AES Corp. announced last week that it is attempting to sell DPL Inc.’s generation fleet rather than spinning it off into an unregulated subsidiary.
The Public Utilities Commission of Ohio has ordered AES to separate DPL’s generation into an unregulated subsidiary by mid-2017, but Chief Financial Officer Tom O’Flynn told analysts Wednesday that the company may sell instead.
“We’ll explore all potential options to optimize the solution, and we recently began to evaluate the sale of DPL generation assets to an unaffiliated third-party…” O’Flynn said during an earnings call. “Obviously we can’t comment much as we’re in the very early stage of this process.”
$307 Million Charge
AES bought DPL, parent of Dayton Power and Light Co., in November 2011 for $3.5 billion in cash. The company said it wanted to increase its presence in the Midwest, where it already owned Indianapolis Power & Light Co.
Although the purchase price was a modest 9% premium to DPL’s stock price, the company now concedes the deal isn’t looking so smart. “To date, we have not realized the benefits that we anticipated at the time of acquisition,” AES said in its 10-K, filed last week.
The company recorded a $307 million charge ($0.41/share) for goodwill impairment at DPL in the fourth quarter of 2013, citing “lower than expected PJM cleared capacity prices for 2016/2017, lower expectations of future PJM capacity prices and lower projected energy margins.”
Retail Competition
(Source: AES)
Higher maintenance costs from planned outages and switching by retail customers also hurt DPL’s results for the year.
In 2013, about 42% of customers, representing two-thirds of the energy usage within DP&L’s service area, purchased power from competitive suppliers.
DP&L has been the default power supplier to those not shopping. But beginning this year, it will lose its monopoly on these Standard Service Offer customers. Ten percent of the SSO load will be sourced through competitive bids in 2014, rising to 100% in 2017.
DPL Energy Resources Inc., DPL’s competitive retail marketer, has more than 308,000 retail customers in Ohio and Illinois, including 130,000 of DP&L’s 515,000 distribution customers.
2013 Results
AES Corp.’s foreign businesses drove most of the company’s earnings news last week, with an unprecedented drought and bad currency exchange rates in Latin America to blame for much of its downturn in fortunes.
Its fourth quarter per-share earnings were 29 cents, compared to 31 cents in the previous year. Its year-end results were $1.29 per share, compared to $1.21 for 2012.
Like many other utilities, AES said it is going to concentrate on regulated business, and it is looking to sell generation assets. The company, which derives 75% of its earnings outside the U.S., announced late last year that it was shedding assets in Cameroon, India and Poland.
Generation Sale
Hutchings Station (Source: DPL)
AES will find a crowded field if it moves forward with a sale of DPL’s 3,453 MW of generation. Ameren Corp. sold five coal-fired merchant plants in Illinois to Dynegy Inc. last year.
Last month, Duke Energy announced its intention to sell its shares in 13 plants in the Midwest, including seven plants co-owned with DPL.
Dayton Power and Light owns 2,897 MW of capacity, most of it coal-fired. DPL subsidiary DPL Energy LLC owns 556 MW of peaking capacity in Ohio and Indiana.
A White House official dampened expectations that the Environmental Protection Agency will issue a greenhouse gas rule for existing power plants by the June 1 date set by the president last summer. Heather Zichal, deputy assistant secretary to the president for energy and climate change, said it would be premature to issue a rule for existing plants while still reviewing two million comments filed on the proposed GHG rule for new power plants, which was published in January, later than expected. The EPA extended the March 10 public comment deadline to May 9 at Congress’ request.
U.S. Supreme Court West Facade (Source: Wikimedia Commons)
The Supreme Court declined to hear questions raised by some states and utilities about cost allocation for regional power lines. Utilities and regulators in Illinois and Michigan had challenged an appeals court ruling upholding the Midcontinent Independent System Operator’s broad cost allocation design for “multi-value projects,” but the high court declined to take up the case. MISO’s cost-sharing regime is thus left in place.
The coal ash spill at Duke Energy’s shuttered Dan River plant in North Carolina has increased pressure on the federal government to issue strong disposal regulations. The power industry believes the Environmental Protection Agency will not regulate ash as a hazardous waste, and will leave regulatory choices to states, but environmental groups continue to argue for a hazardous designation and a strong federal role.
NREL Studies State Roles In Solar Market Development
A new National Renewable Energy Laboratory report concludes that the effectiveness of state solar policies is influenced by demographic factors such as median household income, solar resource availability, electricity prices, and community interest in renewables. NREL said the study provides “insight into the policy scope and quality that is needed to spur solar PV markets.”
The report includes case studies on three PJM states, citing Maryland’s “comprehensive policy portfolio with equal emphasis on all policy types;” North Carolina’s “strong interest in clean energy-related policy,” and Delaware’s experience, which it said “illustrates how targeted market preparation and creation policies can effectively stimulate markets.”
Shaheen-Portman Re-filed; Changes Aimed at Passage
An energy efficiency bill that has been stalled for months was reintroduced last week with some new provisions that could pave the way for passage, though timing of Senate floor action is still uncertain. The Energy Savings and Industrial Competitiveness Act, introduced again by Sens. Jeanne Shaheen (D-N.H.) and Rob Portman (R-Ohio), would strengthen model-building codes, create a building efficiency financing program, provide incentives for energy-efficient industrial motors, and more. Numerous new provisions, which brought more senators onto the measure, include repeal of a 2007 law requirement that new federal buildings use no fossil fuel energy sources.
Detroit-area Democratic Rep. John Dingell announced he would retire from the House of Representatives after a record 59 years. His wife, Debbie Dingell, is among those reportedly planning to run for his seat.
In his tenure, Dingell presided over the Energy and Commerce Committee’s passage of major energy and environmental legislation, including the Clean Air Act Amendments of 1990, which established the Acid Rain Program. He also was involved with the Energy Policy Act of 1992, which established incentives for renewable energy and conservation and created a full-fledged independent power business by allowing “exempt wholesale generators.”
He also led the committee during writing of the American Clean Energy and Security Act of 2009, referred to as the Waxman-Markey bill, which passed the House but died in the Senate. It would have created a greenhouse gas cap-and-trade program. Rep. Henry Waxman (D-Calif.) has also announced his retirement, placing Democratic leadership of the energy committee in contention.
Stakeholders last week agreed to develop technical standards for “smart” inverters that can allow solar PV and other renewables to provide reactive power.
The Markets and Reliability Committee approved a problem statement/issue charge directing the Planning Committee to develop standards and accompanying rule changes.
The increasing penetration of solar PV and other asynchronous generation resources, combined with the retirement of traditional generation, has made managing voltage more difficult in some regions. Smart or enhanced inverters allow such resources to provide reactive power support and increase their abilities to remain operating during frequency swings and low voltage. (See `Smart’ Inverters May Give Solar Reactive Capability.)
The new standards would apply to new sources of renewable generation, while allowing existing units to maintain the status quo, said PJM’s Frank Koza.
Many smart inverters are already installed on existing PV solar generators, but their enhanced capabilities have been disabled due to current conservative IEEE standards, which force generators to trip offline quickly to avoid islanding. Smart inverters are already being used successfully in Europe.
“These (regulations) could apply to any type of generation seeking interconnection,” said Koza, who noted that smart inverters could aid transmission and distribution projects, too.
Several stakeholders noted that the distribution system — where many inverters will be installed — is beyond the purview of PJM and urged the RTO to work with state regulators to determine jurisdictional boundaries and policy implications. This was added as a friendly amendment to the proposal, which passed without opposition.
PJM hopes to complete work on the issue in time for an August FERC filing.
The Markets and Reliability and Members committees last week approved revisions to the Operating Agreement to allow PJM to share non-public operational information with natural gas pipelines and local distribution companies.
The changes were prompted by FERC Order 787, which sought to increase coordination of the natural gas and electric sectors due to concerns over the ability of gas-fired generators to obtain fuel supply during the winter heating season. (See FERC OKs Gas-Electric Talk.)
The revised OA confidentiality provisions allow communication of non-public information “for the purpose of promoting reliable service or operational planning.”
While Order 787 applies only to communication with interstate pipelines, the revised OA also allows communications with LDCs and intrastate pipelines, provided these entities agree to no-conduit rules prohibiting them from sharing the information with marketing affiliates or third parties.
In January, FERC granted PJM temporary waivers of its confidentiality rules to allow the RTO to share information with natural gas operators during the arctic cold that strained gas supplies.
An energy trading firm that has been the subject of a FERC investigation for more than three years without being charged has decided to go on offense by releasing documents it says proves it has been unfairly hounded.
The dispute provides a case study for critics, including former FERC officials, who say the agency is punishing legitimate, if opportunistic, trading. It may be a topic that comes up when FERC enforcement chief Norman Bay faces a Senate hearing for confirmation as FERC chairman.
Among those on the team challenging FERC are Bay’s predecessor as enforcement chief, Susan J. Court, Harvard professor William Hogan and John N. Estes III, a partner with Skadden Arps and the go-to defense attorney for companies accused of market manipulation. (See sidebar “The Players.”)
$4.7 Million Profit
At the center of the case is Powhatan Energy Fund LLC, a West Chester, Pa., private investment fund headed by portfolio manager Kevin Gates and his identical brother Rich. FERC says Powhatan and a predecessor fund netted $4.7 million in profits in 2010 by taking advantage of a loophole for making low-risk up-to-congestion trades to profit from line loss refunds.
In August 2010, PJM asked FERC to approve Tariff changes to close the loophole (ER10-2280) and the commission notified Powhatan that it was opening up an investigation into the legality of its trading.
Since then, despite a growing file and a preliminary finding that the trades violated FERC market manipulation rules, FERC has not charged Powhatan.
After three and a half years in FERC’s crosshairs, the Gates brothers have had enough.
Website image
They have built an elaborate website laying out Powhatan’s defense, with copies of its correspondence with investigators and affidavits and video testimonials from a dozen former FERC officials and others supporting their case. FERC could not be reached for comment Monday.
Among those featured are former Court and nine Ph.D.s, including Hogan, former FERC economist David Hunger; consultant Roy Shanker, and two former chief economists for the Securities and Exchange Commission, Chester S. Spatt and Larry Harris.
Gates decided to go public after FERC last week rejected his call to terminate the investigation.
“Powhatan has about ten investors. These individuals have reputations that are important to them. They are concerned that FERC’s accusations will unfairly harm their relationships with family that they love, friends who enrich their lives, and business acquaintances who are vital to their livelihoods,” the company says in an introduction to the website. “…They do not want to carry the stigma of unfounded accusations on their shoulders.”
Trading Strategy
At the heart of the case are a series of trades made by Houlian “Alan” Chen, a Chinese immigrant and Ph.D. engineer hired by Powhatan, who found a way to take advantage of a quirk in PJM’s “marginal loss pricing” method for collecting transmission line-loss payments. The method treats every transmission as if it were the last transmission in the system. Because this method charges each buyer for the most problematic load transmission at the time, it collects far more than actual losses.
Chen was among a handful of traders who PJM says netted $19 million in profits by scooping up some of that money.
Chen determined that if he bought day-ahead energy in Midwest ISO, and sold it at a point in PJM in a UTC trade, and did the same thing in the opposite direction, he could frequently profit.
Although UTCs don’t involved the movement of physical energy, UTC traders then had to reserve transmission service for each transaction, making them eligible for the line-loss refunds. In September 2010 PJM stopped requiring transmission service reservations for UTCs, eliminating the opportunity Chen had exploited.
The change in the PJM Tariff came after FERC notified Powhatan and Chen that it was investigating their trades.
Wash Trades or Not?
FERC investigators notified Chen and Powhatan that it had opened an investigation on Aug. 18, 2010. Over the next 15 months, Powhatan sat for depositions and responded to three sets of FERC data requests, followed by several months of arguments among attorneys for the company and the commission over whether the company had fully complied with the requests.
In one exchange, Powhatan attorney William M. McSwain got personal with Steven C. Tabackman, the lead FERC attorney in the case. “From the beginning, you have exhibited a close-minded, heavy-handed attitude that persists to the present,” McSwain wrote. “For example, in the first deposition of Kevin Gates, you literally fell asleep for 15-20 minutes, with your head down and your eyes closed, as you sat across from Mr. Gates while your colleague questioned him. There were multiple witnesses to this conduct.”
By October 2011, McSwain says, FERC officials had told him a decision on whether to charge Powhatan was “imminent.” Yet little more happened until August 2013 — three years after the case was initiated — when Tabackman sent the company a 28-page document in which enforcement staff summarized its “preliminary findings” concluding that the trades were designed “to manipulate the PJM market to capture and maximize receipt of Marginal Loss Surplus Allocation (MLSA).”
“Chen … designed and scheduled matched UTC transactions that had the same or nearly the same effect as what the law would label a `wash trade’ or `sham’ transaction,” Tabackman wrote. “These trades were carefully configured to eliminate or reduce both profits and losses from price differentials in the market, and they also incurred certain costs related to scheduling the transactions. Yet, these same transactions profited, intentionally so, from collection of the MLSA based on associated transmission reservations.”
Powhatan Response
Chen’s attorney, John N. Estes III, wrote an eight-page response. “The trading activity at issue was consistent with price signals approved by the Commission, added value to the PJM markets and assumed market risks, and contained absolutely no deceptive or fraudulent element,” he wrote.
McSwain’s response was only two sentences: “Your preliminary findings make no sense. Should you choose to proceed with a public notice against Powhatan and/or Huntrise [a predecessor fund operated by the Gates brothers], please be advised that they will respond publicly and forcefully.”
Settlement
While the Gates brothers and Chen are fighting the FERC investigation, one company that engaged in similar trades, Oceanside Power LLC, agreed a year ago to settle the charges against it by disgorging profits of $29,563 and paying a fine of $51,000 (IN10-5).
Kevin and Rich Gates are identical twins — and as they proudly note on their website — former Eagle Scouts who were principals in the investment funds under investigation by FERC. Both hold chemical engineering degrees from the University of Virginia and now serve as co-portfolio managers of TFS Capital LLC, a West Chester, Pa., advisory firm that manages more than $1 billion in three mutual funds and several hedge funds. Rich Gates was featured in a 2010 Wall Street Journal article as a whistleblower exposing “latency arbitrage” — the advantage computer-driven firms get from obtaining stock prices 100 to 200 milliseconds before other traders.
William McSwain
William M. McSwain, who represents Powhatan Energy Fund, is a former federal prosecutor turned white collar defense attorney who “brings a creative and aggressive mindset to representing clients,” according to his law firm biography. He is a former U.S. Marine Corps infantry officer and sniper. While serving as an assistant U.S. Attorney in the Eastern District of Pennsylvania, he was assigned to the Department of Defense as the lead staff investigator and executive editor of the “Church Report,” an examination of military interrogation techniques commissioned by Defense Secretary Donald Rumsfeld.
Houlian “Alan” Chen is a Chinese immigrant and Ph.D. engineer hired by the Gates brothers to conduct power trades. “He obtained a Ph.D. in engineering in China in 1995 and moved to the United States to seek a better life for him and his family,” according to his description on the Gates’ website. “In the following decade, he gained experience and developed knowledge about the electrical grid in the United States, with a particular expertise in the PJM market.”
John Estes III
John N. Estes III, Chen’s attorney, has defended a majority of the FERC enforcement cases involving market manipulation allegations that have become public, including Barclays Bank PLC, JP Morgan Ventures Energy Corp. and DB Energy Trading. He was involved in five of the eight investigations listed as “Significant Matters” in FERC’s 2013 Report on Enforcement.
Susan Court
Susan J. Court retired from FERC after more than 30 years, where she held several key jobs including chief of staff, associate general counsel for general and administrative law and agency ethics official. She was the first director of enforcement after Congress granted FERC enhanced penalty authority in the Energy Policy Act of 2005. She now runs a consulting firm and serves as a hearing officer for ReliabilityFirst Corp.
For the Prosecution
Norman Bay, FERC Director of Enforcement and President Obama’s nominee for FERC chair, is a former U.S. Attorney and constitutional law professor. He joined FERC in 2009, replacing Susan Court. (See FERC Pick a Blank Slate.)
Steven Tabackman
Steven C. Tabackman, the lead FERC attorney in the case, is a former assistant U.S. Attorney who conducted depositions of Bush administration officials as a member of the Independent Counsel investigation into allegations of misconduct in the State Department’s Passport Office during 1992 presidential campaign. He joined FERC in 2010 after more than 20 years in private practice in which he represented former members of Congress (the House Postal scandal) and the Clinton administration (Travelgate). He says he also served as a consultant to the defense team for 9/11 defendant Zacarias Moussaoui.
(Editor’s note: RTO Insider editor Rich Heidorn Jr. worked in FERC’s enforcement division between 2002 and 2009, serving under both Susan Court and Norman Bay.)
WASHINGTON — A panel headed by former CIA and NSA chief Michael Hayden today recommended an expansion of the electric industry’s cybersecurity efforts, saying the current efforts by FERC and NERC fail to protect the distribution system.
The Bipartisan Policy Center panel recommended creation of an industry-led body, modeled on the Institute of Nuclear Power Operations (INPO), to expand adoption of cybersecurity risk-management practices and complement the North American Electric Reliability Corp.’s mandatory standards on the Bulk Electric System.
Retired Gen. Michael Hayden, former CIA and NSA director
“In some ways, the electric sector is in a stronger position than other sectors to address cyber threats because it already has extensive policies in place — including mandatory federal standards that apply to the bulk power system and nuclear power plants…” the BPC report acknowledged.
“While standards provide a useful baseline level of cybersecurity, they do not create incentives for the continual improvement and adaptation needed to respond effectively to rapidly evolving cyber threats. Distribution facilities generally operate outside of FERC jurisdiction. In some cases attacks at the distribution-system level could have consequences that extend to the broader grid.”
The report’s recommendations would require actions by Congress, federal agencies, state public utilities commissions and industry. It was authored by Hayden, former FERC chairman Curtis Hebert and consultant Susan Tierney.
PJM’s Boston Agrees
PJM CEO Terry Boston, who served an advisory panel consulted by the authors, was among those who attended a briefing today announcing the report. Although he was not involved in drafting the resulting report, Boston said he generally agreed with its recommendations.
PJM CEO Terry Boston
Boston said he particularly favored the recommendation for an INPO-like organization. INPO was the model for the North American Transmission Forum, which was created about five years ago to facilitate sharing of information and best practices among grid operators. The new organization would expand such efforts to generation operators and distribution operations.
One key risk to the distribution system, Boston said, is that smart grid devices could be hijacked to turn load on and off, sending system frequency fluctuating wildly. “The smarter we get, the more at risk we are,” he said.
EEI: No Need for New Organization
Former FERC Chairman Curtis Hebert
Scott Aronson, senior director of national security policy for the Edison Electric Institute, also served on the BPC advisory panel and participated in a panel discussion at the BPC event.
Aronson said that EEI agrees that current efforts are not sufficient but doesn’t believe a new organization is necessary. “We do have a lot of organizations,” he said, citing NERC, the Transmission Forum, the Electricity Sector Information Sharing and Analysis Center (ES-ISAC) and the Electricity Sub-sector Coordinating Council, which includes utility CEOs and deputy secretaries from the departments of Energy and Homeland Security.
Aronson also pushed back on suggestions that “there’s a hole in the distribution-level” protections, noting that many states have mandatory reliability rules. “I do think, though, that we need to elevate all of the states” to meet those employing best practices, he said.
Recommendations Detailed
The proposed organization would develop performance criteria, conduct cybersecurity evaluations at individual facilities and analyze systemic risks, particularly on the distribution system.
The report also calls on Congress to adopt legislation providing liability protection to entities that achieve a favorable cybersecurity evaluation by the new institute and backstop cybersecurity insurance “until the private market develops more fully.”
It also said industry and the federal government should establish a certification program that independently tests grid technologies and products and that the National Institute of Standards and Technology (NIST) should develop guidelines for skills training and workforce development.
Asked whether he disagreed with any of the panel’s recommendations, Boston mentioned the call for liability protection. “That’s not where my emphasis is,” he said.
The Federal Energy Regulatory Commission last week clarified its 2013 rule opening the ancillary services markets to more competition from electric storage.
Order 784 was designed to improve competition and transparency in ancillary services markets at a time when the growth of wind power and other intermittent sources is increasing the need for imbalance services. The rule requires PJM and other transmission providers to consider speed and accuracy in acquiring regulation resources, removes obstacles to selling such services at market-based rates, and creates new accounting categories for tracking investments in electric storage. (SeeFERC Rule Boosts Storage, Renewables.)
Any intra-hour transmission scheduling practice will meet Order 784’s requirements regarding sales of energy and generator imbalance services;
The section 205 filing requirement for sales of ancillary services made pursuant to a competitive solicitation applies only to sales not otherwise authorized in Order 784;
Order 784 is not intended to permit transmission providers to limit the quantity or percentage of total reserve obligations of regulation and frequency response service a customer may self-supply;
Historical one-minute and 10-minute ACE data must be posted to OASIS by public utility transmission providers within 30 days;
Account 555.1, Power Purchased for Storage Operations, is intended to include all costs of power purchased for energy storage operations regardless of the classification of the associated energy storage device used in operations; and
The new accounting and reporting requirements must be implemented in the 2013 forms due to be filed April 18, 2014.
Separately, the commission scheduled a staff workshop April 22 at FERC headquarters on third-party provision of reactive supply, voltage control, regulation and frequency response services. Those wishing to provide input can complete a speaker nomination form. FERC encouraged those wanting to attend to register in advance.
Virtual transactions are used to arbitrage price differences between the day-ahead and real-time energy markets and hedge financial exposure from physical positions. A market participant takes a financial position in the day-ahead energy market by agreeing to buy or sell energy at a specific location that it then liquidates in the real-time market.
If the day-ahead price were higher than the real-time price, a trader would profit by submitting an increment offer (INC) to sell energy at the high day-ahead price and buy out of that position at the lower real-time price. Conversely, a decrement bid (DEC) would make money if the real-time price is higher.
An up-to congestion trade (UTC), used to arbitrage price spreads between geographical locations, is a bid in the day-ahead energy market to purchase congestion and losses between two points. UTCs based on the prevailing flow purchase positions on the day-ahead energy market congestion; those in the counterflow direction are paid to take a position.
Virtual transactions can benefit the market by providing price convergence between the day-ahead and real-time energy markets. However, by competing with physical resources in the day-ahead energy market, PJM says virtual transactions can affect the scheduling and dispatch of physical resources, contributing to uplift.
The Federal Energy Regulatory Commission ordered PJM and financial traders to submit briefs in a long-running dispute over excess line-loss revenues.
FERC said the filings will help it build a record so that it can respond to an appellate court ruling last August that found the commission had failed to justify its rationale for demanding repayment of $37 million in surplus funds awarded to the traders in 2009. (See Split Decision for Financial Traders on PJM Line-Loss Collections.)
The commission’s order last week (EL08-14) gave the parties 45 days to file initial briefs, with reply briefs due 30 days later.
FERC asked the parties to discuss the impact on the market of requiring the refunds; how much of the $37 million refund amount that PJM has already recouped; and which classes of customers would make up the shortfall if FERC denies PJM’s refund request.
