By Rich Heidorn Jr. and Tom Kleckner

SPP executives had “inappropriate” involvement in the oversight of its Market Monitoring Unit, FERC said in an audit report released Friday that called for changes (PA15-6).

The report said the internal MMU “should strengthen its independence and enhance its separation from” the RTO by barring non-MMU employees from its office and RTO management from its meetings with the Board of Directors’ Oversight Committee.

The audit report raised many of the concerns reported by RTO Insider in a series of articles earlier this year, citing SPP executives’ involvement in the MMU’s budget, performance reviews and salary decisions. The audit also said the MMU’s independence was hampered by the fact that until recently it shared legal counsel with the RTO.

Auditors criticized MMU Director Alan McQueen — though not by name — saying he took actions that “blurred the lines” between the MMU and RTO.

It also said the Oversight Committee should undertake a “closer review of the performance of the MMU” and its director. “In complying with Order No. 719, one of the important steps taken by the MMU to ensure independence was when it structured its accountability process so that it reports directly to the Oversight Committee,” the auditors noted.

But the report did not address SPP’s treatment of former monitors Catherine Mooney and John Hyatt, who say they were fired for raising independence concerns. Nor did it mention their allegations that McQueen pressured them to compromise their positions in order to minimize conflicts with SPP management and stakeholders and that Oversight Committee Chairman Joshua W. Martin III refused to meet with them when they attempted to raise concerns. (See SPP Squelching MMU Independence, Former Monitors Say.)

The auditors said most of their 16 recommendations were already being addressed by the Oversight Committee’s revised December 2015 position statement on the MMU’s independence, which made the committee responsible for all salary and bonus decisions for McQueen and other MMU employees and ensured that the MMU director could meet with the committee in executive sessions without RTO officials present.

The committee approved the statement, which had last been updated in 2012, nine days after Hyatt and Mooney were fired. Martin announced the statement at the Board of Directors meeting in January — also announcing that McQueen would retire by the end of the year.

The audit did not call for replacing the internal unit with an independent monitor, noting FERC Order 719 allowed RTOs to choose their structure.

Aside from CAISO, SPP is the only regional grid operator that does not have an independent market monitor, and SPP officials indicated Friday they intend to keep that arrangement.

“We’re pleased the auditors found no instances in which SPP exerted inappropriate influence on the MMU,” SPP General Counsel Paul Suskie said in a statement. “Neither did FERC conclude the MMU is not independent, nor recommend that SPP’s market-monitoring functions be performed by a third party. As a result, SPP can continue to operate with an internal MMU, and MMU staff will be employees of SPP and participate in our collaborative stakeholder process while remaining independent.”

Joe Bowring, Independent Market Monitors Wouldn’t Have It Any Other Way.)

In a letter appended to the report, McQueen and Suskie agreed with all of the audit’s 16 recommendations, but challenged auditors’ repeated use of the terms “inappropriate” and “improperly.”

“SPP understands that, where the report discussed items that were inappropriate or improper, FERC audit staff is referring to processes, procedures and structures that could potentially result in inappropriate or improper conduct or that could demonstrate an appearance of impropriety,” they wrote. “No such activity took place.”

Suskie and McQueen said the audit was “a valuable process for SPP to assess the continued working relationship between [the] RTO and MMU given the evolution of SPP and its markers and services.”

The audit report was among the topics of conversation at Monday’s Regional State Committee meeting, where SPP CEO Nick Brown defended the RTO’s firing of Hyatt and Mooney. “No one is terminated from SPP without multiple officers concurring,” he said. “The board was very much informed, specifically the Oversight Committee. We were quite cautious, but very firm in our decision. I will say we were unanimous in our decision.”

FERC’s recommendations, Brown added, “really decrease the potential for any inappropriate influence over the independence of the Market Monitoring Unit.”

17-Month Inquiry

During the 17-month inquiry, auditors conducted three site visits and reviewed 30,000 emails of MMU and RTO employees “to understand communications between both groups, with outside parties and internal to the MMU and SPP RTO.”

Although the audit also looked at SPP’s compliance with its transmission-provider obligations, FERC accounting regulations and FERC Form 1 financial reporting requirements, it issued findings on the MMU only.

The auditors said that the independence and separation of function concerns they have regarding the MMU are “similar, in some respects,” to those identified in the commission’s 2008 audit of SPP’s Regional Entity, which is charged with enforcing NERC reliability standards (PA08-2, AD09-3).

RTO Executives at Oversight Committee Meetings

To ensure its independence from SPP management, the MMU is supposed to be under the control of the Board of Directors’ Oversight Committee. But the commission noted that until recently, RTO executives attended the MMU’s meetings with the committee.

“The presence of an SPP RTO executive in these meetings … could result in SPP RTO potentially exercising undue influence during such meetings and inappropriately having access to information associated with MMU operations,” the auditors said.

“Audit staff did not identify evidence of any impropriety in practice (nor has any such impropriety been alleged), and notes that the Oversight Committee can, and during the audit period did, conduct MMU-related meetings in executive session without the presence of the SPP RTO executive, when it deemed it appropriate. However, the presence of the SPP RTO executive in MMU-related executive sessions does not reflect the necessary separation of functions.”

In their letter, McQueen and Suskie acknowledged that the presence of RTO management at OC meetings “could give rise to the perception that there is an insufficient degree of separation between the MMU and SPP RTO.”

Incentive Compensation

The commission also said SPP executives “were inappropriately involved in the performance evaluation of the MMU director, approval of the MMU budget and compensation adjustments for MMU staff.”

“Audit staff is concerned that such involvement by SPP RTO executives creates issues in terms of using incentive compensation to exercise influence over MMU staff not to oppose SPP RTO initiatives,” FERC said.

“Rather than involving SPP RTO executives in the operations of the MMU, the audit staff determined that the Oversight Committee should take a more active role in its oversight of the MMU including performance evaluation of the MMU director as well as the overall performance of the MMU. This would be similar to the manner in which the SPP RE board provides guidance and oversight to the RE.”

The auditors said they met with the full Oversight Committee at its quarterly meeting at the beginning of the audit and later conducted several phone interviews with Chairman Martin. Martin told RTO Insider in an interview May 2 that he met with the auditors once, at the committee meeting in March 2015. He said it “was not an in-depth session where we were looking at specifics.” (See FERC Ended Audit Without Talking to Key Witness.)

Legal Counsel

Until March 2015 — after FERC began the audit — the MMU relied on SPP for legal services because it lacked its own counsel. “The MMU’s reliance on the SPP RTO for legal services and support could be problematic, particularly when the MMU disagreed with an SPP RTO position and desired to make a filing to the commission in opposition to an SPP RTO filing,” the report said. “Difficulties may arise both in terms of allocation of available legal staff as well as possible concerns of conflict of interest.”

RTO Insider reported that, until the last 18 months, the MMU generally filed only testimony packaged with RTO filings. (See SPP MMU Struggles to Find its Voice.)

MMU Shared Staff

The auditors said the lack of “clear separation” between the RTO and MMU staff also resulted from MMU staff’s involvement in RTO activities unrelated to MMU operations, particularly in 2013 and early 2014 when the RTO was racing to launch its Integrated Marketplace.

“This effectively blurred the lines of separation by making resources appear fungible,” the auditors said. “Moreover, SPP RTO rewarded MMU staff in the form of incentive compensation for their efforts on behalf of SPP RTO. This economic incentive further clouded the separation between the MMU and SPP RTO.”

MMU Involvement with Tariff Formation

The audit cited “tension … between the role of the MMU as an independent organization and the role of the MMU as an internal function of SPP, and therefore an integral part of its collaborative process.”

“Central to this tension are the concepts that, as SPP RTO employees, MMU staff should conduct themselves in a manner that promotes the interests of SPP RTO, while as members of the MMU the staff might be engaged in activities and take positions that run counter to what may be the consensus of the SPP members,” FERC said. “However, this inherent tension was latent until a contentious issue arose between the MMU and SPP RTO.”

The issue was the RTO’s attempt to mollify generators who became upset after the Integrated Marketplace opened that the MMU was not including general operations and maintenance in its calculations of cost-based offers. (See SPP MMU Struggles to Find its Voice.)

“At times, the MMU staff acted in a manner to steer the outcome rather than permitting the stakeholder process to arrive at a position that reflected their independent collaboration, consensus development and team-based approach,” FERC said. “It is incumbent on the MMU to advise the RTO and other interested parties of its views regarding any needed rule and tariff changes and the merits of proposed changes, but not to obstruct the SPP RTO’s process.

“The MMU should not disrupt the SPP process when tariff revisions are not acceptable to the MMU; rather, it should intervene when the proposal comes before the SPP board and when it is filed with the commission.”

The auditors criticized McQueen’s decision to join the Mitigated Offer Strike Team, which was created to reach a compromise.

“The MMU director wanted to restore a good working relationship, consistent with the SPP principle of being ‘relationship-based,’” the auditors said. “While the intent to improve relationships might be justified in general principle, audit staff believes that the MMU director’s efforts were counterproductive in this instance.”

Operational Separation

Auditors also raised concerns that the MMU staff works in offices accessible to RTO employees, most in open cubicles. “Audit staff observed that conversations can be overheard and sensitive materials visible to parties outside the MMU. Conversations by MMU staff members may involve discussions of matters such as ongoing investigations and potential referrals to the commission.”

The commission said the MMU should consider erecting physical barriers and key card access to ensure the physical separation of MMU staff from other RTO staff, as the commission required in the RE audit.

McQueen and Suskie said the MMU lacks the resources to erect security barriers but said they are “looking into practical solutions” to address the concern.

Compliance Filings

The commission required the RTO to submit a compliance filing within 30 days detailing how it plans to respond to the recommendations, along with quarterly status reports on its progress.

[Editor’s Note: SPP/ERCOT Correspondent Tom Kleckner worked as an SPP spokesman from 2011 to 2015; Editor-in-Chief Rich Heidorn Jr. participated in the 2008 audit of SPP as a member of FERC’s Office of Enforcement.]