Dominion is selling the electricity side of its competitive retail energy business and hopes to have a transaction closed in the next several months. “It just doesn’t fit our business model,” CEO Tom Farrell told analysts, according to an earnings call transcript from Seeking Alpha.
Shrinking margins and higher volatility have struck other retailers, too, Farrell observed. “It’s a volatile market out there. We are not going to quantify it for you, but it’s extraordinary to watch.”
At the same time, the company said it would expand its portfolio of contracted utility-scale solar projects by nearly 250 MW, with projects coming online in 2014 and 2015.
The Fourth Circuit ruled that the Federal Energy Regulatory Commission properly granted incentives to a Dominion unit for five transmission projects, rejecting the claims of North Carolina utility regulators that the commission abused its discretion (case #12-1881).
The North Carolina Utilities Commission had challenged the incentives FERC granted in 2008 to five Virginia Electric & Power Co. transmission projects under FERC order 679. The North Carolina commission contended that four of the five projects didn’t satisfy a three-prong test to determine eligibility for incentives.
Former Duke Chief Rogers Would Be Utility ‘Attacker’
Jim Rogers
If he were starting in the business today, former Duke Energy chief Jim Rogers would go all out for solar roofs and would be an “attacker, not a defender” of the traditional utility model. In an interview with EnergyBiz magazine, Rogers spoke of “a continuing battle between central and distributed generation.”
The Alliance for Solar Choice welcomed Rogers’ remarks and urged him to persuade Duke and the utility industry to “see a better way forward” instead of defending their central-station model.
The Federal Energy Regulatory Commission told Duke Energy it would audit the utility’s compliance with conditions FERC put on its 2012 merger with Progress Energy. The conditions included making power sales to third parties while North Carolina transmission upgrades that would ease competition concerns were completed. A Duke spokesman said the upgrades were ahead of schedule, and Duke was complying with other conditions.
Tax experts are closely watching Exelon’s challenge of a $517 million tax bill stemming from transactions in 1999, when the company sold some power plants and acquired others in what it characterized as a tax-free exchange. The Internal Revenue Service says the transactions were taxable and the matter awaits Tax Court resolution. If Exelon loses, such transactions risk being viewed by the IRS as “abusive tax shelters,” tax lawyers said. No trial date been set.
Exelon Generation’s 10 nuclear plants in Illinois, Pennsylvania and New Jersey produced 134 million net MWh in 2013, their highest output ever, exceeding the previous record set in 2007. The plants operated at a 94.1% capacity factor.
AEP River Operations, a subsidiary of American Electric Power, received the first of 20 tank barges that will constitute its new Liquids Division. Starting Feb. 20, the unit’s barges will carry liquid cargoes, including petrochemicals and agricultural chemicals. “Entering the liquid cargo market means we can offer our customers a more complete range of services,” company President Keith Darling said.
January’s arctic cold lasted only a few days, but its impact could be felt for years depending on how the Federal Energy Regulatory Commission rules on the RTO’s request to waive its $1,000 price cap.
The commission agreed Jan. 24 that PJM could make whole natural gas generators that can prove that the spike in natural gas last month pushed their operating costs above the $1,000/MWh offer limit. (See FERC Lifts Price Cap as Cold Grips PJM.)
Still pending before the commission is PJM’s request to lift the price cap altogether for the remainder of the winter so that generators with costs over $1,000 set the PJM clearing price (ER14-1145). Among the factors the commission will consider in weighing the request to waive the PJM Tariff is whether the request is of “limited scope” and that it not harm third parties.
Windfall
Opponents told FERC in filings last week that PJM’s proposal would provide a windfall to generators at ratepayers’ expense.
“Tens of billions of dollars of obligations among sellers and buyers are committed every year on the basis of market rules, including the $1,000/MWh offer price cap,” NextEra wrote in opposition. “…This is precisely the circumstance in which market participants should be able to rely on a market rule that protects against unlimited price exposure. Indeed, the only time such a rule actually matters is when prices are extremely high.”
Opponents said the price cap was a trade-off consumers won in return for making capacity payments.
“The regulatory and pricing risk associated with exceptions to the offer-price cap rule will increase the cost of hedging instruments long after March 31, 2014,” wrote the PJM Industrial Customer Coalition and consumer advocates for seven states and the District of Columbia.
The consumers group said the waiver would gouge ratepayers as a result of bad business decisions by generators that failed to hedge gas prices or install dual fuel capability.
At the same time that operating costs for simple-cycle combustion turbines hit $1,200/MWh, generators with similar heat rates were producing power at about $310/MWh by burning oil.
The consumers said allowing “the least efficient generators that chose not to hedge” to set the market-clearing price will create undesirable incentives.
A company that owns four generation units — one fueled by natural gas purchased on the spot market and three that are not fueled by natural gas — could have an incentive to pay higher natural gas prices because of the potential gain to its other plants, they said.
Supporters
Among those who filed in support of the waiver were PJM generation owners and the Market Monitor.
“In a time of extreme cold weather events, it’s more important than ever that the market clearing prices reflect the value of resources that are needed to support reliable operations,” wrote Exelon. It said the commission should approve the waiver “to support accurate price formation and reliable operations going forward.”
The PJM Power Providers said the use of a single market-clearing price is a “fundamental tenet” of the PJM market. “Reflecting the marginal cost of fuel in uplift payments is a fundamentally flawed market design that must be stopped as soon as possible.”
It added: “the growth in demand response in PJM since 2002 suggests that there may be good cause to address whether an offer cap is even necessary in today’s market.”
PJM’s Market Monitor told the Federal Energy Regulatory Commission last week that rule changes approved by PJM stakeholders to increase the flexibility of demand response are insufficient and that the commission should impose a must-offer requirement similar to that for generation resources.
Monitoring Analytics asked that its complaint (EL14-20) be merged into docket ER14-822, in which FERC is considering the proposed changes.
Current rules require PJM operators to provide two hours’ notice before dispatching DR. Under the proposal approved by PJM stakeholders in December, resources will be dispatchable in 30 minutes.
The new rules also limit the “Emergency DR” designation to resources using back-up generators that are subject to environmental permits. Other resources will be known as “Capacity DR.” In addition, the minimum event duration will be reduced from two hours to one hour and the strike price will be reduced. (See Members OK DR Dispatch Rules after Late Amendments.)
The Monitor said the proposed changes fail to address all of the disparities in PJM’s treatment of DR and other capacity resources. It said FERC should limit DR’s offer cap — now effectively $1,800/MWh — to the $1,000 allowed generators.
“The current rules allowing non comparable demand resources are unjust, unreasonable and unduly discriminatory, and PJM should be directed to take immediate action to correct this design flaw,” the Monitor wrote.
In a filing in December (ER13-2108), four Ohio utilities, FirstEnergy, AEP, Dayton Power & Light and Duke-Ohio, also called on FERC to impose a must-offer requirement on DR. The lack of such a requirement obscures the cost of energy in high demand periods, resulting in higher production costs and uneconomic dispatch of DR, the utilities said. A must-offer obligation would allow PJM operators to dispatch DR economically rather than as a block, they said. (See Generators: Ban Planned DR.)
January’s sky high energy prices claimed its first casualty Friday as green energy retailer Clean Currents abruptly suspended service, returning its customers to their distribution utilities.
Average on Peak Prices – Total LMP PJM RTO (Source: PJM Interconnection, LLC)
“The recent extreme weather, which sent the wholesale electricity market into unchartered territories, has fatally compromised our ability to continue to serve customers,” the company said in a notice on its website.
Clean Currents had 6,000 residential and 2,000 commercial customers in Maryland, Pennsylvania and the District of Columbia. Based in Silver Spring, MD, the company had 19 employees.
The company was headed by CEO Charles Segerman, a lawyer and engineer who had worked in green real estate development, and President Gary Skulnik, a former Sierra Club lobbyist and CNN writer. Its board included two executives with SolarCity, a leader in residential solar power.
“This all happened very rapidly,” Skulnik told the Baltimore Sun. “Obviously this is not the way we would have hoped things would have happened, but this polar vortex and extended cold weather sent the electricity market into an extreme situation. Prices were through the roof and beyond anything we could afford to cover.”
The company’s former customers will revert to their distribution utilities’ Standard Offer Service until they choose an alternative retailer. Clean Currents said it was waiving any advanced notice requirement or early termination fees.
Could this be the first of a string of defaults?
“There is some concern that other electric or gas suppliers may do the same thing, so we will monitor this situation closely,” Maryland People’s Counsel Paula Carmody said in an email. “I also will be monitoring, to the extent we can get the information, price increases with variable price contracts, as we suspect consumers with see significant increases in their supplier bills as a result.”
Tom Matzzie, CEO of competitor Ethical Electric, mourned Clean Currents on Twitter as “pioneers,” but in a bullish sentiment quickly added that he would consider hiring its former employees.
PJM’s bills for energy purchased during the cold snap will be due this Friday, Matzzie said. “It’s probably going to be a bloodbath,” he said in an interview.
Many retailers likely received calls from PJM last week to provide more collateral due to the high prices — a demand Clean Currents apparently was unable to honor.
Matzzie said his company will survive despite excess energy costs “in the seven figures” because it hedged the day ahead market and will be able to pass along some of the costs to customers with variable price contracts. The company has a credit support “sleeve” backed by a bank. “You’re naked without that sort of credit support,” he said.
“The PJM uniform clearing price model is not suited for emergency events, which allows for tremendous windfalls for some parties and tremendous losses for other parties during emergencies,” Matzzie said. “The [$1,000] price cap is already too high. There should be a different set of rules for emergency events. The problem is the generators all get made whole. The suppliers and customers are left holding the bag.”
For his part, Skulnik claimed not to regret his failed venture. “We showed there was a demand for clean energy,” he told the Sun. “People want a solution for climate change.”
The Federal Energy Regulatory Commission approved PJM’s request to cap the quantity of Limited and Extended Summer demand response that clears in the annual base capacity auction, rejecting protests of opponents, who said it will increase costs and stunt the growth of DR.
The commission’s 4-0 ruling late Thursday (ER14-504) allows the changes to take effect in May’s Base Residual Auction for delivery year 2017-18.
The new rules cap the amount of Limited and Extended Summer DR at 10% of PJM’s reliability requirement, with Limited DR providing no more than 4%.
The changes — which the PJM Board filed with FERC despite a lack of stakeholder consensus — could boost capacity prices by $1.8 billion over two years, according to PJM simulations. (See PJM Goes it Alone in Bid to Limit DR in Capacity Auction.) PJM said those increases will be more than offset by a $3.4 billion reduction in energy prices over the same period.
“While we cannot confirm the simulation’s relative estimates,” the commission wrote, “we agree with PJM that additional generation resources clearing the capacity auction under PJM’s proposal would, unlike demand response that does not participate in the energy market until an emergency event occurs, contribute more energy in the energy market, which in turn would tend to place downward pressure on energy price.”
PJM told FERC the volume of limited DR clearing in the capacity market had to be reduced because current rules result in a vertical demand curve that threatens reliability. The RTO said it had erred in 2011 when it won FERC approval for rules incorporating limited and extended summer demand response into the capacity market.
PJM CEO Terry Boston issued a statement this morning praising the FERC ruling. “FERC’s action expands the usefulness of demand response and will allow demand resources to make a bigger contribution during tight power supply situations outside of the summer peak season, as we have been experiencing this January,” Boston said.
UBS Investment Research called the ruling “a coup” for PJM generation owners such as Exelon, FirstEnergy, PSEG, Calpine and NRG Energy, saying it could boost capacity prices by $25/MW-day in the RTO and $10/MW-day in MAAC.
USB termed it “a clear setback” for DR providers, although it said sector leader EnerNOC might benefit because its “relative technological advantage” will allow it to provide more Annual DR.
FERC rejected the arguments of consumer advocates, industrial load, cooperatives and state regulators opposed to the changes. However Commissioner John Norris did acknowledge some of their concerns in a concurring statement, expressing “caution that we not lose sight of the extraordinary benefits demand response has brought to consumers.”
“We must continue to provide demand response opportunities to participate in the PJM market on a level playing field with other types of resources,” Norris wrote.
“…It is my hope that this Commission will strike the right balance that maintains a reliable system while ensuring competition among resources that result in the most efficient costs to consumers.”
FERC is one commissioner short since the departure of former Chairman Jon Wellinghoff, who had championed DR. President Obama last week nominated FERC Enforcement Director Norman Bay as Wellinghoff’s replacement.
The PJM proposal won only 45% support from the Members Committee and 37% from the Markets and Reliability Committee in votes in November. A simulation by PJM found that the changes would have increased total capacity costs by nearly $2 billion over the last two Base Residual Auctions. (See Demand Response Changes Could Cost $1B Annually.)
FERC took note of the stakeholders’ misgivings but ruled that it was “reasonable for PJM to distinguish between each class of resources when designing its capacity market rules.
“On balance, we find that PJM’s proposal retains an adequate opportunity for limited-availability demand response to participate in PJM’s capacity markets,” the commission wrote.
It added: “While there may be other ways to address the problem identified by PJM, as suggested by intervenors, that does not mean that the solution proposed by PJM is unjust and unreasonable.”
PJM’s spending on black start generators will increase by at least $3.4 million — and perhaps as much as $21.6 million — under proposals outlined to the Markets and Reliability Committee Thursday.
The proposed changes, developed by the System Restoration Strategy Senior Task Force, are intended to increase the incentives for existing black start resources to continue providing the service, PJM’s Chantal Hendrzak said. PJM initiated the changes over concern that it will lose much of its existing capacity by 2015 due to coal plant retirements.
Minimum Incentive Proposal
Almost two-thirds of the task force voting supported a “minimum incentive” proposal that would set annual compensation for a 20 MW combustion turbine at $71,609, a 40% boost from the current $51,270.
The proposal, which will be the main motion when the MRC votes on the issue Feb. 27, would increase PJM’s annual black start costs to $24.4 million from the $21 million revenue requirement as of last Sept. 1.
Proxy Proposal
(Source: PJM Interconnection, LLC)
A second “proxy” proposal, which won 63% support from the task force, would increase compensation for a 20 MW CT five-fold to $312,486 while more than doubling annual black start costs to $42.7 million (see charts). It may be considered by MRC if the minimum incentive proposal fails to win support.
The mininum incentive proposal would:
Change the incentive factor from 10% to the greater of 10% or $25,000;
Allow non-ICAP (energy-only) units to receive compensation based on the offered black start MW;
Permit automatic load rejection units (ALR) to recover NERC Compliance costs as documented to the Market Monitor;
Allow compensation for storage of fuels other than oil;
Provide for a 5-year PJM internal review of formula.
The proxy proposal would replace the base formula rate, variable operations and maintenance costs, fuel storage and training costs with a formulation based on the average of responses to PJM’s recent solicitation for black start resources.
No Change to Capital Recovery
Neither proposal changes the capital recovery rate for units requiring capital investments to become black start-capable.
Hendrzak said PJM expects to issue awards to the winners of the solicitation by April 1. The task force also is working on changes to the “back stop” compensation in zones that did not receive bids.
(Source: PJM Interconnection, LLC)
The impact of the proposed changes vary dramatically by region. For example, the minimum incentive proposal would increase costs less than 10% in 10 zones while seven zones would see costs jump by more than a third, with PPL’s doubling (see chart).
Token Incentive
John Horstmann, of Dayton Power & Light Co., said increasing incentives for existing units will be cheaper than paying for new ones, which could cost $250,000 or more annually. The $20,000 increase a 40-year-old 20 MW CT would receive under the minimum incentive is “at least a token effort to keep some of the older units around.”
Black start units must be capable of starting without an outside electrical supply, maintaining frequency and voltage under varying load, and maintaining rated output for a specified time, typically 16 hours.
In September, the Federal Energy Regulatory Commission approved Tariff revisions that PJM said will increase the pool of potential black start generators by 64,000 MW (ER13-1911).
The Markets and Reliability Committee last week endorsed changes to Manuals 14B and 18 to implement proposed capacity import limits and clarify rules on substitution of demand response resources.
Manual 14B: PJM Region Transmission Planning Process
Reason for Change: The MRC endorsed changes to Manual 14B to implement PJM’s proposed capacity import limits, now pending before the Federal Energy Regulatory Commission. (See related story, FERC Demands More Details on Import Cap.)
Stakeholders approved the limits in November out of concerns that PJM might lack sufficient transmission to accommodate its growing volume of capacity imports. Cleared imports grew from about 3,000 MW to more than 4,500 MW in 2009-2012 before more than doubling to nearly 7,500 MW last year.
Impact: The revised methodology would limit external generation resources in this year’s base capacity auction to 6,200 MW — a 17% drop from the volume of imports that cleared in the May 2013 auction — while also setting five import zones with their own limits. (See Members OK Capacity Import Limit; Prices May Rise.)
Manual 18: PJM Capacity Market
Reason for Change: The committee endorsed changes to Manual 18 to clarify Tariff provisions that allow substitutions of demand response resources.
Impact: The change makes clear that curtailment service providers may substitute a non-performing DR registration with one or more other DR registrations in the same geographic area and with the same lead time. Providers may use Limited DR to replace Annual DR but the substitution will not count against Limited’s 10 dispatch-per-year cap. Annual DR has no limits on the number of dispatches.
PJM and other RTOs asked EPA Jan. 28 to allow states to meet pending greenhouse gas regulations through regional caps and to include a “safety valve” to maintain reliability.
EPA is drafting its first limits on carbon dioxide emissions from existing power plants. The ISO/RTO Council (IRC) said that it usually doesn’t take policy positions on EPA regulations but that it wanted to ensure the rules “recognize the relationship between proposed environmental rules, electric system reliability, and economically efficient dispatch.”
The council’s seven-page proposal asks EPA to allow states to adopt State Implementation Plans (SIPs) based on “a regional measurement mechanism for determining compliance with CO2 rule obligations.” The group also said EPA’s regulations should include “a process to assess, and, as relevant, to mitigate, electric system reliability impacts resulting from related environmental compliance actions.”
Meanwhile, major business and manufacturing trade groups announced a coalition to ensure any GHG rules are cost effective, technologically achievable and allow use of all domestic energy resources.
The Partnership for a Better Energy Future is undertaking the effort “because we want a better outcome, not because we want to throw obstacles in the way,” said Karen Harbert of the U.S. Chamber of Commerce’s Institute for 21st Century Energy. The Edison Electric Institute and American Public Power Association are not on the membership list, though the National Rural Electric Cooperative Association is.
The Environmental Protection Agency will issue a final rule on disposal of power plant coal ash by Dec. 19, according to a consent decree EPA signed with environmental groups. Spurred by the disastrous 2008 ash pond collapse at a Tennessee Valley Authority site, EPA started developing regulations but never finalized them. Environmental groups sued and won a ruling requiring the agency to specify a timeline for action. EPA’s proposed rule included options to regulate ash as a hazardous or a non-hazardous waste. Utilities and coal interests oppose a hazardous designation.
The Department of Energy has made $2 million available for development of taller wind turbines that research shows could capture more wind energy. Although wind towers in the U.S. max out at about 300 feet now, the funds would go toward studying 400-foot towers. The taller units are not uncommon in Europe. According to DOE, National Renewable Energy Laboratory research shows higher turbines could unlock more than 1,800 GW of wind potential.
The Internal Revenue Service will be giving special scrutiny to recipients of Section 1603 renewable energy “stimulus” grants because it has found that some also claimed energy tax credits. The grants were meant to be in lieu of credits. A report released last week by the Treasury Inspector General for Tax Administration said the IRS is conducting a compliance study on the 1603 program, which is expected to be completed by June 30. The IRS said some tax practitioners have encouraged use of leasing transactions “because that allows fair market value to be overstated to increase the grant amount.” As of May 2013, Treasury had awarded 9,016 of the grants totaling $18.5 billion.
California Democrat Henry Waxman, a leader of major environmental legislation in the House of Representatives for decades, will not seek reelection. Waxman, who will have served 20 terms, is the top minority member of the Energy and Commerce Committee, and spearheaded the Clean Air Act Amendments of 1990 and the ultimately unsuccessful greenhouse gas cap-and-trade legislation. It is not clear who will succeed him in the lead-Democrat position, but Rep. John Dingell, the Michigan Democrat who is the longest-serving member in history, expressed interest. He is 87 and has served 59 years.
There were more than a few concerned stakeholders at last week’s Members Committee webinar when Market Monitor Joe Bowring presented data showing that only 10 generating units were responsible for 38% of the RTO’s uplift charges in 2013.
Whose generators are they and where are they located? Bowring would like to tell you. But PJM officials said they are prevented by the RTO’s confidentiality rules from disclosing the names.
(Source: Monitoring Analytics LLC)
“The only way that’s ever going to get released by PJM is if we get a FERC order,” Executive Vice President for Markets Andy Ott told the Markets and Reliability Committee Thursday.
The 10 units were responsible for about $335 million of uplift charges in 2013. In total, PJM had $882 million in uplift, or operating reserve charges, for the year, a $231 million increase over 2012. Reactive service charges increased $263.5 million, while black start costs jumped $78 million. (See related story, Black Start Units to See More Green.) Balancing and day ahead charges decreased by a combined $110 million.
Ott said the recent spike in reactive charges is temporary – a result of coal plant closures forcing operators to order more out-of-merit dispatch -– and will be corrected by the addition of new generation and reactive upgrades.
“The reactive issue will be done before we could get [FERC approval for] language changes” to the confidentiality rules, Ott said.
Howard Haas, representing the Monitor, told the MRC the confidentiality rules don’t apply because it is not market-sensitive information. “This is a non-market payment. It’s not hedgeable, so there’s no problem in releasing the information,” he said.
Dave Anders, PJM manager of member services, said that while the Energy Market Uplift Senior Task Force is devising strategies to reduce uplift, PJM staff is considering operational changes it can make without modifying the Tariff or Operating Agreement. “Can we change the model and how we commit units? We may be able to take steps to limit the cost of reactive uplift,” he said.
Bruce Bleiweis, of DC Energy, said it was improper for PJM to take actions “that divide us all into winners and losers without subjecting it to the stakeholder process.”
Ott insisted the changes were permitted. “Similar decisions are made every day.”
The coal industry lobby that sank Ron Binz’ nomination to the Federal Energy Regulatory Commission won’t have a clear shot at President Obama’s new choice as FERC chair.
But that doesn’t necessarily mean smooth sailing for nominee Norman Bay, who has served as director of FERC’s Office of Enforcement since 2009.
While Binz, a former Colorado regulator, called for a new “regulatory compact” and opined on the future of coal and natural gas, those combing through Bay’s history will find little on utility law or energy policy.
A former federal prosecutor and law school professor, Bay has written extensively on criminal law and national security issues. But his opinions on the major policy issues facing the commission — the role of demand response and renewables, implementing Order 1000 — are unknown. Unlike most FERC commissioners in the last decade, Bay has never served as a state utility regulator.
Of the 15 FERC commissioners who have served since 2000, 10 served as commissioners or staffers at state regulatory agencies prior to their appointments. Four of the others worked in energy-related posts in state or federal legislative committees or executive agencies; one was a former utility executive. (See table.)
Of the 15 FERC commissioners who have served since 2000, 10 previously served as members or staffers at state regulatory agencies.
The last five chairmen served a median of 30 months before becoming chair. Only one, Patrick H. Wood III, served less than a year on the panel before his promotion.
Alaska Sen. Lisa Murkowski, ranking Republican on the Energy and Natural Resources Committee, had criticized Obama’s plan to elevate Binz directly into the chairmanship. She also has reservations about the president’s plans for Bay. “It’s curious that they would elevate him to chairman over existing qualified members,” spokesman Robert Dillon told Bloomberg News.
In his favor, Bay has no obvious enemy constituencies — except, perhaps for members of the energy bar, some of whom believe his office has been overzealous in its enforcement actions.
Harvard Law Graduate
The son of Chinese immigrants, Bay studied history at Dartmouth before getting his law degree from Harvard. He clerked with a judge on the Ninth Circuit appeals court and worked in the Legal Adviser’s Office of the U.S. State Department before beginning an 11-year stint as an assistant U.S. Attorney in Washington and Albuquerque, where he prosecuted violent crime.
In 2000, President Clinton appointed him U.S. Attorney for New Mexico, where Bay led a staff of more than 130 and inherited the government’s controversial case against Wen Ho Lee, a scientist at the Los Alamos Nuclear Laboratory.
Lee was indicted on 59 counts for allegedly stealing secrets about the U.S. nuclear arsenal for the People’s Republic of China. But after keeping Lee in solitary confinement for nine months, the government dropped the case in return for Lee’s guilty plea to a single count of mishandling classified material.
The judge who accepted the plea apologized to Lee for what he called misconduct by senior Justice Department officials and Bay’s predecessor as U.S. Attorney. In 2006, Lee received $1.6 million from the federal government and five media organizations to settle a civil suit he had filed against them for leaking his name to the press before charges had been filed.
Although he was not personally implicated in any wrongdoing, Bay was called before a Senate oversight hearing into the case. He resigned as U.S. Attorney in 2001, after the election of President George W. Bush.
As a professor at the University of New Mexico School of Law between 2002-2009, he taught criminal law, evidence, constitutional law, national security law, and ethics. His law journal articles include Prosecutorial Discretion in the Post-Booker World and Executive Power and the War on Terror.
Evolution of FERC Enforcement Unit
When manipulative schemes by traders at Enron and other power marketers roiled the Western energy markets in 2000-01, FERC’s enforcement staff consisted of 20 lawyers in the Office of General Counsel. The maximum penalty FERC could impose was $10,000 per violation per day.
Since then, FERC created a separate enforcement division now staffed with 200 economists, accountants, auditors, former traders and attorneys, including former prosecutors. (Full disclosure: RTO Insider editor Rich Heidorn Jr. worked for the Enforcement Division between 2002-2010.)
Bay created a new unit in 2012, the Division of Analytics and Surveillance, which runs automated screens to detect potential manipulative behavior.
Since passage of the 2005 Energy Policy Act, which increased the penalties to $1 million per violation per day, FERC has collected $873 million in civil penalties and disgorgements. They included cases against Morgan Stanley, Constellation Energy Group Inc., Deutsche Bank AG and JP Morgan Chase.
Barclays PLC meanwhile is fighting a FERC order that it pay a $453 million fine and $35 million in unjust profits over alleged manipulation of Californian and other western power markets by the British bank in the last decade.
But consumer advocates and other critics say regulators’ enforcement actions have neither provided sufficient deterrent nor made consumers and honest market participants whole. Moreover, some say regulators will never be able to catch up with clever traders looking to exploit the rules. (See JP Morgan Settlement: A Verdict on Electric Markets?)
Appellate Loss
FERC also has been criticized for overreaching in its enforcement under Bay. The D.C. Circuit last year threw out FERC’s market manipulation case against Brian Hunter, whose natural gas trades contributed to the collapse of hedge fund Amaranth Advisors LLC.
FERC had accused Hunter of selling natural gas futures contracts at the end of the trading day, which depressed the futures closing price but benefited the hedge fund’s swap positions in physical markets.
The court ruled that the agency had encroached on the jurisdiction of the Commodity Futures Trading Commission (CFTC), which sided with Hunter in the case in claiming exclusive jurisdiction over futures contracts.
“Although the Commission reads the Hunter decision as narrow in scope, some market participants interpret the decision more broadly to cover not only manipulation in the futures market, but also many additional transactions and products, including those squarely within FERC’s jurisdictional markets,” Bay told the Senate Banking Committee in testimony last month. “Accordingly, a legislative fix to eliminate uncertainty on this matter could ensure that FERC has the full authority needed to police manipulation of wholesale physical natural gas and electric markets.”
FERC and the CFTC took a step toward settling their long-running turf battle in January, signing two Memoranda of Understanding to address jurisdictional issues and information sharing.
Criticism of FERC Enforcement
At the National Association of Regulatory Utility Commissioners annual meeting in November, a panel including former FERC Chairman Joseph Kelliher and former General Counsel William Scherman attacked FERC’s enforcement as opaque and a threat to market liquidity.
Kelliher, now executive vice president for NextEra Energy Inc., said he now realizes “it’s much harder to comply [with market rules] than I thought.” He said the commission has not clearly defined what constitutes a “strong compliance culture,” a consideration when calculating penalties. Because most of FERC’s enforcement cases have resulted in settlements, the agency has not created a full record to define behavior it considers manipulative.
Scherman went further, saying that FERC’s actions are causing companies to leave the energy markets, reducing liquidity and increasing volatility.
They were joined in criticism by Harvard professor William Hogan, who said FERC needs to be transparent regarding its definition of market manipulation.
Bay was not present at the NARUC conference. His deputy, Larry Gasteiger, defended FERC’s record, saying it was following the direction of Congress, which allowed FERC to determine on a case-by-case basis whether trading behavior is manipulative.
LaFleur’s Future?
Bay’s nomination leaves the future of acting FERC Chair Cheryl LaFleur in question. LaFleur, named acting chair in November with the expiration of former Chairman Jon Wellinghoff’s term, told reporters last week she’d like to be renominated for another term, whether or not it was as chair. (See Acting FERC Chair Wants to Keep Her Job.) Her term expires in June.
Asked Friday whether President Obama will nominate LaFleur to a second term, a White House spokesman replied cryptically, “I have no personnel announcements to make.”
Wellinghoff, who hired Bay at FERC, reportedly lobbied for him as his replacement. “Norman Bay did a great job as the Office Director of the Office of Enforcement and I think he will make a great commissioner,” Wellinghoff said in an email to RTO Insider.
Dominion is selling the electricity side of its competitive retail energy business and hopes to have a transaction closed in the next several months. “It just doesn’t fit our business model,” CEO Tom Farrell told analysts, according to an earnings call transcript from Seeking Alpha.
Tax experts are closely watching Exelon’s challenge of a $517 million tax bill stemming from transactions in 1999, when the company sold some power plants and acquired others in what it characterized as a tax-free exchange. The Internal Revenue Service says the transactions were taxable and the matter awaits Tax Court resolution. If Exelon loses, such transactions risk being viewed by the IRS as “abusive tax shelters,” tax lawyers said. No trial date been set.
Exelon Generation’s 10 nuclear plants in Illinois, Pennsylvania and New Jersey produced 134 million net MWh in 2013, their highest output ever, exceeding the previous record set in 2007. The plants operated at a 94.1% capacity factor.
