Page 1643 – RTO Insider

March 3, 2014

The Players

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 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 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 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 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.)

February 28, 2014

Expand Cyber Protections to Distribution System: Panel

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.

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

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.

February 25, 2014

FERC Clarifies Energy Storage Rule

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. (See FERC Rule Boosts Storage, Renewables.)

The new ruling (Order 784-A) clarifies that:

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.

February 25, 2014

Virtual Trading 101: INCs, DECs, UTCs

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.

February 25, 2014

FERC Asks for Briefs in Line-Loss Dispute

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.

February 25, 2014

EPA Regs, Low Prices Raise Reliability Concerns at NARUC

WASHINGTON — PJM and other grid operators will face unprecedented reliability challenges in the next several years as federal environmental regulations and low energy and capacity prices threaten to sideline baseload coal and nuclear capacity, federal and PJM officials told state regulators.

“The next two, three years, I just hope energy is not on the front page every single day,” Federal Energy Regulatory Commissioner Philip Moeller told the National Association of Regulatory Utility Commissioners winter meeting, shaking his head. “If you’re up for excitement, the next two, three years will be very exciting.”

MATS, Coal Ash, GHG, Cooling Water Rules

Moeller cited the Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) and pending EPA rules on coal ash and greenhouse gas emissions. More than 30 GW of coal-fired capacity retirements have been announced nationwide, with about three-quarters expected by 2015, when MATS takes full effect. (See sidebar: State Regulators Await GHG Rules.)

PJM CEO Terry Boston and others also cited EPA’s pending regulations on cooling water intakes, which will affect nuclear and fossil steam generating units representing more than 80% of U.S. generation, according to the North American Electric Reliability Corp. The greatest impact will be on more than 1,200 generators with once‐through cooling water systems, NERC said.

Boston said he was most concerned about the impact of the rules on the nuclear fleet, citing an estimated cost of $400 million to $500 million per plant to install closed-cycle cooling systems.

David Owens, executive vice president of the Edison Electric Institute, said it could cost the industry as much as $100 billion to comply with the regulations.

“I hope that the [EPA] air division is talking to the water division,” Moeller said. “There are so many [regulations] coming. I’m fuel neutral … but we can’t be reliability neutral.”

John Shelk, CEO of the Electric Power Supply Association, echoed Moeller’s concerns, saying, “I worry a lot about the next five to 10 years.”

Markets’ Impact on Reliability

Several speakers also voiced concerns that energy and capacity markets in PJM and other RTOs aren’t providing enough revenue to sustain nuclear generation, which is unaffected by most of the new EPA regulations.

“Right now competitive markets are not working and that’s why we’re losing nuclear plants,” said Marvin Feitel, president and CEO of the Nuclear Energy Institute.

EEI’s Owens agreed. “I think it would be a travesty if we lost a large number of nuclear plants because we don’t have sustainable price signals,” he said.

Owens said the markets’ treatment of demand response was partly at fault. “I think [DR] gets paid too high a price because I don’t think it’s the same as steel in the ground,” he said. “Right now we’re shutting down plants that [should remain operating] because of market distortions.”

FirstEnergy CEO Tony Alexander said competitive markets are flawed because they encourage excess capacity.

“Those of you in regulated states would never put your states at risk the way we are in PJM and other competitive markets,” he said.

PJM’s Boston defended the RTO’s market rules but conceded that the current low prices are “not sustainable.”

“The markets aren’t broken, but furiously competitive,” he said.

Gas-Electric Dependencies

FirstEnergy’s Alexander also called for changes in the relationship between the electric grid and natural gas pipeline system.

“You can’t have the electric system at the tail being wagged by the pipeline system. That’s what we’re building today,” he said.

Commissioner Moeller said two consecutive warm winters “masked our vulnerability” to gas supply shortages, vulnerabilities that were exposed during last month’s arctic cold. FERC will hold a technical conference April 1 to discuss operational and market issues raised by the grid’s response to this winter’s cold. (See related story: Technical Conference Set on Winter Reliability.)

February 25, 2014

NYISO Scheduling Product Wins FERC OK

The Federal Energy Regulatory Commission approved a new product designed to reduce uneconomic power flows between PJM and NYISO.

The commission’s orders (ER14-623 and ER14-552) allows Coordinated Transaction Scheduling (CTS) to begin as soon as November if stakeholders are satisfied with the accuracy of the forecasts the product will use.

According to PJM, power often flows into NYISO even when prices are higher in PJM. CTS, which is based on a price projection algorithm, will allow traders to submit bids that would clear only when the price difference between New York and PJM exceed a threshold set by the bidder. (See New NYISO Product OK’d.)

Before beginning to use the product, PJM will be required to post monthly price forecasts from its Intermediate Term Security Constrained Economic Dispatch (IT SCED) application from November 2013 through April 2014 and win a stakeholder vote approving the tool’s accuracy.

CTS trades will be in addition to two current options: hourly evaluations of traditional wheel-through transactions and intra-hour evaluations of traditional LMP bids and offers.

February 25, 2014

Senators Weigh in on Bay Nomination, PTC, Nuclear Waste

WASHINGTON — Senators told state regulators they had little hope of passing comprehensive cybersecurity legislation or finding a solution for the nuclear waste stalemate this year.

Four members of the Senate Energy and Natural Resources Committee gave the National Association of Regulatory Utility Commissioners an update on the prospects for legislation affecting the grid and made their cases on subjects including the wind Production Tax Credit, greenhouse gas rules and Norman Bay, President Obama’s nominee for the Federal Energy Regulatory Commission chairmanship. (See sidebar: Senators Cite PJM in Reliability Concerns.)

Senator Mary Landrieu — Sen. Mary Landrieu (D-La.)

Sen. Mary Landrieu (D-La.), who replaced Oregon Democrat Ron Wyden as chair of the energy panel, promised “a very balanced and common sense” approach that she said reflects her state’s role as both a big producer and — due to its industrial production — consumer of energy.

Also speaking was Arkansas Democratic Sen. Mark Pryor, a mentor to NARUC president Colette Honorable.

Pryor, who serves on the Communications, Technology and the Internet Subcommittee, said he no longer expects Congress to pass a single, comprehensive cybersecurity bill. “I think it’s more likely we’ll do it section by section, committee by committee,” he said, referring to committees with jurisdiction over energy, banking and telecommunications. “I’m hoping we can get some of that done this year.”

Sen. Lamar Alexander (R-Tenn.) spoke out against extending the PTC, which expired Jan. 1, saying it contributed to negative energy prices, which undercut the viability of nuclear power. “It props up renewable energy at the expense of reliable energy,” Alexander said.

Carbon Capture

Senator Lamar Alexander — Sen. Lamar Alexander (R-Tenn.)

Alexander also called for simplifying the tax code, eliminating fuel-specific energy subsidies and doubling spending on energy research, which he said could make carbon capture and sequestration (CCS) cost competitive.

Sen. Joseph Manchin (D-W.Va.) touted a bill he sponsored with North Dakota Republican Sen. John Hoeven that would essentially bar the Environmental Protection Agency from requiring CCS in new coal-fired generators. The bill would instead base emission standards on those achieved by the six cleanest coal plants currently operating. “If [the standard is] not obtainable it’s not reasonable,” Manchin said.

Norman Bay Nomination

Senator Joseph Manchin — Sen. Joseph Manchin (D-W.Va.)

Manchin and Alaska Republican Sen. Lisa Murkowski — who helped sink Ron Binz’ FERC nomination last year — said they were keeping an open mind on the new nominee, FERC enforcement director Norman Bay. (See FERC Pick a Blank Slate.)

“Don’t know much about him. We’re going to look him up pretty good,” Manchin told reporters after his speech.

He offered unsolicited support for Honorable, the Arkansas regulator whose name had circulated in the capital earlier as a potential FERC candidate. “She has the chops to get it done,” he said, adding, “There’s a lot of good candidates.”

Murkowski, the ranking Republican on the energy panel, told reporters she was surprised Obama nominated Bay to the FERC chairmanship rather than promoting a current commissioner. “It didn’t work out so well for Mr. Binz,” she said.

She said she also has “a little concern” about Bay having to recuse himself in commission votes because of his involvement in enforcement cases.

Nuclear Waste

Senator Lisa Murkowski — Sen. Lisa Murkowski (R-Alaska)

Murkowski expressed frustration that energy efficiency legislation, which she thought would be “low-hanging fruit,” instead “has gotten caught up in the process.”

Members are awaiting a Congressional Budget Office cost estimate on a bipartisan bill co-sponsored by Murkowski and Alexander that would create a new nuclear waste administration and a consent-based process for siting waste facilities.

Alexander said the bill has reached near consensus, with “one or two things we don’t agree on.”

But Murkowski said she wasn’t optimistic it would move quickly. “It’s probably up against the clock in this 113^th Congress,” she said.

Alexander said the Obama administration should also renew work on Nevada’s Yucca Mountain. But Energy Secretary Ernest Moniz, speaking to the conference later, said the administration believes Yucca is “not a workable solution.” The proposed waste site, 100 miles north of Las Vegas, is opposed by many in the state, including Senate Majority Leader Harry Reid (D-Nev.).

February 25, 2014

Company Briefs

Ameren Chairman and CEO Thomas Voss will wind down his career by July 1, and is being succeeded by Warner Baxter, president and CEO of Ameren Missouri. Baxter has succeeded Voss as president of Ameren and on April 24 he will become CEO as Voss becomes executive chairman. When Voss retires from the board July 1, Baxter will succeed him as chairman.

More: Ameren

Calpine Still Plans to Sell Southeast Power Plants

Calpine still plans to sell some of its 10 Southeast plants, though its sale plans have gone more slowly than expected. Pending Environmental Protection Agency regulations should spur interest in the 5,236 MW portfolio, CEO Jack Fusco told analysts in an earnings call. The company may sell other plants, too. Now, Calpine is focusing on PJM. “I like where they’re headed, with transparency and competition in trying to level the playing field there, and I think you should expect that to be a real focus of ours,” Fusco said.

More: Utility Dive

Duke Explores New Model As ‘Trusted Energy Adviser’

Duke Energy aims to create a “trusted energy adviser” business model as new challenges face the industry. The company is exploring new business areas, Denis Garman, leader of Duke’s energy management and information solutions group in Charlotte, N.C., said. “We’re really trying to rethink our value proposition. … There are no apathetic customers – we just haven’t figured out how to deliver value to them in a way that resonates,” he said.

More: Utility Dive

FirstEnergy Closes on Sale Of Hydro Plants to LS Unit

FirstEnergy completed the sale of 11 hydropower stations to Harbor Hydro Holdings, a subsidiary of LS Power Equity Partners, for about $395 million. The plants, totaling 527 MW, are in Pennsylvania, West Virginia and Virginia.

More: FirstEnergy

February 25, 2014

Contrarian View: CERA Sees Higher Load Growth

WASHINGTON — For generators buffeted by low energy prices and unreliable capacity revenues, PJM’s General Session Feb. 12 provided something of a tonic.

Larry Makovich, vice president and senior advisor for global power at consulting firm IHS CERA, provided a bullish forecast for load growth for the more than 75 stakeholders and PJM officials who attended the session at the Hyatt Regency Washington near the Capitol. Another 55 — some perhaps dissuaded from attending in person by snowstorm forecasts — watched via webcast.

The low- or no-growth forecast of many analysts “is probably far too bearish,” Makovich said. “The fundamentals suggest we ought to be running 1.5 to 1.7% per year” load growth.

EIA, PJM More Bearish

That is substantially above the Energy Information Administration’s projection that U.S. power demand will grow by only 0.9% annually through 2040. EIA’s 2013 Annual Energy Outlook predicted increasing demand would be largely “offset by efficiency gains from new appliance standards and investments in energy-efficient equipment.”

PJM is projecting summer peak load growth of 1.0% annually over the next 10 years, and 0.9% over the next 15 years with winter peaks growing at 0.9% and 0.8% respectively. (The projection was revised this month to reflect a 120 MW reduction in the 2014/15 forecast peak for the BGE zone.)

While the “conventional wisdom” is that electric efficiency gains will result in little or no load growth, Makovich noted that after steadily improving between 1950 and 1970, U.S. electric efficiency stalled at about $3 of real GDP per kWh for the next 20 years. Since 1990, efficiency has declined, to about $3.50 of GDP per kWh.

Meanwhile, ratepayer spending on electric efficiency, which grew steadily from less than $1.5 billion in 2000 to about $6 billion in 2011, has been flat since then.

More spending in the future will be to keep the gains of the past, Makovich said. “The cost of increasing efficiency and the cost of supply are getting kind of close to each other.”

Load Growth by Sector

Similarly, electric use per customer is virtually unchanged over the past decade. Residential load growth has averaged 1.6% to 2.2% per year over the last decade while commercial load had grown by 2.4% to 3.4% annually. “What’s been going down is industrial” use, he said.

And that could change as a result of what Makovich called the U.S.’ “dramatically improved competitive position.” Since 2001, the U.S.’s industrial electricity prices have declined substantially relative to trading partners such as Mexico, China and Canada. Germany, which was at parity with the U.S. in 2001 now has rates that are more than twice as high.

Meanwhile, demand response, which has roiled the PJM capacity market, is nearing “saturation” in the U.S., said Julien Dumoulin-Smith, a UBS Investment Research analyst who also spoke at the session.

Distributed Generation

Makovich also challenged predictions that distributed generation will increasingly displace large generators owned by utilities and independent power producers.

While the growth of rooftop solar has generated much buzz, he noted, utility-scale solar is 50% cheaper and thus likely to dwarf residential applications. One-third of worldwide rooftop solar is in Germany, which Makovich noted has “the sunlight intensity of Anchorage, Alaska.”

Wind power is not well suited to distributed generation because of siting limitations and economies of scale. Manufacturers have obtained substantially greater efficiency as they have increased the average rotor diameter to 330 feet from less than 50 in 1980.

The costs of fuel cells and other storage technologies haven’t dropped enough to make a major difference, he said.

Makovich said fuel diversity is undervalued and being lost because wholesale power prices are too low. The low natural gas prices the U.S. has enjoyed as a result of shale gas shouldn’t obscure the fuel’s historic price volatility.

“Natural gas will remain cyclical and prone to periodic volatility as transportation becomes challenging,” Makovich said.