FERC has ordered American Efficient to defend its energy efficiency programs in PJM and MISO or pay a $722 million penalty and return $253 million in profits to ratepayers.

The commission’s Dec. 16 show-cause order directed the company demonstrate how it did not violate the Federal Power Act, FERC’s anti-manipulation rule and the MISO and PJM tariffs “through a manipulative scheme and course of business in PJM and MISO that extracted millions of dollars in capacity payments for a purported energy efficiency project that did not actually cause reductions in energy use” (IN24-2). (See “American Efficient Pushes Back on Allegations of Tariff Violations,” PJM Asks FERC to Eliminate Energy Efficiency from Capacity Market.)

The commission said the company has 30 days to either elect for a hearing before an administrative law judge or request a prompt penalty assessment.

“We are greatly encouraged by FERC’s enforcement action today against American Efficient, which is fully consistent with the findings of our investigation of its conduct in the MISO markets,” MISO Monitor David Patton said. “We continue to encourage MISO to respond to our recommendation to remove energy efficiency from its capacity market or to substantially improve its tariff to eliminate this type of gaming of MISO’s capacity market in the future.”

In a report attached to the order, FERC Office of Enforcement (OE) staff report allege that, instead of using capacity market revenues to deliver reduced demand, the company and its subsidiaries ran a market research program that determined how much consumption would be avoided if certain products were sold and then bid those savings into capacity markets “as if it caused the savings.”

OE said American Efficient did not deliver reductions in consumption, acquire ownership or rights to capacity savings associated with product installations, or “have a nexus with end-use customer projects.”

“American Efficient has exploited those markets, enriching itself, its individual investors, its various holding companies, and its investment bank counterparties by receiving capacity payments for a purported energy efficiency project that does not actually do anything to reduce demand,” OE said in the report. “Over the past 10 years, the company has cleared half a billion dollars in capacity without offering any real energy efficiency, providing any demand reductions or making the grid any more reliable. Its program receives more capacity payments than any single generator in PJM, and it offers nothing in return.”

The report says that, by purchasing “environmental attributes” and sales data associated with products sold at retailers such as Home Depot, Lowe’s and Costco, American Efficient claimed to have rights to enter those savings into capacity markets. Enforcement staff, however, argued the company did not inform consumers that it was claiming rights to any capacity associated with their purchase of efficient devices nor did it enter into any agreements with consumers or hold rights over any projects.

The report explained that EE programs typically include a host of measures to reduce demand, including marking down efficient products at the retail level, incentivizing residential consumers to install efficient appliances or incentivizing commercial and industrial customers to retrofit their businesses. Utility programs are subject to review by state commissions through measurement and verification processes.

Third-party programs have included efforts by a university to improve the efficiency of cold water distribution infrastructure and a school district improving lighting and building envelopes across its system.

OE staff analysis found traditional utility EE programs paid $20 to $100 per appliance for direct discounts, while American Efficient paid 15 cents on average. That analysis found the company paid around $0.001/kWh for energy savings it calculated — around 1% of what utility programs paid.

‘At Best Unethical’

The OE report notes the company had been barred from the ISO-NE and MISO capacity markets and that independent market monitors for MISO and PJM both referred the company to the Enforcement office in April 2021. It also states that American Efficient’s policy director left the company and voluntarily provided testimony for Enforcement staff, which wrote that she had “concluded that it had become nothing more than a ‘wealth transfer’ from ratepayers and was being run in a manner that was ‘at best unethical.’”

American Efficient did not inform PJM after being disqualified from MISO and ISO-NE, the report says, and instead expanded its program in the RTO’s Base Residual Auctions, increasing to account for nearly three-quarters of EE in PJM. The RTO’s stakeholders in August voted to outright eliminate EE from the capacity market , which FERC approved in November (ER24-2995). (See PJM Stakeholders Endorse Elimination of EE Participation in Capacity Market.)

“American Efficient defrauded the markets and ISO/RTOs by presenting its market data program as a capacity resource,” OE wrote in its report. “To carry out that scheme and ensure that it maximized its capacity payments, American Efficient concealed the true nature of the program by making false statements to market regulators. For example, it claimed that it provided ‘incentives’ and reductions in energy usage. Without any evidence or factual basis, the company also claimed that its program influenced or even dictated customer behavior.

“The company also repeatedly represented to PJM and MISO that its program met the respective tariffs’ EER definitions when the program did not. Finally, American Efficient also withheld material information from PJM and MISO to avoid scrutiny of its capacity market activities,” the report said.

Responding to the notification that OE intended to recommend an administrative proceeding, American Efficient defended its program by saying neither the RTO monitors nor the investigation had demonstrated fraud. The company argued that PJM had acknowledged in its stakeholder process and FERC filing to eliminate EE from the capacity market that its tariff does not require a causal link between capacity revenues and reduced capacity demand through EE programs. The company said it effectively followed the tariff language and was being expected to comply with anticipated rule changes.

“While the market monitors in PJM and MISO have strong policy preferences that EERs [EE resources] be removed from the markets, they are not arguing (nor could they, based on the record) that American Efficient misrepresented its program when seeking approval,” the company wrote. “Instead, the allegations go directly to the fundamental features of American Efficient’s EER program. There is no support for the allegation in the preliminary findings that American Efficient had a scheme with an intent to defraud the markets when the features were transparently presented to the RTOs, scrutinized by RTO staff and subsequently approved.

“Put simply, an enforcement action based upon fundamental features of American Efficient’s EER program that MISO and PJM knew and approved of would be inequitable.”

The company instead recommended that FERC open a technical conference to consider industry-wide changes to how EE participates in capacity markets and how its contributions are measured and verified.

After the monitors’ referrals, American Efficient met with commission staff and argued that it had not violated any FERC or RTO rules and enforcement action was unnecessary. Preliminary findings were presented to the company in July 2023 and a response was submitted the following September.

Enforcement staff sought to interview company personnel, according to the OE report, but American Efficient sent a letter in October 2023 stating that it would not make witnesses available. OE then requested that the preliminary investigation be made formal, which was granted in October 2023. Several former employees and third-party investors spoke with investigators in the proceeding.