After allegations of management interference led PJM to replace its internal market monitoring unit with an independent monitor in 2008, FERC had an opportunity to prohibit other RTOs from using the internal structure. Because it chose not to do so, the temptation for RTO officials to muzzle their MMUs remains.

Second in a Series

By Tom Kleckner and Rich Heidorn Jr.

LITTLE ROCK, Ark. — Alan McQueen, head of the SPP internal Market Monitoring Unit, says the best evidence of the MMU’s independence is in the filings it has made to FERC staking out positions contrary to the RTO and market participants.

“The proof is in … our record,” he said. “And that’s what’s important.”

The record shows that until the last 18 months, the MMU generally filed only testimony packaged with RTO filings. Since then, it has filed comments opining on SPP filings or policies in nine dockets: six times siding with the RTO and three times proposing different rules. FERC sided with the MMU in two of the three challenges.

Catherine Mooney and John Hyatt, formerly two of McQueen’s three direct reports, say that the three challenges were exceptions and that McQueen discouraged them from opposing positions held by SPP and its stakeholders. Hyatt and Mooney, who were fired in December, say they were dismissed for resisting pressure to conform to policy positions of SPP management and members. (See Part 1: SPP Squelching MMU Independence, Former Monitors Say.)

Half-Hearted Opposition

Mooney said that while the MMU would often disagree with RTO proposals at Market Working Group meetings — where market-design revisions are hashed out — it would drop its opposition if members approved them, despite its responsibility to notify the commission of such disagreements.

The former monitors say SPP’s FERC filings started only after commission staff questioned whether the MMU was fulfilling its obligations.

“It became clear to us that FERC expected us to file,” she said. “Until late 2014, we had not been doing it.” A FERC audit that began in April 2015 brought increased scrutiny.

FERC detailed its expectations of MMUs when it issued Order 719 in 2008. “We do expect the MMU to advise the commission, the RTO or ISO, and other interested entities of its views regarding any needed rule and tariff changes,” the commission said. “Likewise, in the event an RTO or ISO files for a proposed tariff change with which the MMU disagrees, we expect the RTO or ISO to inform the commission of that disagreement, although not necessarily to include a written MMU proposal with its filing.” (See Order 719: FERC Balanced MMU Independence Against RTO Autonomy.)

SPP spokesman Dustin Smith said the increase in MMU filings was the natural result of SPP’s developing, and more complex, markets.

“I think it is important to note that SPP did not have a day-ahead market until March of 2014. Prior to March 2014, SPP operated its [Energy Imbalance Service] market, which had a much more simple structure than SPP’s new Integrated Marketplace. The nature of developing market rules for a new marketplace necessitates more filings than does operating the more simple EIS market. The number and frequency of filings has less to do with time and more to do with the type of market SPP operates.”

However, FERC records show that SPP made its first Tariff filing on the marketplace in February 2012 (ER12-1179), more than two years before the MMU began commenting separately in FERC dockets. SPP records show the MMU began attending Market Working Group discussions on the development of the marketplace in September 2009.

Surprising Admission

FERC records show that the first listing of the MMU as the author of a substantive policy filing was in December 2014, when it requested rehearing of a September 2013 commission order requiring the removal of its market impact test from the MMU’s monitoring for physical withholding. The MMU said eliminating the test would “produce excessive false positive screen failures for the MMU to analyze” (ER15-21).

The December filing, which was signed by Mooney and Hyatt, included a surprising admission: The MMU had delayed raising the issue for more than a year after FERC’s order.

“We apologize for the delay in raising this to the commission’s attention,” they wrote. “In 2013 and early 2014, SPP’s staff maintained a focus on supporting the effort to launch the Integrated Marketplace by March 1, 2014, for the greater benefit of SPP and its members.” The changes the MMU sought “were not seen as critical for the market to launch,” they said, adding that the MMU believed it could make changes after market launch.

Mooney and Hyatt said SPP had warned staff against doing anything that could delay the launch of the marketplace, which gave the RTO a day-ahead market, real-time balancing market and a centralized balancing authority. “If the market is delayed, it better not be your fault,” they said RTO employees were told by management.

When the marketplace opened, SPP boasted in a press release that it was the first RTO “to design, build and deliver a Day 2 market on time.”

FERC rejected the belated rehearing request in August 2015.

Three Challenges

The MMU’s first direct challenge to SPP came in April 2015, when Mooney asked FERC to reject proposed Tariff changes that would prevent the RTO from canceling commitments of gas-fired generators if they are not needed. SPP’s proposal, Mooney wrote, would result in “an inefficient transfer of gas market risks to SPP’s load.” (See SPP Market Monitor Protests Make-Whole Promise for Gas Units.)

FERC rejected the monitor’s concerns and accepted the Tariff changes in August (ER15-1293). The commission said the RTO’s proposal “provides additional certainty about how SPP will operate during extreme conditions” and that it was “not proposing fundamental changes to the way it administers de-commitment of resources.”

The MMU fared better in September 2015, when it helped persuade FERC to reject an SPP proposal to change what costs are included in mitigated offers, which are required when a generator is deemed to hold market power (ER15-2268).

In February 2016, FERC again sided with the MMU over SPP in the solution to an underfunding problem in the RTO’s transmission congestion rights market (ER16-13). As recommended by the MMU, the commission set the amount of transmission system capability to be offered during the annual auction revenue rights allocation process at 60% for October through May, rejecting SPP’s proposal of an 80% allocation. (See FERC Rejects SPP’s Proposed 80% ARR Allocation.)

‘Obstructing SPP’s Progress’

Hyatt said McQueen often complained “‘You don’t understand the pressure I’m under.’”

McQueen declined to say whether he had made such a comment.

The mitigated offer case provided a vivid illustration of the pressures.

SPP filed its proposed Tariff changes after more than a year of stakeholder meetings failed to reach consensus on the issue. The RTO acted in response to 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.

In April 2014, SPP created the Mitigated Offer Task Force to address the generators’ concerns. Mooney and Hyatt said they opposed concessions to the generators in defense of “efficient market economics.”

The monitors argued that SPP’s proposed changes would allow mitigated offers to include recovery of variable operation and maintenance (VOM) costs that are not short-run marginal costs. FERC had required the RTO in an October 2012 order to “establish that offers are to be mitigated to their short-run marginal costs of the generating unit.”

Mooney said the monitors’ position brought a rebuke from McQueen, who told Mooney that they were “obstructing SPP’s progress.”

There were a “lot of messages to not say this or that, because it’s a hot button and it makes the members upset,” Mooney said. The term “short-run marginal costs” was one such hot button. “I was told to stop using those words altogether,” she said. The term is “in SPP’s Tariff. It’s hard to have an intelligent conversation about short-run marginal costs without saying the words.”

McQueen did not respond to requests for comment for this article.

Hyatt recalled a lunch that members of the MMU had with several SPP board members last June, at which he said Vice Chairman Harry Skilton expressed disappointment that the MMU was considering a FERC filing differing from the RTO’s position. “We like to handle these [disputes] within the SPP family,” Skilton said, according to Hyatt’s recollection.

“These types of comments were very common,” Hyatt said.

Skilton declined to comment.

Lobbying the Oversight Committee

Such messages also were delivered by members.

In September 2014, Noman Williams, then of Sunflower Electric Power, attended a meeting of the Board of Directors’ three-member Oversight Committee “to represent the member perspective” on the issue, according to meeting minutes.

The Oversight Committee is responsible for monitoring compliance with SPP and regulatory policies. It also is assigned to supervise the MMU. Attachment AG of SPP’s Tariff states that “management representatives on the Board of Directors will be excluded from the Board of Directors’ oversight of the market monitor.”

Nevertheless, until recently, SPP management regularly attended Oversight Committee meetings with the MMU. Stacy Duckett, then vice president and chief compliance officer, was in attendance when Williams made his pitch.

Williams “suggested MMU be more overt on its positions and intent to resolve matters through the SPP process,” according to the minutes.

Williams, now chairman of the Markets and Operations Policy Committee, said in an interview that he was encouraging the MMU to “become much more engaged in the process” of reaching consensus solutions rather than merely observing and critiquing. He said he was not suggesting the MMU not file opposing comments before FERC.

Mooney recalls then-MOPC Chairman Rob Janssen, of Dogwood Energy, saying at a meeting in December 2014 that he feared a “PJM-style train wreck” if the MMU filed comments with FERC opposing a Tariff change supported by members. Janssen formerly worked at D.C. consulting firm Boston Pacific, where he helped McQueen and Director of Market Design Richard Dillon structure the MMU.

His remark was an apparent reference to what transpired in 2007, after PJM Market Monitor Joe Bowring — then a PJM employee — complained at a FERC technical conference that RTO management was attempting to muzzle him. Following an investigation, PJM’s CEO resigned and Bowring formed his own company to become the RTO’s external monitor.

Janssen declined to comment.

Dueling Proposals

In July 2014, American Electric Power’s Richard Ross proposed market protocol revision request (MPRR) 197, which would allow generators that did not use FERC accounts or separate variable costs from fixed costs in their commission filings the ability to “include some level of variable costs in their mitigated offers.”

At McQueen’s direction, Mooney helped develop a compromise, MPRR 213, that was submitted by ACES Power in September. The proposal included a table of costs that was less generous than the AEP proposal but still higher than Mooney wanted. “These numbers were drawn up to be large enough to get the members to stop complaining,” Mooney said.

In December 2014, the MOPC recommended that the Board of Directors approve the AEP proposal, but the board declined, citing the MMU’s opposition. Instead, the board created the Mitigated Offer Strike Team to reach a compromise.

The team was composed of Dillon, McQueen and representatives from Westar Energy, ACES and the Oklahoma Municipal Power Authority. Mooney, AEP’s Ross and other members of the earlier task force were excluded from the strike team, which met in private, not open to any other stakeholders.

The strike team sent a written recommendation to the MOPC that called for implementing default VOM costs for mitigated offers as an interim measure and adapting MISO’s approach for mitigated offers as the long-term solution.

At a testy MOPC meeting on Jan. 13, 2015, Dillon presented the recommendation, which was described as unanimous.

But an uncomfortable-looking McQueen was reluctant to give the proposal his endorsement. “I think the approach was a sound way to do it” was as far as he would go, according to RTO Insider’s contemporaneous notes of the meeting.

Doug Collins of the Omaha Public Power District complained that the costs the MMU wanted to include were “one-tenth of 1% of the costs I want to include,” he said, hyperbolizing for emphasis. (See SPP Moves Forward on Change to Generator Mitigation Rules.)

Two months later, in an apparent effort to straddle the divide, McQueen told the MWG that the MMU supported the default costs but wanted the Tariff change to include the words “short-run marginal costs.” Mooney protested that the MMU’s position was illogical because the default levels were not representative of short-run marginal costs. “This is not about logic,” Mooney said McQueen told her. “This is about people.”

In July 2015, SPP filed a Tariff change that largely mirrored the compromise MPRR 213. SPP’s filing drew protests and interventions from nearly two dozen market participants, including the New Jersey Board of Public Utilities, which said it feared an “adverse precedent that spills over to other regions.”

The MMU responded with a filing Aug. 14 that disagreed with several aspects of the change. Two subsequent filings were stronger in their criticism.

“The audit made it very clear that FERC was watching what we were doing,” Mooney said. “I do think that contributed to the strength of the statements.”

SPP proposed generators be able to recover VOM costs that included maintenance overhauls, long-term service agreements, insurance and inspection services.

The MMU, in contrast, said recoverable costs should be limited to the cost of inputs “directly consumed” as a result of a generator’s decision to produce in a given hour: fuel, emissions, opportunity costs, “a small amount of maintenance and, on occasion, labor.”

The MMU also disputed assertions by SPP and generation owners including AEP and Westar Energy that “all variable costs and short-run marginal costs are synonymous terms or otherwise interchangeable.”

“The decision to incur major maintenance costs, as well as many of the other costs included in the FERC maintenance accounts that the SPP filing seeks to include in mitigated offers, are long-term decisions,” it said.

The SPP proposal included a default start-up VOM cost for industrial frame gas turbines of $15/MW. Monitoring Analytics, which was advising SPP as a consultant, had recommended setting the short-run marginal costs for such plants at only $0.12/MW — or less than 1% of what SPP proposed.

SPP’s proposal, the MMU said, would result in unjust preferences to generators with market power, allowing the RTO to obtain excessive “cost-based” rates. It noted that “competitive pressure prevents those without market power from similarly raising offers to obtain higher revenues.”

FERC rejected SPP’s proposal in an Sept. 22 order. (See FERC Sides with SPP Monitor on Mitigated Offers.)

“We find that SPP’s proposal to base mitigated offers on variable costs may lead both to inefficient dispatch outcomes, characterized by higher production cost, and to distorted locational marginal prices that do not reflect competitive conditions,” the commission said.

FERC said SPP failed to define the term “variable cost” or to “describe with specificity what costs may be included in mitigated offers as variable costs that were not previously regarded as short-run marginal costs.”

“As such,” the commission said, “SPP proposes to replace one phrase that SPP contends is undefined (short-run marginal cost) with another phrase that is not well defined (variable cost).”

Monitoring Analytics, PJM’s Independent Market Monitor, also had weighed in on the case, filing a protest that backed the MMU’s position.

The IMM said the proposed changes raised questions about whether SPP was protecting its MMU’s independence. “When the SPP market monitor made interpretations with respect to mitigated offers that SPP market participants did not like, the response was that market participants initiated a stakeholder process to apply pressure on the SPP market monitor to compromise or change those interpretations,” FERC said, paraphrasing the IMM’s filing.

The commission rejected the PJM monitor’s call for an examination of the MMU’s independence as outside the scope of the docket. “We note, however, that the SPP market monitor’s participation in this case demonstrates the importance of having an independent market monitor … to ensure that markets are competitive.”

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