because the wind may be blowing. It may not be.”

Synchronized Reserve Windfall

In addition, PJM’s synchronized reserve costs are higher than necessary because of the unintended consequence of its shortage pricing rules, which require that Tier 1 reserves be paid the Tier 2 synchronized reserve clearing price any time the non-synchronized reserve clearing price is above $0.

“This rule significantly increases the cost of Tier 1 synchronized reserves with no operational or economic reason to do so,” the Monitor said in the 2013 State of the Market report. “PJM is not actually reserving any Tier 1 but simply paying substantially more for the same product without any additional performance requirements.”

Although the rule doesn’t apply in most hours, when it does, it’s expensive. In 2013, the Monitor said, 40% of payments for Tier 1 reserves were paid when they were not needed. “This is a windfall payment to Tier 1 reserves,” the Monitor said.

Bowring said PJM’s proposal will not eliminate the problem. The RTO would still pay some Tier 1 resources the Tier 2 price when the non-synchronized reserve price is greater than zero, he said.

August 12, 2014

FirstEnergy Wants Regulated Companies to Subsidize Generation

By Ted Caddell and Rich Heidorn Jr.

Ohio electricity consumers paid FirstEnergy $6.9 billion to compensate the company for generation assets “stranded” when its monopoly over energy sales was eliminated in 1999.

Now, FE is asking them to pay again to prop up nuclear and coal generating plants the company says are at risk of closing due to low energy and capacity prices.

While the economics of the proposal aren’t convincing to consumer advocates and environmentalists, the company seems to be betting on its appeal to state lawmakers eager to save the plants’ jobs and tax revenues.

Under a proposal dubbed “Powering Ohio’s Progress,” the company asked the state Public Utility Commission last week to order three of its regulated utilities to sign 15-year purchase-power agreements with the Davis-Besse nuclear plant, the mammoth coal-fired W.H. Sammis plant and two Ohio Valley Electric Corp. (OVEC) units — located in Gallipolis, Ohio, and Madison, Ind. — in which it owns a 105-MW interest.

FirstEnergy Assumptions

In effect, FE wants distribution customers of Toledo Edison, Ohio Edison and The Illuminating Company to subsidize the plants in at least the short term in return for the potential upside in the later years. FE projects market revenue will begin exceeding costs in 2019 and continue to do so throughout the remainder of the program, saving retail customers $2 billion (nominal) or $800 million in net present value — an average of $360 (nominal) per customer — over the 15-year term.

The projected savings are based on layers upon layers of assumptions, including future fuel prices, economic growth and operating expenses. Some of the assumptions, such as an ICF International projection on future electricity prices, have been redacted and cannot be inspected by the public (though the numbers will be available to Ohio PUC analysts).

UBS Securities said the PPA was priced to begin at about $65/MWh — $26 above current market prices —and increase by $2/MWh annually.

FE said the plan will “help mitigate rising retail prices and help ensure that vital baseload power plants built to serve Ohio customers remain available to support the state’s electric consumers and businesses.”

“Ohio’s economic security and quality of life is highly dependent on maintaining a diverse mix of baseload coal and nuclear power plants,” FirstEnergy CEO Anthony Alexander said in a statement. “Powering Ohio’s Progress helps ensure these vital facilities continue powering the state’s energy-intensive economy, helps protect customers against volatility as future prices rise, and preserves $1 billion in annual statewide economic benefits, vital tax revenues for local communities and an estimated 3,000 direct and indirect jobs created by these plants.”

Deja Vu

The proposal makes no sense to the Office of the Ohio Consumers’ Counsel.

“1.9 million consumers paid billions of dollars to FirstEnergy for its transition to deregulated power plants under a 1999 Ohio law,” OCC spokesman Scott Gerfen said. “Fifteen years later, FirstEnergy is again asking consumers to pay charges related to the power plants. FirstEnergy’s requests include asking the government to guarantee profits for what are deregulated power plants whose profits should instead be determined by the electricity market.”

The Sierra Club also was critical.

FE “is essentially asking for a blank check to bail out their dirty, aging coal plants at the expense of customers, the environment and public health,” said Daniel Sawmiller, senior campaign representative for the Sierra Club’s Beyond Coal campaign. “We are urging the PUCO and Gov. [John] Kasich not to make Ohioans pay more every month for dirty coal plants.”

“The fact is,” Sawmiller said, “Ohio is a de-regulated state. They just want to go back to rate base. That is not what the law is in Ohio.”

Volatility Protection

That’s not how FE sees it. Company spokesman Douglas G. Colafella said Friday that the plan is aimed, in part, at preserving the reliability of regional power grid, and protecting FE customers from weather-related price spikes.

“Recent weather events, such as last winter’s polar vortex and September 2013’s unseasonable heat wave, have exposed potential vulnerabilities on the electrical grid serving Ohio and surrounding areas — in some cases resulting in severe retail price spikes,” he said. “In addition, a significant number of baseload power plants are being prematurely retired due to a variety of factors. Together, these issues are putting Ohio’s energy future at risk by challenging the reliability and affordability of electricity in our region.”

Under the plan, FE’s regulated Ohio utilities will buy the plants’ output from unregulated FirstEnergy Solutions, the power plant owners, and then sell it into PJM’s capacity, energy and ancillary services markets from June 2016 through May 2031.

The regulated utilities would pay all of the plants’ expenses, including fuel, operations and maintenance, depreciation and taxes, plus a “reasonable” return on invested capital of 11.15%.

The three utilities would net the revenues against costs, with the difference being passed along to customers through a “retail rate stability rider” that would act as a charge or credit on their monthly bills based on the fortunes of the plants in PJM’s markets. The utilities would freeze distribution rates, which they say have increased only 1% since 2009, through 2019.

“As power prices increase as projected over time, proceeds from the market sales that exceed costs from the purchased power agreement will be applied as credits on customers’ electric bills to mitigate volatility and address rising retail prices,” FE said in a press release.

The company predicts that its regulated utility customers in Ohio would pay higher prices for the first three years — about $3.50 per month for the first year — and then the market prices would increase and the surcharge would transform into a credit. None of it, however, is guaranteed.

Tough Sell

UBS analysts, who last month changed their outlook on FE from “hold” to “sell,” issued a report last week expressing skepticism that the company will win commission approval for the proposal, although a smaller, less expensive plan might pass muster.

“Given the PUCO staff’s rejection of AEP’s proposal to add just its OVEC ownership into a PPA rider, we suspect a similar reaction from staff,” UBS said. “The fundamental question for Ohio remains how politically palatable will it be to continue to allow substantial coal and nuclear retirements?”

FE is portraying the plan as an attempt to save two of its largest generation assets — the 2.2-GW Sammis plant and the 908-MW Davis-Besse nuclear plant. But UBS said the company’s leverage with state officials was reduced by the disclosure that the two plants cleared PJM’s Base Residual Auction in May.

In its quarterly earnings filing last week, FE reported that it cleared 8,930 MW in the capacity auction, up from 7,440 in the 2013 auction but down from the more than 10,000 MW that cleared in the prior three auctions.

Mansfield Retirement Risk

FE officials said that because its 2.4-GW Bruce Mansfield coal-fired plant had not cleared the auction, it would delay spending on a dewatering facility it needs to continue operation beyond the end of 2016, when the plant’s coal ash waste impoundment must close. The plant is Pennsylvania’s largest generator.

The Ohio PUC has not yet set a hearing date on the 1,000-page filing; the company has requested a decision by next April.

There are certain to be many eyes on the plan going forward.

“Needless to say, we are concerned for consumers,” OCC’s Gerfen said. “We are analyzing FirstEnergy’s new request, including its claim that there will be future cost savings. We then will make recommendations on behalf of consumers to the PUCO.”

August 12, 2014

Minimum Generation Event Exposes Flaws in Response

PJM has created a new emergency procedure and is testing a software fix following poor generator response to a minimum generation event July 5, officials told the Operating Committee last week.

Extremely mild temperatures and a holiday weekend resulted in an RTO peak of 61,300 MW — unusually light but in line with PJM’s forecast — forcing PJM officials to curtail 2,000 MW of imports and order cuts of 100% of reducible generation.

Of about 200 generation owners, only 31 (16%) responded to the eDart minimum generation report. Of those that responded, only half reported an emergency reducible value greater than 0 MW.

But only 1,458 MW of the 1,665 MW of reducibles — units that said they were willing to go below their economic minimum — responded, PJM’s Chris Pilong told the committee.

Among combined-cycle owners that responded, all reported economic minimum ratings — the lowest level a unit can achieve while following economic dispatch — equal to their emergency minimum — the minimum generation that can be produced by a unit while maintaining stability.

“We only know what the generation operators, owners tell us,” said Mike Bryson, executive director of system operations.

Pilong said the responses indicate the need for additional training. “We really need to be sure we have the right rules in place so that people are reporting the real emergency min and not the eco min.”

Low Prices

Pilong said many generators entered low-priced offers for the weekend, wanting to keep running over the holiday to capitalize on hot weather forecast for the following week. Pilong said operators also were stressed by the inability of PJM’s dispatch engine to set proper price signals for wind units bidding below $0/MWh.

The RTO is testing a software fix to allow prices as low as -$60/MWh, which should help incent wind units to respond automatically via automatic generation control (AGC). Currently, some wind operators do not respond to AGC signals, requiring phone calls from PJM operators.

In addition, PJM has created a new minimum generation advisory procedure that it can issue one or two days in advance of anticipated light load days.

Minimum Generation Event Chronology

PJM declared a minimum generation alert at 10:25 p.m. July 4, saying the RTO was within 3,286 MW of normal minimum energy limits.

At 12:25 a.m. July 5, a Saturday, operators issued a minimum generation emergency declaration, reducing prices to $0/MWh and indicating a need to cut generation at 3 a.m.

Shortly before 3 a.m., operators declared a minimum generation event, ordering a 50% cut in reducible generation. Generators were encouraged to sell energy outside the control area.

Thirty-five minutes later, operators upped the call for reducible generation cuts to 100%. It remained there until shortly before 8 a.m., when it was reduced to 50%.

Before then, at 3:30 a.m., operators manually ordered all remaining wind (1,000 MW) to zero and ordered three other generators offline. All hydro was either offline or pumping into storage.

Hot Water Heaters

John Farber of the Delaware Public Service Commission said the incident illustrated why PJM should create a resource category for thermal storage, such as hot water heaters, that can provide load. “PJM could help [the Department of Energy] move off the dime,” Farber said.

Farber was referring to DOE’s pending decision on whether to exempt large capacity grid-interactive water heaters from current energy efficiency standards or regulate them under a separate category.

August 12, 2014June 15, 2023

Federal Briefs

A federal judge approved a $27.8 million settlement between the Tennessee Valley Authority and property owners harmed by the utility’s massive coal ash spill in 2008. The spill occurred when a dike burst at TVA’s Kingston Fossil Plant and released more than 5 million cubic yards of toxic ash sludge from a containment pond. The sludge flowed into a river and fouled hundreds of acres along the river about 35 miles west of Knoxville, affecting about 800 property owners. U.S. District Court Judge Thomas Varian found TVA at fault in 2012.

More: PennEnergy

FERC Approves Settlement in Southwest Blackout

The Federal Energy Regulatory Commission last week approved a consent agreement that its Office of Enforcement and the North American Electric Reliability Corporation reached with the Imperial Irrigation District relating to a Sept. 8, 2011 blackout that left more than 5 million in the dark. NERC and FERC found that the IID violated four Reliability Standards in its operations leading up to the blackout that spread from Southern California to Arizona and Baja California, Mexico. The settlement mandates that the IID spend at least $9 million on system reliability improvements, with the remaining $3 million going to the U.S. Treasury and NERC.

More: FERC

DOE’s Research Info More Accessible Now

The Department of Energy has developed an Internet-based portal to a trove of its scholarly publications and research data. The Public Access Gateway for Energy and Science – PAGES – provides free access to manuscripts and published scientific journal articles within a year of publication.

“Increasing access to the results of research … will enable researchers and entrepreneurs to capitalize on our substantial research and development investments,” Secretary of Energy Ernest Moniz said. PAGES already contains a collection of accepted manuscripts and journal articles, and more data and links to articles and accepted manuscripts will be added as they are submitted. DOE hopes it grows by up to 30,000 articles and manuscripts a year.

More: Department of Energy

EPA Names New 2nd-in-Command

The Environmental Protection Agency last week named Lisa Feldt as acting deputy administrator, the second highest position in the agency. She replaces Bob Perciasepe, who served in the position since 2009. Perciasepe is leaving to become director of the Center for Climate and Energy Solutions, an advocacy group. Feldt’s appointment was among several staffing announcements at the agency.

More: The Hill

EPA Chief: Climate Change Should Be Taught in Schools

Environmental Protection Agency Director Gina McCarthy said in an interview she thinks the science behind climate change should be taught in the nation’s schools. “I think part of the challenge of explaining climate change is that it requires a level of science and a level of forward thinking and you’ve got to teach that to kids,” McCarthy said in an interview published last Friday in the magazine Irish American. Observersbelieve her remarks will generate controversy, especially among Republican lawmakers who remain skeptical of the idea of man-caused climate change.

More: The Hill

Final Rule on Nuke Waste Expected Soon

The Nuclear Regulatory Commission is expected to issue the final rule governing storage of nuclear waste, a rule that has impacted nuclear generating stations’ ability to store used fuel on site. The U.S. Court of Appeals for the D.C. Circuit in 2012 found that the NRC rule allowing on-site storage for up to 60 years violated the National Environmental Policy Act and ordered the NRC to come up with a new rule. The new rule is expected to be released within a month and will be named “Environmental Impacts of Continued Storage of Spent Nuclear Fuel Beyond the Licensed Life for Operation of a Reactor.”

More: PowerMag

NRC Cites Calvert Cliffs for Safety Violation

The Nuclear Regulatory Commission last week cited Exelon, operator of the Calvert Cliffs nuclear station in Lusby, Md., for a miscalculation that could have led to an unnecessary evacuation. Radiation detectors at the plant were accidentally set to trigger an alarm at radiation levels 100 times lower than what would have posed a safety threat. The alarm was never activated, and workers discovered the mistake and corrected it four months later.

NRC inspectors said the mistake could have caused an unnecessary evacuation and deemed it a safety violation. “Ideally, we want them to be in the right zone if they have an emergency event,” NRC spokesman Neil Sheehan said, “not under-classifying it but not over-classifying it, either.” The violation could result in increased NRC scrutiny of the plant.

More: The Baltimore Sun