Page 1717 – RTO Insider

April 2, 2013

CFTC Approves Dodd-Frank Exemption for RTOs

By Rich Heidorn Jr.
PJM Insider

WASHINGTON (April 2, 2013) — The Commodity Futures Trading Commission agreed Thursday to exempt PJM market transactions from most of its regulations, ceding authority to the Federal Energy Regulatory Commission.

But it is unclear whether CFTC’s action will end its turf skirmishes with FERC because the agency retained its right to police RTO trades under its anti-fraud and anti-manipulation authority (see pg. 2 of the order). Also unclear is the impact on small traders that don’t meet the criteria for the CFTC exemption.

Acting on a petition by PJM and other Regional Transmission Organizations and Independent System Operators, the CFTC relinquished most oversight over energy, capacity and ancillary product transactions already regulated by FERC. The exemption also applies to ERCOT, which is regulated by the Public Utility Commission of Texas (PUCT).

The commission’s 5-0 ruling is nearly identical to the proposed order it issued August 28, but includes expanded definitions of covered transactions and parties.

The Dodd-Frank Wall Street reform act encouraged the jurisdictional handoff by inserting a section in the Commodity Exchange Act (CEA) underscoring FERC’s authority over RTO transactions.

Exempt Transactions

Exempted are FTRs (p. 13), day ahead and real time energy transactions, including demand response (p. 14); forward capacity transactions (p. 14-15) and Reserve Regulation Transactions (p. 15-16). Similar products offered by the RTOs in the future also will be exempt (p. 22-23).

PJM and the other regional system operators said the transactions should be exempt because they are “subject to pervasive regulatory oversight” by FERC and PUCT. The regions said they made the request “in an abundance of caution” to forestall future legal challenges that could cause market “uncertainty.”

The definition of exempted transactions was expanded in the final order to include “Virtual and Convergence Bids and Offers,” because they enable market participants to trade energy without physically producing or consuming it. “Although there is an apparent financial settlement nature of virtual and convergence bids and offers … they are inextricably linked to the physical delivery of electric energy due to their being subject to the same aggregate physical capabilities of the electric energy transmission grid as other physical Energy Transactions,” the commission wrote (p. 31-32).

Not exempted are financial transactions that are “not tied to the allocation of the physical capabilities” of the electric grid “because such activity would not be inextricably linked to the physical delivery” of electricity (p. 16).

Exempt Parties

The transactions are only exempt if conducted among “appropriate persons,” a definition that includes banks, broker-dealers regulated by the Securities Exchange Act, futures traders regulated under the CEA and other companies with a net worth exceeding $1 million or total assets exceeding $5 million.

The commission expanded the definition to include a “person who actively participates in the generation, transmission, or distribution of electric energy” but declined to extend the exemption to all those participating in RTO and ISO markets (p. 77-78).

The only parties not exempt in RTOs, the commission said, are “market participants that can demonstrate neither the financial wherewithal nor the requisite business activities and congruent expertise to qualify as appropriate persons under” the Commodity Exchange Act (p. 78).

“The Commission is concerned that a person or entity that is engaged in purely financial transactions in the RTO or ISO markets, but that does not meet [the] … appropriate person criteria may be operating on inadequate resources and may pose inappropriate risks to itself and other market participants.” (p. 70-71)

RTO Interpretation

In comments filed Dec. 20, PJM requested that the commission rule that all PJM market participants are “appropriate persons.” Of 588 participants with transaction rights in PJM markets, PJM said, it was unable to confirm that 246 would qualify as Appropriate Persons. In the final order, the commission indicated that 55 PJM participants — an apparent reference to financial traders listed by PJM — would not be covered by the rule (footnote 412, p. 108).

Carol Smoots, counsel to the Financial Marketers Coalition, said the number of market participants excluded from the exemption will be determined largely by how the ISOs and RTOs interpret the CFTC order. “If a participant is trading in three markets do they need to have $1 million net worth in each?” she asked.

A PJM spokeswoman said yesterday the RTO “is reviewing the order and will discuss the implications for members in the near future.”

CFTC-FERC Conflicts

Smoots said the CFTC’s retention of its authority to take action against electric market participants for fraud or market manipulation means that the agency could find itself at odds with FERC in the future.

“It continues to be a pretty troubled relationship,” she said. “Hopefully, this order removes uncertainty in a lot of areas, but there’s a lot of uncertainty that remains.”

The two agencies recently squared off in federal court over FERC’s prosecution of former Amaranth Advisors trader Brian Hunter for market manipulation. Hunter was accused of selling natural gas futures contracts at the end of the trading day to drive down the closing price — benefitting swap positions held by Amaranth.

FERC argued that it shared jurisdiction with CFTC in the case because Hunter’s actions impacted natural gas physical markets, over which FERC has clear jurisdiction. The CFTC insisted it had exclusive jurisdiction over the futures markets, a position the U.S. Court of Appeals for the D.C. Circuit backed in a ruling March 15.

Conditions

The CFTC conditioned its exemption on the regions’ compliance with FERC Order 741 on credit practices and a legal opinion from outside counsel that the region’s netting arrangements give it the right to seize a trader’s assets in a bankruptcy (p. 17).

The commission also required that that information sharing arrangements with FERC remain in effect and that the regions agree not to notify a member prior to providing the commission information about it in response to a subpoena (p. 18).

Recreating Market Prices

The CFTC dropped a proposed condition that the regions be able to re-create Day Ahead and Real Time prices — an aid to investigators seeking to determine the magnitude of losses caused by manipulative trading schemes. The commission said it dropped the requirement because of “the potentially significant costs” involved although it encouraged FERC and PUCT to issue the requirement. (p. 92)

April 2, 2013

PJM, Monitor in Stalemate on FTR Forfeiture Rule

WILMINGTON (April 2, 2013) — PJM officials were left scratching their heads Thursday after stakeholders rejected the RTO’s tariff changes for determining when to issue forfeitures against Financial Transmission Rights.

“We’ll have to take it back and see what we’re going to do,” said Stu Bresler, PJM vice president of market operations, after the changes won only a 2.29 vote from the Markets and Reliability Committee, far below the two-thirds (3.34) threshold required. “We have no manual language.”

Bresler said he was surprised by the vote because the PJM proposal had won about 90% support at the Market Implementation Committee on March 6, besting an alternative proposed by Market Monitor Joseph Bowring.

At issue are the criteria for applying the FTR forfeiture rule, which is intended to prevent participants from submitting virtual bids that boost the value of their FTRs. Forfeiture rules would apply when those transactions result in a higher LMP spread in the day-ahead market than in the real-time market.

Recently Discovered

Bresler said PJM discovered only recently that it disagreed with the criteria by which the monitor has been determining whether a company’s virtual bid is “at or near” the delivery or receipt buses of its FTR. PJM does the billing for forfeitures and has the authority to use its own determination if it disagrees with the monitor’s.

Under the PJM plan, companies would lose any profit for an FTR if 75% or more of the energy injected or withdrawn by a virtual bid is reflected in a constrained path between FTR source and sink points.

The monitor has been applying the penalty based on the net impact of virtual bids, triggering application of the rule in less than one-tenth of 1% of transactions. In December, PJM penalized 65 companies a total of about $75,000; PJM’s load-weighted reference bus method would have resulted in penalties on a single company for only $1,500, a 98% reduction, Bowring said.

“This is a very dramatic change to a rule that’s worked well” for 10 years, Bowring told the MRC Thursday. “It makes the rule ineffective and meaningless.” Bowring said any changes in the criteria should be made after issuance of a problem statement and a full stakeholder review.

Bresler said it wasn’t until PJM attempted to create documentation explaining how the rule is applied that the RTO realized it disagreed with the monitor’s criteria. Bresler said the monitor finds the worst case increment or decrement on a path, which is inappropriate because “we don’t know where energy is being injected or withdrawn.”

Carol Smoots, counsel to the Financial Marketers Coalition, supported PJM’s change, which she said would make the criteria more transparent and reduce the triggering through false positives. “There are a lot of transactions that just weren’t done for fear of the rule being applied,” she said. “Many of my clients see the rule as definitely not clear.”

Testing the Limits

David Pratzon, representing Calpine, said he opposed the PJM proposal because he fears it would lead to traders testing the limits of the new criteria. The infrequent triggering of the rule under Bowring’s interpretation “indicated that people know how to do INCs and DECs away from FTRs,” he said.

Pat Sunseri, of Twin Cities Power, LLC, said PJM should consider the volume of transactions in its application of the rule. “It shouldn’t ever come up as a false positive for people who want to hedge their portfolio.” Bowring agreed that the rule should take trading volume into account.

Bowring said the monitor will continue to interpret the rule the way it has been doing, whether or not PJM issues penalties as a result. If it sees evidence of market manipulation that PJM does not police, he said, “we have no other recourse” but to notify the Federal Energy Regulatory Commission.

The lengthy debate ended on a conciliatory note from Ed Tatum of Old Dominion Electric Cooperative: “Let’s work this out.”

April 2, 2013

Cool Reception for DR “Fatigue” Study

WILMINGTON — A proposal to study potential “fatigue” among demand response resources met strong opposition Thursday, March 28, with curtailment service providers suggesting anticompetitive motives by the sponsor.

Ken Carretta, of PSEG, told the Markets and Reliability Committee that stakeholders should explore whether PJM has sufficient safeguards to ensure that Emergency Demand Response resources will perform as needed if they are increasingly called upon in the future, as PJM expects.

Carretta said the proposed problem statement, presented to the committee on first reading, is a response to a recommendation by the Brattle Group that PJM should “confirm that [DR] Resources can respond as often and as seasonably as claimed.”

Representatives of demand response companies, including Dan Griffiths of Comverge and Bruce Campbell of EnergyConnect, said new rules could increase their record-keeping costs and were unnecessary because providers already face high penalties if they fail to perform. “This appears to be an anticompetitive” move, said Aaron Breidenbaugh, of EnerNOC. “… A solution in search of a problem.”

Bob Weishaar, who represents industrial customers, also was skeptical. “We normally don’t oppose problem statements but we have no evidence that there’s been any demand response fatigue,” he said.

Carretta denied the proposal was motivated by competitive concerns. Current PJM rules, he said, don’t require CSPs to demonstrate that their portfolios are capable of meeting frequency obligations. Potential reporting requirements for DR resources would be no more onerous than those for generators, which track their outages, he said.

PJM Concerned

Michael Kormos, PJM senior vice president for operations, declined to take a position on the problem statement or any potential solutions but said the RTO “absolutely” is concerned about its increasing reliance on DR.

PJM expects the importance of demand response to increase because its Installed Generation Reserve Margin (IGRM) is projected to fall from the current 13% to 9% after 2013/14. The RTO projects DR resources will be called upon from five to nine times annually beginning in 2014/15, up from one to five calls in 2013/14.

“It’s not a problem — we’re still reliable — but we’ll probably have to call on demand response more in the future,” Kormos said.

Annual Limits

Limited DR resources can be called upon 10 times annually for up to six hours each over the summer. Annual DR resources can be called upon for up to 10 hours a day with no limit on the number of days they are called.

April 2, 2013

Task Force to Study Gas-Electric Coordination

The Markets and Reliability Committee approved the creation of a task force to study potential reliability problems resulting from PJM’s increasing reliability on gas-fired generation. The Gas Electric Senior Task Force (GESTF), which will report to the MRC, will prioritize gas-electric coordination issues for potential solutions.

Natural gas’ share of PJM’s generation has nearly tripled since 2007, rising to almost 20% of electric production in 2012. Gas is expected to replace most of the coal-fired generation scheduled to retire through 2015.

Michael Kormos, PJM senior vice president for operations, said although PJM does not face any immediate reliability problems it could take five years to respond to potential shortages through the capacity markets. “We probably should start talking about it now,” he said.

Because natural gas generation relies on “just-in-time” fuel supplies, the Federal Energy Regulatory Commission has warned that some plants may not be able to operate on the coldest days when gas demand for heating is at its peak.

In late January, the operator of Transco Zone 6 — which supplies generators in northern New Jersey and heating and electric demand in New England and New York — briefly limited supplies with an operational flow order.

“Doing nothing is not an option here,” said PJM CEO Terry Boston. He said although PJM has increased its communication with the gas industry there is room for improvement. “We are talking more to each other but we still talk past each other.”

Boston noted that the gas pipelines supplying generators are radial systems giving them less flexibility than PJM’s networked electric transmission system.

FERC held five technical conferences on the relationship between the natural gas and electricity markets last year (docket #AD12-12-000). The commission will hold another conference April 25 in Washington on coordinating gas and electric scheduling.

The issue is most acute for New England. ISO-NE is seeking FERC approval for tariff changes to allow earlier clearing of its Day Ahead energy market (Docket # ER13-895) and sharing of generator information with pipelines (ER13-356). The commission last month approved ISO-NE’s proposal to increase its procurement of ten-minute non-spinning forward reserves (ER13-465).

To date, PJM has been working to improve coordination with gas pipelines through information sharing and cross training of dispatch personnel.

PJM also is working with ISO-NE, NYISO, MISO and TVA to conduct an analysis of the infrastructure serving the Eastern Interconnection. The study, for which the regions are seeking federal funding, will evaluate the ability of gas systems to supply gas-fired generation into the next decade.

PJM Contact: Gary Helm

April 2, 2013

Delmarva Power Seeks $65 Million in Rate Increases

Delmarva Power & Light Co. filed rate hike requests totaling almost $65 million in Delaware and Maryland, saying its revenues have not kept pace with growing capital spending.

Delmarva asked for a $42 million annual increase in its electric distribution rates in Delaware, where it serves 300,000 customers, and $22.7 million in Maryland, where it serves 200,000.

Delaware Filing

Delmarva’s March 22 filing with the Delaware Public Service Commission said its current return on equity is only 6.6%, below the 9.75% ROE approved by the commission in its 2011 rate case, which boosted revenues by $22 million annually. The company is seeking a 10.25% ROE and a 7.38% increase in total revenue.

The company said the biggest driver in its rising costs is its capital spending. It expects to spend about $397 million on capital projects in 2013 through 2017, much of it for reliability upgrades. “Delmarva is not realizing sufficient growth in the number of customers and load served to offset this pace of investment,” the company said. It requested new rates take effect May 21. DE PSC Docket No. 13-115

Maryland Filing

In its March 29 filing with the Maryland Public Service Commission, the company requested a 10.25% ROE, saying it was currently earning only 7%.

The company said it spent almost $54 million on reliability improvements in 2012, with plans for an additional $115 million in 2013 and 2014. The spending helped reduced the frequency of outages by 9% and their duration by 17% since 2010, the company said.

The requested base rate increase would boost the monthly bill for a residential customer using 1,000 kWh by $7.74.

Resiliency Surcharge

In addition, Delmarva asked Maryland regulators for a three-year “grid resiliency” surcharge that would add another $1.06 to the typical customer’s bill in 2014 and allow the company to accelerate its infrastructure spending. The proposed surcharge would provide the company incentives for reaching reliability benchmarks and penalties if it failed to do so, as recommended by a September 2012 task force report prepared for Gov. Martin O’Malley. MD PSC Case # 9317

Delmarva is a subsidiary of Pepco Holdings Inc., which is also seeking a $60 million rate increase in Maryland and a $52.1 million boost in Washington, D.C. and. (See story “Pepco Goes Back to the Well“.)

April 2, 2013

MDPSC Upholds PJM Membership Billing

The Maryland Public Service Commission upheld an administrative law judge ruling allowing Williamsport, Md., to pass through to ratepayers PJM’s annual $5,000 membership fee.

The commission ruled March 18 that the fee is part of the cost of purchased power because the town is required to be a PJM member to buy power on the wholesale market. The town purchases power from Allegheny Energy Supply Co. for distribution to town residents. The Office of People’s Counsel challenged inclusion of the fee in the town’s Power Cost Adjustment, saying it should be requested as part of Williamsport’s next base rate proceeding.

April 2, 2013

Pa. Lawmakers Push Gas Pipeline Expansion

Senate Majority Leader Dominic Pileggi and Sen. Gene Yaw announced legislation March 26 to increase the availability of natural gas to homes and businesses.

Yaw, who represents a rural district in north central Pennsylvania, said only half of Pennsylvania homes are heated with natural gas. “We’re sitting on one of the largest deposits of natural gas in the world and don’t have access to it,” he said at a press conference.

Senate Bill 738 would require all natural gas distribution utilities to submit reports to the Pennsylvania Public Utility Commission outlining their plans for pipeline extension and expansion projects. The bill also would expedite such projects if an economic development agency or a large number of customers want natural gas service.

Senate Bill 739 would provide $15 million in grants to schools, hospitals and businesses to fund up to half of the cost of extension projects.

“Black Liquor” Bill Fails in Md.

The Maryland legislature Friday, March 29 rejected a bill that would have removed so-called “black liquor,” a paper mill byproduct, from qualifying as a renewable fuel. The bill, which had passed the Senate easily, failed in a House committee in the face of lobbying by labor unions and paper companies.

The state’s renewable portfolio standard requires Maryland utilities to generate increasing amounts of electricity from renewable sources or purchase renewable credits from other companies doing so. The Washington Post reported that most of the payments for credits have been going not to wind or solar projects but to seven paper mills that use black liquor as fuel. More in The Washington Post.

April 2, 2013

Business Practices to Get MRC Review

Business practice documents will be reviewed by the Markets and Reliability Committee in the future under a manual change approved March 28 by the Members Committee.

PJM’s business practices and implementation documents spell out its rules regarding transmission service and energy scheduling in greater detail than the manuals or tariff. Because all manual changes are already reviewed by senior stakeholder committees, some members thought business practices also should be subject to member ratification.

The change, which was approved without opposition, will require revisions to Manual 34: Stakeholder Process.

The Members Committee approves changes to Manual 34 and Manual 15: Cost Development. MRC has authority to approve all other manuals.

PJM contact: Rich Souder

April 2, 2013

MRC First Readings

The Markets and Reliability Committee heard first readings of the issues listed below. The committee will be asked for its endorsement at its next meeting.

Capital Cost Recovery for Black Start Generators

Transmission operators providing cranking paths for black start generators would recover capital costs over five years under a proposal presented by the System Restoration Strategy Task Force. The task force rejected an alternate proposal that would have extended capital recovery over the entire asset life.

Task force chair Chantal Hendrzak said the change is needed to coincide with a provision approved by MRC February 28 allowing generators to provide black start capability outside their own zones.

The task force also will draft for MRC consideration a revised charter allowing it to broaden its consideration of black start unit compensation, including incentives based on capability and performance (e.g., fast-starting units).

Representatives of American Electric Power, Exelon Corp. and Pepco Holdings Inc. voiced support for an expanded charter at Thursday’s meeting.

But Bill Schofield, representative for the PJM Public Power Coalition, said stakeholders should wait to evaluate the impact of the initiatives approved in February before considering further revisions. “It’s premature to discuss compensation changes,” Schofield said. “It’s solving a problem we don’t know exists.”

PJM Contact: Chantal Hendrzak

Provision of E-Tag Data

PJM will make revisions to the confidentiality provisions of its tariff to comply with FERC Order 771, requiring provision of E-Tag data to Independent System Operators, Market Monitoring Units and FERC.

E-tags are used to schedule the transmission of electric power interchange transactions. FERC said the data will help it and the regions in their efforts to police market manipulation and monitor market
efficiency.

Market Monitor Joseph Bowring welcomed the change, though he said FERC should have gone further and required provision of actual flow data.

PJM Contact: Jacqulynn Hugee