Page 1599 – RTO Insider

December 19, 2014

FERC Staff Seeks $30 Million Fine in Powhatan Case

By Ted Caddell and Michael Brooks

The Federal Energy Regulatory Commission issued notice Wednesday that it may seek $29.8 million in fines from hedge fund twins Rich and Kevin Gates over a PJM trading scheme that became the centerpiece of a debate over FERC enforcement policy during Commissioner Norman Bay’s confirmation process earlier this year.

FERC issued an Order to Show Cause, the next step in the enforcement process over what it called a “fraudulent scheme” by the Gates brothers, their Powhatan Energy Fund and associate Houlian “Alan” Chen to collect line-loss rebates on riskless up-to-congestion trades. It gave the accused 30 days to tell the commission why they shouldn’t be fined.

The attached enforcement staff report recommended that the parties give up more than $4.7 million in profits collected by alleged wash trades in 2011. The show cause order didn’t include that recommendation.

They can ask for a hearing or pay the fines. If the fines aren’t paid, FERC can file in U.S. District Court to collect.

FERC’s Office of Enforcement alleged that “with Powhatan’s knowledge and encouragement, Chen placed UTC trades in opposite directions on the same paths, in the same volumes, during the same hours for the purpose of creating the illusion of bona fide UTC trading and thereby to capture large amounts of” rebates.

Kevin Gates said Powhatan would respond to the allegations in the enforcement staff report, insisting that everything they did was legal. He said they seek an extension in the filing deadline.

“I still firmly believe that no violations occurred, that there were no ‘wash trades’ and no violations of any kind,” he said in an interview. “There was an economic purpose to the trades, and there were risks.”

Chen said in an interview that he is “struggling” to understand the allegations against him. “I ask myself, ‘are the type of trades we put on, the match trades, are those trades supportive [of the market]?’ And the answer is definitely ‘yes.’ They were necessary trades to provide a healthy market.”

Both he and Kevin Gates said the type of trades they undertook would have been helpful, in fact, during last winter’s polar vortex. “They would have been there to support the market at the very time the market needed them the most,” Gates said.

FERC enforcement cases usually take place quietly via letters and documents filed back and forth between parties, and they nearly always result in settlements.

But Rich and Kevin Gates have taken a much more public route fighting FERC. They hired expert witnesses, and posted video depositions and statements and reams of legal documents on their website, ferclitigation.com.

The brothers argued that Bay, who headed FERC’s Office of Enforcement during the Powhatan investigation, should recuse himself from any dealings with the case. Bay has since done so.

It appeared in October that a settlement might be in the works when the brothers took down the site. However, when FERC issued a notice on Dec. 5 that the commission was heading toward the next step, civil prosecution, the site was reactivated, and the fight was back on.

The next step was FERC’s, when on Wednesday it issued the show cause order.

At Thursday’s FERC meeting, Commissioner Phillip Moeller read a statement citing the show cause order and explaining the FERC investigation and enforcement process. Moeller took pains to say the commission has not made any final determinations, comments Gates said he found “comforting.”

“In the show cause order, the commission noted that issuance of the staff report does not indicate commission adoption or endorsement of staff’s findings,” Moeller said. “This statement reflects the commission’s long-standing practice not to pre-judge the findings made in staff reports. Instead, the commission will consider the entire record in this proceeding to determine whether the assessment of civil penalties is appropriate.”

Chairman Cheryl LaFleur was asked in a press conference after the meeting if the show cause order means the commission has reached a decision on the Gates case.

“We’ve reached the conclusion that’s reflected in our order, which is that, if you will, it rose to a level of an order to show cause to say ‘here respond to this,’ but we have not reached a conclusion as to a finding of market manipulation. We’ll make that determination presuming we get to the next stage of the case when we decide if there’s market manipulation,” LaFleur said.

LaFleur also was asked whether traders should be prosecuted when they were acting within the RTO’s rules, at the time. PJM’s rules on collecting the rebates were changed after officials recognized the loophole Powhatan was exploiting. 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.

“Clearly the issue you identified is one of the ones that’s been debated a lot: what are the bounds of market manipulation under our regulations and we’re seeing it evolve more and more as we take on more cases,” LaFleur said.

December 17, 2014

Update: Senate Confirms Honorable to FERC

By Michael Brooks

The Senate last night confirmed Arkansas Public Service Commission Chairman Colette Honorable to the Federal Energy Regulatory Commission. Honorable recently completed a term as president of the National Association of Regulatory Utility Commissioners.

Honorable was nominated in August by President Obama to fill the remainder of departing Commissioner John Norris’ term, which will end in June 2017. She was confirmed unanimously by simple voice vote. Honorable was among a handful of non-controversial nominations that the Senate quickly approved before adjourning until January, making her confirmation among the last acts of the 113th Congress.

“Colette brings a wealth of experience and expertise to the important issues we are facing,” FERC Chairman Cheryl LaFleur said in a statement. “She and I worked together closely during her time as the president of NARUC, and I very much look forward to continuing that strong relationship when she joins the commission.”

The Senate Energy and Natural Resources Committee voted last week to advance Honorable’s nomination to a full vote. Ranking member Lisa Murkowski (R-Alaska) said a majority of the committee met off the Senate floor Thursday, also voting by voice, after the committee failed to reach a quorum at its meeting the day before.

Assist from Cruz

Honorable was expected to be confirmed by the Senate this week, but only after some political kabuki by Sen. Ted Cruz (R-Texas) inadvertently expedited her nomination.

On Friday, the Senate convened to debate a $1.1 trillion omnibus spending bill, which had to be passed by Saturday night to avoid a government shutdown. Party leaders worked out a deal to pass a short-term spending bill that would fund the government through Wednesday before convening again on Monday to pass the omnibus bill.

Under the rules of the Senate, votes need to be scheduled a certain amount of time in advance, but this wait period can be waived by unanimous consent. Cruz and colleague Mike Lee of Utah, however, objected to the waiver in an effort to oppose Obama’s executive order delaying the deportation of 5 million immigrants living in the country illegally.

The move forced the Senate to stay in D.C. Saturday, infuriating members of both parties. But it also gave Senate Majority Leader Harry Reid (D-Nev.) an opportunity to push through 24 of Obama’s nominations, including Honorable’s, which were being stalled by Republicans in the hopes that they would be delayed until the GOP took over the Senate in January.

“While we wait we shouldn’t waste time,” Reid said when the Senate convened Saturday. “The Republican leader has known for weeks, if not months, that we intend to vote on the president’s nominations.”

Senators spent nearly 10 hours voting on procedural motions to advance the nominations while they waited until they could vote on the omnibus bill, which they ended up passing 56-40 Saturday night.

While the Senate was expected to take up the nominations when it reconvened on Monday, Democrats had feared that the process would take too long and some senators would leave for the holidays before all of them passed.

Reid spent most of Monday and Tuesday putting more controversial nominations to a vote, such as Obama’s pick for surgeon general Vivek Murthy, to get them confirmed before the Senate adjourned and Republicans take over in January. While Honorable would have likely been confirmed next year, Cruz’s maneuver guaranteed that she would be confirmed this week and not have to be advanced by the Energy Committee again next year.

Honorable had received praise from members of both parties at her Dec. 4 confirmation hearing. (See FERC Nominee Colette Honorable Gets Bipartisan Support at Senate Hearing.)

Farewell to Landrieu

The committee met on Wednesday to vote on Honorable’s nomination, but it spent most of its 20-minute business meeting complimenting and thanking outgoing Chairman Mary Landrieu (D-La.) for her service. It adjourned when Landrieu announced it had failed to reach a quorum.

Landrieu lost her bid for re-election earlier this month in a runoff vote against Republican Bill Cassidy, who represents Louisiana’s 6th district in the U.S. House. Murkowski, Landrieu’s likely replacement as chair, said her Democratic colleague has been a “true leader” on energy issues.

Landrieu focused “on the things that are not only important to the people of Louisiana but for the people of this country,” Murkowski told her. “I am very, very grateful for what you have given the United States Senate, for what you have given your state and for what you’ve given to the American people.”

Sens. Maria Cantwell (D-Wash.), Joe Manchin (D-W.Va.), Al Franken (D-Minn.), Ron Wyden (D-Ore.) and Rob Portman (R-Ohio) also offered their appreciation and support for Landrieu. Franken noted that as a former comedian, he would mostly miss Landrieu’s “infectious” laugh.

December 16, 2014

Transmission Outage, Cold Causes Price Spike on Long Island

Power prices briefly spiked above $1,000/MWh on Long Island Wednesday due to a combination of cold weather and an unplanned transmission outage.

The price jolt occurred around noon and lasted for only a few minutes when the East Garden City Bank #2 line failed due to equipment issues between 10:45 a.m. and 2 p.m., according to NYISO spokesman David Flanagan.

The Long Island Zone K jumped to about $1,102/MWh. The adjacent Zone J, in New York City, remained at about $33/MWh.

The Zone K day-ahead forecast was for 2,450 MW from 9 a.m. to 2 p.m., but real-time demand was 2,550 MW.

December 16, 2014June 15, 2023

PJM MRC Preview

Below is a summary of the issues scheduled to be brought to a vote at the PJM Markets and Reliability Committee Thursday. Each item is listed by agenda number, description and projected time of discussion, followed by a summary of the issue and links to prior coverage in RTO Insider.

RTO Insider will be in Wilmington covering the discussions and votes. See next Tuesday’s newsletter for a full report.

Markets and Reliability Committee

2. PJM Manuals (9:10-9:30)

Members will be asked to endorse the following manual changes:

A. Manual 10: Pre-Scheduling Operations — This update, an annual review, includes a new section highlighting the criticality of reporting outages on facilities providing black start service.

B. Manual 14D: Generator Operational Requirements — Modified to provide consistency with revised North American Electric Reliability Corp. standard VAR-002-3, effective Oct. 1, 2014. Sections 7.1.2 and 7.3.4 contain revisions regarding notifications of status changes on automatic voltage regulators, power system stabilizers and reactive capability.

C. Manual 01: Control Center and Data Exchange Requirements — Addition to Section 3.2.4 regarding user agreements related to purchase of PJMnet connections.

3. Zonal and Residual Metered Load Aggregates (9:30-9:45)

Members will be asked to approve Tariff revisions related to data availability for the bus distribution factors for zonal and residual metered load aggregates utilized by the day-ahead energy market. If there are technical problems that prevent PJM from obtaining the load distribution factors from the snapshot one week prior to the operating day, the load distribution factors from the most recently available day of the week that the operating day falls on will be used.

4. Harmonization of PJM’s Governing Documents (9:45-10:00)

Members will vote on a proposed problem statement and issue charge related to ensuring PJM’s Operating Agreement, Tariff and Reliability Assurance Agreement are consistent in their definitions. (See Task Force Proposed to Resolve Inconsistencies in PJM Governing Documents.)

5. Enhanced Inverter Capability (10:00-10:15)

The committee will be asked to approve Tariff and manual revisions related to enhanced inverter capabilities. The new rules will apply to Federal Energy Regulatory Commission jurisdictional inverter-based generators defined as asynchronous generation that have an Interconnection Service Agreement or a Wholesale Market Participation Agreement. The changes will not affect merchant transmission facilities, HVDC inverter-converter facilities or existing generation. (See Enhanced Inverters Clear MRC.)

December 16, 2014

NYPSC OKs Con Ed’s Demand Management Program to Relieve NYC Overloads

By William Opalka

The New York Public Service Commission on Thursday approved a plan by Consolidated Edison of New York to address overloads in Brooklyn and Queens through a $200 million program that will deploy distributed generation and demand-side management (DSM) in order to defer installation of a $1 billion substation until at least 2026.

The commission said it was the first time New York has chosen to relieve congestion in “non-traditional” methods instead of authorizing construction of utility infrastructure.

Con Ed’s plan is consistent with the state’s “Reforming the Energy Vision” program to restructure the electricity market with greater reliance on technology and distributed resources, the commission said. “The commission is making a significant step forward toward a regulatory paradigm where utilities incorporate alternatives to traditional infrastructure investment when considering how to meet their planning and reliability needs,” the order states.

Commission Chair Audrey Zibelman added that because of the recent D.C. Circuit Court of Appeals decision striking down federal jurisdiction over demand response in wholesale markets, it’s important for state regulators to set market rules for that resource.

Con Ed said the feeders serving the Brownsville No. 1 and 2 substations began to experience overloads in 2013 and would be overloaded by 69 MW for 40 to 48 hours during the summer by 2018. A new substation, transmission subfeeders and a switching station would cost $1 billion, according to the company. The PSC accepted the company’s estimate of the DM Program’s costs and ordered a cap of $200 million.

The program would include 52 MW of non-traditional utility-side and customer-side relief, including about 41 MW of energy efficiency, demand management and distributed generation, and 11 MW of utility-side battery energy storage. This will include incentives to upgrade building “envelopes,” improve air conditioning efficiency of equipment, encourage greater use of energy controls, and establish energy storage, distributed generation or microgrids.

This will be supplemented by approximately 17 MW of traditional utility infrastructure investment, consisting of 6 MW of capacitors and 11 MW of load transfers from the affected area to other networks.

The commission said the project is hoped to have a salutary effect on utilities statewide. “Important and critical lessons will be learned as changes to traditional utility operations and ratemaking are explored, which are consistent with the core elements of the REV proceeding,” it said.

December 16, 2014

PJM MIC OKs Capacity Transfer Rights Inquiry

PJM stakeholders last week agreed to review modeling practices that the RTO said may be shortchanging loads with transmission agreements that pre-date the RTO’s capacity market.

Members of the Market Implementation Committee approved a problem statement proposed by Stu Bresler, vice president of market operations.

Bresler said PJM’s capacity modeling considers all external firm point-to-point transmission resources as sinking to the “rest of RTO” region, including historic resources that actually sink in constrained zones. While PJM uses this transfer capability in calculating the Capacity Emergency Transfer Objective/Capacity Emergency Transfer Limit (CETO/CETL), it does not allocate the benefits of the capability to the transmission holder. This can expose the load-serving entities to locational capacity price differences, Bresler said.

Under the problem statement, stakeholders will consider adding a mechanism in the capacity market similar to one used to allocate Auction Revenue Rights to historical transmission paths in the energy market. PJM said the issue affects “a very limited number of entities.”

Market Monitor Joe Bowring, however, warned “it’s a slippery slope.”

“There were a lot of entities who had bilateral agreements when they joined the market. There is no reason to make special allowances for preexisting arrangements or for those who do not like the outcome of market rules,” Bowring explained after the meeting. “Others will seek concessions related to locational capacity price differences that are also not permitted by the market rules.”

Waiver Request

Bresler said the issue caused one PJM member in Commonwealth Edison’s locational deliverability area to seek a waiver of PJM’s Reliability Assurance Agreement before last May’s base residual auction.

It was an apparent reference to the Illinois Municipal Electric Agency, which won a waiver from the Federal Energy Regulatory Commission regarding its means of serving the Naperville, Ill., portion of its load (ER14-1681).

IMEA said it had agreed to pay $468 million for rights to capacity resources for self-supply of its ComEd load through 2035. IMEA said it had acquired firm transmission rights to ensure delivery of external capacity resources in Kentucky and Illinois. Without a waiver, it said, its investment in self-supply would be worthless and it would have had to spend as much as $24 million per year in additional costs to serve its Naperville load.

PJM supported the request, noting that the “ComEd LDA was recently, and for the first time ever, modeled with a separate VRR Curve.”

The commission approved the one-year waiver, concluding that it would “not lead to undesirable consequences,” but it urged IMEA and PJM to discuss a solution for future years.

Commissioner Philip Moeller dissented, saying the waiver “will transfer costs incurred on behalf of IMEA to everybody else in Chicago and its neighboring areas.”

December 16, 2014June 15, 2023

PJM, MISO Reach Agreement on New Interchange Product

PJM and MISO have reached agreement on a new product for interchange transactions similar to the Coordinated Transaction Scheduling (CTS) product PJM launched Nov. 4 with NYISO.

The product is intended to reduce uneconomic flows between PJM and its western neighbor. PJM says almost half of the transactions from PJM into MISO occur when prices are higher in PJM.

Under CTS, traders would be able to submit “price differential” bids that would clear when the price difference between MISO and PJM exceeded a threshold set by the bidder.

PJM outlined its plan to the Market Implementation Committee Friday.

The new product will be in addition to two existing means of trading between the two RTOs: hourly evaluations of traditional wheel-through transactions and intra-hour evaluations of traditional LMP bids and offers. PJM and MISO will require CTS transactions to be submitted 75 minutes before the flow begins. Traditional transactions can be submitted only 20 minutes in advance.

“Market participants can still be a price taker if they feel they have a better idea of future prices than PJM,” said PJM’s Rebecca Carroll.

The CTS product is expected to be similar to the PJM-NYISO offering except that both PJM and MISO will evaluate the trades: only those trades that clear both PJM’s and MISO’s thresholds will clear. NYISO alone is responsible for clearing transactions for the original CTS product.

“Neither one of us [PJM and MISO] do an economic clearing today. We both need to make software changes,” Carroll explained.

PJM and MISO hope to obtain members’ approval in time for a filing with the Federal Energy Regulatory Commission in May 2015. Implementation may not occur until the third quarter of 2016 because of software changes required. “So we need a longer runway to get these software changes implemented,” Carroll said.

December 16, 2014June 15, 2023

MISO Rejects ‘Too Prescriptive’ Governance Proposal

MISO’s Board of Directors Thursday rejected proposed guidelines on how the board chair makes committee appointments.

The guidelines, part of proposed changes to the Principles of Corporate Governance, were withdrawn after criticism from board members that they were “too prescriptive” and limited flexibility. The Corporate Governance & Strategic Planning Committee had earlier approved the changes by a 2-1 vote.

Some of the proposed changes spelled out the increase in the board’s membership to nine members from seven (in addition to the CEO), a change approved by the Federal Energy Regulatory Commission in June.

It was the guidelines proposed under the “Selection of Committee Members” that annoyed some directors. The guidelines spelled out the experience that should be required for membership on each of the board’s seven committees. One provision stated that membership on the nominating committee may be rotated annually.

“This is getting pretty prescriptive,” Director J. Michael Evans said. “I don’t think it’s ready for us to take up.”

The board referred the proposals back to the committee.

New Additions to MISO Board

Earlier in the day, MISO members elected two new directors: Thomas Rainwater, CEO of Rainwater Capital Management, and Paul Bonavia, executive chairman of UNS Energy, parent company of Tucson Electric Power and UniSource Energy Services.

One director is the first of two additions to the board between now and 2016 as it expands to nine members. The other takes the place of Shelley Longmuir, an attorney who had been on the board since 2006 but chose not to seek another term.

Baljit Dail, who has served on the board since 2009, was re-elected. All three will serve three-year terms.

The board is expanding from seven to eight directors effective January 1, 2015 and will add its ninth member in 2016.

Members also approved an increases in board members’ compensation. Annual retainers were increased by $10,000 to $70,000. The retainer for commission chairs was boosted by $2,500 to $7,500. The board chair also received a $2,500 increase to $15,000.

A day earlier, MISO’s Advisory Committee cast votes for new leadership. Vice Chairman Kevin Murray, executive director of the Industrial Energy Users-Ohio, was elected chairman for 2015. Tia Elliott, director of regulatory affairs for independent power producer NRG Energy, was elected vice chairman.

December 16, 2014

PJM MIC to Consider Earlier Notice on Pricing Interfaces

PJM’s Market Implementation Committee will begin work in January on an initiative to consider whether the RTO should be required to provide more notice to the market before introducing “closed loop” interfaces to capture operator actions in pricing.

The MIC last week approved an issue charge by DC Energy’s Bruce Bleiweis to consider if such pricing interfaces should be barred from taking effect until they are announced before the monthly Financial Transmission Rights or Balance of Planning Period FTR auction.

In the last year, PJM has created closed-loop interfaces in at least four locations so that operator actions — such as sub-zonal dispatch of demand response — are captured in LMPs rather than uplift. PJM said it must use the interfaces to set prices because its modeling software can only set prices for thermal constraints, not voltage problems.

December 16, 2014June 15, 2023

Connecticut: Power Prices to Rise 63% by 2024

By William Opalka

Connecticut policymakers say inadequate natural gas infrastructure will lead to sharply higher electricity prices despite energy-efficiency measures that will nearly eliminate demand growth over the next decade.

The state’s 2014 Integrated Resource Plan, released last week by the Department of Energy and Environmental Protection, sees the state mirroring regional trends: an increased reliance on natural gas generation hampered by a constrained pipeline system, and shortfalls of capacity and renewable energy sources.

Increased prices for natural gas, capacity and renewable resources are likely to increase the generation rates for retail customers by 63%, from approximately 9.8 cents/kWh in 2014 to 16.0 cents/kWh in 2024.

“Connecticut ratepayers are being affected by critical developments in New England’s wholesale electricity markets that are challenging the affordability and reliability of the region’s electric system,” the plan says.

Demand growth is expected to be flat over the next decade due to the increased use of energy efficiency. Electricity consumption is only expected to grow by 0.05% annually, with peak demand growth at 0.5% annually. The state’s last IRP, in 2012, had projected an increase in consumption of approximately 1% per year.

Those efficiency gains will be offset, however, by several other factors, DEEP says:

New England’s capacity surplus will disappear by 2017, when a shortage of 143 MW is projected, primarily due to the announced retirement of 4,100 MW of non-gas generation. Capacity costs are likely to increase to about 4.9 cents/kWh by 2024, when the region will need an additional 1,700 MW in resources.

The state expressed skepticism about ISO-NE’s ability to fill the shortfall. “There has not been a shortage of capacity before to test the auction’s ability to attract new investment. ISO-NE has recently instituted major changes in the capacity market rules, which add to the department’s concern that the upcoming February 2015 auction may not attract the new capacity that is needed, driving up capacity prices and threatening system reliability. If the market fails, DEEP may pursue options within state authority to procure capacity resources, if needed.”

The region now depends on natural gas for more than half of its power generation, a situation that will be exacerbated by planned coal plant retirements and a shortage of pipeline capacity to deliver gas to both power plants and winter heating. “This problem is too big for any one state to solve alone, and all New England states should contribute to a solution,” the IRP says. Regional pipelines are seen as a potential solution, but local opposition that was especially loud in Massachusetts has put some initiatives on hold.

The wholesale spot market price of natural gas delivered to New England has spiked from about $1-3/MMBtu before 2012-13 to $8/MMBtu in 2012-13 and almost $14/MMBtu in 2013/14, adding $3 billion to wholesale electricity prices.

Gas pipeline capacity expansions expected to enter service in November 2016 as part of Connecticut’s Natural Gas Expansion Plan may provide only temporary relief, the plan says.

Competition between Connecticut and other states for a limited supply of new renewable resources will likely add 0.3 cents/kWh to retail rates by 2024. The impact would be larger but for long-term contracts signed with large wind, solar and biomass facilities, which will save ratepayers more than $235 million over the next two decades. These programs, including a solar incentive program and utility-owned renewables, will only provide about 2,400 GWh of renewable energy by 2020, or about 40% of Connecticut’s renewable portfolio standards goal of 20% by 2020. The plan calls for increased support for distributed generation to address the renewable shortfall.

The plan proposes using existing state authority to solicit large-scale hydropower to offset some natural gas generation, or seeking new authority from the legislature to run a competitive procurement process for liquefied natural gas (LNG) and gas pipeline capacity.

“Neither ISO-NE, the Federal Energy Regulatory Commission, nor key market actors such as electric generators or gas pipeline developers have proposed any meaningful market reforms that will cause electric market participants to invest in urgently needed, cost-effective gas pipeline infrastructure.”

The IRP notes a marked decrease in emissions since 2007, with NOx, SO₂ and CO₂ down 71%, 95% and 28%, respectively. But it said emissions will increase slightly as gas infrastructure constraints cause an increase in generation from the state’s remaining coal-fired capacity.

The plan also proposes “reviving and improving” state demand response programs if the D.C. Circuit Court of Appeals decision voiding federal jurisdiction over DR is not overturned by the Supreme Court.