Page 1837 – RTO Insider

May 21, 2014

Analysis: LaFleur Cruises, Bay Bruises in Confirmation Hearing

By Rich Heidorn Jr.

WASHINGTON — Federal Energy Regulatory Commissioner Cheryl LaFleur sailed through her Senate confirmation hearing Tuesday while Norman Bay was forced to defend his limited policy experience and his running of the commission’s enforcement division.

Cheryl LaFleur and Norman Bay being sworn in to the Senate hearing.

Bay also found himself having to negotiate a gender politics minefield resulting from President Obama’s decision to appoint him directly into the chairmanship — leapfrogging him over LaFleur, the acting chair and the only woman on the panel.

Based on the senators’ comments at the Energy and Natural Resources Committee hearing, Bay will likely need every Democrat — or will have to pick off a Republican or two — to win confirmation.

LaFleur’s reappointment to a second five-year term, by contrast, seems assured.

No one criticized LaFleur, and some of the Republicans, including ranking member Lisa Murkowski of Alaska, said they would like to see her retain the chairmanship.

Heavy-Handed Enforcement?

It was clear well before the hearing started that Bay would face strong headwinds.

Two days earlier, The Wall Street Journal published an op-ed by former FERC general counsel William Scherman, along with a piggybacking editorial by FERC antagonist Paul Gigot, accusing Bay of driving Wall Street banks out of energy trading with heavy-handed enforcement tactics.

It continued an attack that Scherman, now a well-compensated attorney representing FERC targets, had begun at the National Association of Regulatory Utility Commissioners conference in November. (See FERC Pick a Blank Slate.)

Norman Bay, with Richard Gates looking on, responding to questions on his handling of the Gates case.

When Bay stood up to be sworn in, Richard and Kevin Gates — the twin hedge fund managers whose case Scherman cited as exhibit A — were sitting in the row behind him. Richard was on camera, over Bay’s shoulder, during the entire two-hour hearing. (See PJM Trader Calls FERC on Manipulation Probe.)

Murkowski made it clear that Bay had failed his job interview when he met her in her office the previous week.

After praising his “impressive personal story and resume,” Murkowski said she judged his energy policy experience as “recent and limited.”

“I did feel that our discussions had raised questions about your qualifications not just to be a sitting commissioner but to serve as the next chairman of FERC,” she said.

Bay, a first-generation Chinese American who attended Dartmouth and Harvard before becoming a U.S. attorney for New Mexico, has served as director of FERC’s Office of Enforcement since 2009. But unlike most FERC commissioners in the last decade, Bay has never served as a state utility regulator. (See table.) In addition, the last five chairmen served a median of 30 months before becoming chair.

Other Republicans joined in the attack, citing the Wall Street Journal articles and Scherman’s accompanying May 13 article in the Energy Law Journal. The latter — a 49-page, 28,000-word article — alleged a “widespread view that the FERC enforcement has become lopsided and unfair” and called for reforms.

“I find this very troubling,” Sen. John Barrasso (R-Wyo.) told Bay. “I believe this raises serious questions about your fitness to be on the commission. I also believe that these tactics have contributed to driving investors out of the electric market and that means a less reliable grid and higher costs to consumers.”

Sen. Mike Lee (R-Utah) also pressed him on Scherman’s allegations, asking him, “Is this true? Do we need reforms?”

Bay noted that the commission had adopted the “Brady doctrine,” which requires prosecutors to provide targets exculpatory evidence in the government’s possession, at his suggestion. Scherman alleges that FERC officials have failed to abide by the doctrine.

Bay’s response to the criticism was curiously unemphatic. He did not say the allegations were false. He said he didn’t “believe” them to be accurate.

LaFleur provided Bay only limited cover, acknowledging she had dissented on several orders over application of penalty guidelines and investigative procedures. “This is a relatively new area of our work,” she said. “It’s to be expected that we would have debates about how the rules are to be applied … but I haven’t dissented on any of the settlements or the substance of the orders to show cause.”

Negative Pricing and Market Manipulation

Sen. Lamar Alexander (R-Tenn.) tried to corner Bay with a long series of cross examination-style questions in which he attempted to link FERC’s enforcement practices with wind farms, the production tax credit, negative energy prices and nuclear power’s financial woes.

Democrat Joe Manchin and Republican Rob Portman, of the coal-dependent states of West Virginia and Ohio, spent their time on the clock asking what FERC could do to stop the EPA’s pending greenhouse gas rules.

Manchin, who helped sink the bid of Obama’s previous nominee, Ron Binz, did not indicate whether or not he would support Bay. He has previously expressed doubts about Bay’s experience. (See Senators Weigh in on Bay Nomination, PTC, Nuclear Waste.)

Portman offered perhaps the best news Bay heard all day, saying, “I assume you are going to be confirmed.”

Republican Ally

Bay had one notable Republican ally, a frail former committee Chair Pete Domenici, a fellow New Mexican, who introduced him in a rambling defense.

“He’s done everything right to entitle him to try this, try this job on …” Domenici said. “I’m not a great fan of the president of the United States. People know that. But this is a great appointment.”

Current New Mexico Sen. Martin Heinrich, a Democrat, also sponsored Bay. He praised Bay as “fair, balanced [and] consensus-oriented” and said he had used the enforcement tools that Congress granted FERC in 2005 to provide “$300 million in relief to consumers.” Heinrich dismissed Scherman’s attack as “sour grapes,” noting the attorney had represented “the losing side in a number of cases.”

Sen. Maria Cantwell (D-Wash.) also gave a spirited defense. She noted that Congress gave FERC expanded penalty powers in response to the Western energy crisis, during which traders at Enron and other companies boosted profits by manipulating the electricity market.

“The energy markets cannot be a tool for those who want to invest just for their own manipulation of the market. We have to have policemen on the beat,” she said. “… I want to remind everyone that the policeman has been on the beat and has done a lot of great work.”

Gender politics

But for most of the session Bay and his supporters found themselves playing defense, not only over his experience and FERC record but for his gender and Obama’s decision to appoint him as chairman. In addition to having one of five votes on the bipartisan commission, the chairman serves as FERC’s chief executive, responsible for managing staff and setting policy initiatives.

Murkowski said she was troubled by “the fact that our lone female commissioner, who has certainly demonstrated her leadership, would be moved down from the position that she currently holds as chairman.”

Barrasso also said Bay’s qualifications paled in comparison to LaFleur’s, who came to FERC after more than two decades of experience in the electric and natural gas industries, including roles as chief operating officer, general counsel and acting CEO of National Grid USA and its predecessor.

“Given the wide gap in experience between you and chairwoman LaFleur, why should we demote chairwoman LaFleur to make room for you?” Barrasso asked. “And what specific qualifications do you have to be chairman of FERC?”

Bay responded by talking about his “great respect” for LaFleur and professing his confidence that they would work well together.

As to the president’s decision to pass over a seemingly more qualified woman?

“You would have to ask the White House that particular question,” Bay responded. “But I would like to think that the White House might have considered a number of factors. First that I’ve done work – and good work – to protect consumers and the integrity of the marketplace and to ensure that there’s a level playing field for all market participants.”

Bay also cited his “bipartisan record of commitment to public service and good government,” a reference to his work with the State and Justice departments during Republican administrations. Bay also said his experience in the energy industry began before he joined FERC, citing his work as counsel to Sandia National Laboratory and two summers in college during which he worked at a Department of Energy research facility.

Finally, Bay got to what may be the realpolitik answer for why the White House could have bungled the politics of the FERC chairmanship for a second time: “Geographical diversity,” Bay said.

Bay was backed for the post by former FERC chair Jon Wellinghoff, an ally of Senate President Harry Reid of Nevada.

“I do come from New Mexico,” Bay said. “It’s a Western state and it’s a producer state. And Westerners and Pacific Northwesterners have always cast a long shadow, not only on this committee but also on FERC as well.”

Maybe LaFleur, an unapologetic Boston sports fan, shouldn’t have worn her Red Sox jersey to the commission meeting last October.

May 20, 2014

Industry Happy, Environmentalists Outraged by EPA Rule

The EPA’s cooling water rule resulted from a settlement following years of litigation with environmental groups including Riverkeeper Inc., Natural Resources Defense Council and the Sierra Club. Based on environmentalists’ reaction yesterday, the legal battles may not be over.

Reed Super, legal director for the Waterkeeper Alliance, said the EPA abdicated its responsibility “to state agencies that are simply not equipped to make these decisions alone.

“Unfortunately, EPA’s rule will perpetuate the unacceptable status quo that has allowed antiquated plants to withdraw nearly 100 trillion gallons of fresh and sea water each year, and indiscriminately kill fish and wildlife instead of recycling their cooling water or use dry cooling technology, as modern plants have done for the past three decades,” Super said. “We are beyond disappointed with this new rule.”

The energy industry’s initial review was more positive. “The Environmental Protection Agency, to its credit, has taken into account many viewpoints and made improvements to this rule based on the scientific data and procedural analysis that has been brought to its attention,” the Nuclear Energy Institute said in a statement. “We’re hopeful those improvements are included in the final rule.”

NEI said enforcement must recognize the impacts on electric reliability and include cost-benefit analyses to balance increases in electricity costs against environmental benefits.

“Cooling towers consume twice as much water from the aquatic habitats we want to protect compared to once-through cooling systems,” NEI continued “This fact is very important given projections that much of our country will face a water-constrained future. Technology-based solutions at a power plant’s cooling water intake structure can be highly effective in protecting fish and can accommodate the ecological diversity of the various sites. As the EPA has pointed out previously, solutions like traveling screens, with a collection and return system, are comparable to cooling towers in protecting aquatic life in water bodies used for cooling power plants.”

Tom Kuhn, president of the Edison Electric Institute, said the association was “pleased that EPA had avoided imposing a categorical one-size-fits-all approach to compliance; has embraced significant elements of flexibility; and has acknowledged the importance of weighing costs with environmental protection.”

May 20, 2014

Cooling Water Rule: 7,000 MW Lost in PJM?

By David Jwanier and Rich Heidorn Jr.

WASHINGTON — PJM could lose as much as 7,000 MW of generation by 2018 under long-awaited cooling-water regulations approved late yesterday by the Environmental Protection Agency.

The rule will require steam generators in PJM to take steps to reduce the volume of fish and other aquatic life sucked into their cooling water intakes.

The final rule affects about 544 power plants, including nuclear-, coal-, gas- and oil-fired steam generators. More than 500 industrial sites, including pulp and paper mills; chemical, iron, steel and aluminum manufacturing plants; refineries; and food processors, are also covered by the rule.

The EPA said about 40% of affected units are already using the “best available technology” as required by the regulations, which were issued under section 316(b) of the Clean Water Act.

The EPA estimates that 2.1 billion fish, shrimp and crabs are killed annually by being pinned against cooling water intake structures (impingement) or being drawn into cooling water systems (entrainment).

Industry officials were relieved in 2011 when the EPA announced its proposed rules, which did not include a requirement that all generators install expensive closed-loop cooling systems employing cooling towers. The EPA is also delegating enforcement largely to state environmental officials. (See related stories, What’s Covered by EPA Cooling Water Rule?)

PJM spokesman Ray Dotter said the RTO has not done any studies to evaluate the potential impact of the regulations but will review the final rule. “We did look at the proposed EPA rule and believe it provided flexibility to the states to conduct unit-specific determinations, which would minimize the impact to generation,” Dotter said.

The North American Electric Reliability Corp. published an analysis of the proposed rule in November 2011, which projected at least 25,000 MW of retirements or deratings nationwide by 2018 under a “moderate” regulation, including about 7,000 MW in PJM (1,300 MW of deratings and 5,700 MW of retirements).

The moderate case is estimated to cost $170 to $440 per gallon per minute (GPM).

The moderate case assumed only “more aggressive” states would require closed-loop systems. NERC said those states — including Delaware and New Jersey in PJM — are home to three-quarters of affected generation.

NERC projected PJM generators installing cooling towers would lose an average of 1.6% of their energy output.

NERC’s analysis, and a 2011 analysis by ReliabilityFirst Corp., assumed no nuclear plants would retire as a result of the rule, although RFC said retrofits would cut nuclear capacity by 3.5%. That, however, was before nuclear operators began threatening to shutter units because of low capacity and energy revenues.

Oyster Creek Generating Station (Source: Exelon)

PJM is already losing Exelon’s Oyster Creek nuclear plant by the end of 2019 — 10 years before its license expires — under a settlement with the New Jersey Department of Environmental Protection.

NERC predicted PJM would need more generation or additional demand response by 2018 under the moderate case and by 2015 under the “strict” case. The strict case, which would have required closed-loop systems and boosted generators’ costs by 25%, could have caused 35,000 MW in retirements and deratings nationwide, NERC estimated.

In its 2013 10-K filing, Public Service Enterprise Group said it was “unable to predict the outcome of this proposed rulemaking, the final form that the proposed regulations may take and the effect, if any, that they may have on our future capital requirements, financial condition or results of operations, although such impacts could be material.”

Exelon’s 2013 10-K filing, issued in February, said that under a final rule that did not require cooling towers, and allowed states’ permitting agencies to apply cost-benefit tests and consider site-specific factors, “the impact of the rule would be minimized even though the costs of compliance could be material.”

Exelon said its generators without closed-cycle recirculating systems include the Clinton, Dresden, Peach Bottom, Quad Cities, Salem, Calvert Cliffs, Nine Mile Point Unit 1 and R.E. Ginna nuclear plants in addition to Oyster Creek. Also affected in PJM are the Eddystone, Gould Street, Riverside and Schuylkill fossil fuel plants as well as the Fairless Hills plant, which burns landfill gas.

May 20, 2014

What’s Covered by EPA Cooling Water Rule?

The North American Electric Reliability Corp.’s 2011 review of EPA’s cooling water regulations had assumed that the rule would affect 1,200 generators with once-through cooling systems. EPA’s announcement of the final rule yesterday said it would affect less than half as many plants, however.

Covered are:

Existing facilities that withdraw more than 2 million gallons per day (MGD) of water from waters of the U.S. and use at least 25% of their withdrawals exclusively for cooling. They are required to reduce fish impingement using one of seven options.
Facilities that withdraw at least 125 MGD, which must conduct studies to determine whether controls will be required to reduce entrainment.
New units at an existing facility that are built to increase its generating capacity of the facility. They will be required to reduce the intake flow to a level similar to that of a closed-cycle system.

May 20, 2014

PJM Proposes Changes to Capacity Auction Parameters for 2015

PJM proposed changing the demand curve to be used in the 2015 Base Residual Auction while recommending the RTO continue using a combustion turbine as the model for determining the Cost of New Entry (CONE).

Proposed VRR Curve for 2015 Auction (Source: PJM Interconnection, LLC)

PJM’s proposed parameters adopt many of the recommendations from a study by The Brattle Group but differ on some issues, notably rejecting Brattle’s recommendation that CONE be determined based on an average of combustion turbine and combined cycle plant costs.

Brattle recommended that the Variable Resource Requirement Curve be changed so that the price cap (point a) for the system curve is set to a quantity equaling a loss-of-load expectation (LOLE) of one event in five years. Brattle said the change would provide stronger price signals when capacity resources are reduced or become more expensive and would not increase long-term average prices. The study also recommended stretching the VRR curve into a convex shape, making it steeper at lower reserve margins and flatter at higher reserve margins.

PJM said it favored the convex curve but would right-shift it by 1%, setting the price cap to 150% of net CONE at an unforced capacity (UCAP) level 0.2% below the installed reserve margin (IRM). PJM would use the same system curve for locational deliverability areas.

CONE Model

Brattle recommended using an average of combustion turbine and combined cycle costs as the reference technology for calculating Net CONE rather than the current reference of the GE Frame 7FA model combustion turbine.

Brattle said the change would acknowledge that combined cycle plants are the favored choice of merchant generators while avoiding a complete switch away from the current CT reference. It also recommended switching from the Handy Whitman “Other” Index to the Bureau of Labor Statistics’ indices for wages, materials and turbines, which it said would provide more accurate escalation factors for CONE estimates.

PJM agreed with changing to the BLS index but is recommending continued use of the frame-model CT as the reference technology, saying it would provide “market stability and avoids perceived opportunistic switching to units with more favorable economics in any given year.” It noted that the New York ISO recently selected a CT as its reference technology.

PJM seeks to have final stakeholder input by Aug. 31, with changes submitted to the Federal Energy Regulatory Commission by Oct. 1.

PJM Opposes Auction “Re-Run”

In a related matter, PJM asked FERC on May 9 to reject a request from the North Carolina Electric Membership Corp. to require the RTO to develop a mechanism for “unwinding” Base Residual Auction results and rerunning the auction. The scenario envisioned by NCEMC would occur if FERC ruled after the auction and reduced supply curve parameters below those filed by PJM.

“The hypothetical series of events that NCEMC envisions as warranting such a mechanism includes a Commission determination on how best to apply any final rulings on RPM parameter changes resulting from a periodic review,” PJM said in its response. “That opportunity for Commission intervention invalidates any suggestion that PJM’s current Tariff could lead to unjust or unreasonable results.”

NCEMC made the request in response to PJM’s April 4 proposal (ER14-1660) to move up by two months the deadlines for filing changes to auction parameters. Proposed parameter changes would be due May 15 instead of the current July 15. PJM said the changes will allow stakeholders more time to assess the parameters before the Base Residual Auction.

May 20, 2014

FERC to Relax OATT Rules for Tie Lines

The Federal Energy Regulatory Commission said it intends to grant a blanket waiver from Open Access Transmission Tariff (OATT) requirements for utilities whose only transmission assets are generator tie lines. The revisions are detailed in a Notice of Proposed Rulemaking (RM14-11).

Current policy requires a tie line owner to make excess capacity available to third parties unless it can justify its plans for future use of the line. The NOPR would allow tie line owners to wait until a third-party request for service is made under sections 210 and 211 of the Federal Power Act before having to demonstrate their plans.

The proposed changes follow a technical conference and a Notice of Inquiry issued in April 2012.

May 20, 2014

Order 1000 Reversal: Reality Check or Surrender to Incumbents?

PJM’s transmission planning process may exclude consideration of non-incumbent proposals on projects subject to state rights of first refusal (ROFR), the Federal Energy Regulatory Commission ruled last week.

FERC had previously required PJM to remove language designating an incumbent transmission owner as the “Designated Entity” to build a transmission project, “when required by state law, regulation or administrative agency order with regard to enhancements or expansions or portions of such enhancements or expansions located within the state,” and when a transmission project is “proposed to be located on a Transmission Owner’s existing right of way and the project would alter the Transmission Owner’s use and control of its existing right of way under state law.”

But the commission ruled 3-1 Thursday that its previous position would require planners to evaluate nonincumbent proposals that had no chance of getting built because of state rules assigning them to incumbent utilities. The commission said it was persuaded by the arguments of North Carolina Utilities Commission, the Indiana Utility Regulatory Commission and others that the language merely acknowledged state jurisdiction and did not create a federal right of first refusal.

The commission made the change in Order 1000 compliance rulings for PJM (ER13-198, ER13-195, ER13-90), MISO and South Carolina Electric & Gas Co. (SCE&G).

Norris Dissents

In a dissent, Commissioner John Norris said the reversal undercuts Order 1000’s requirement eliminating federal rights of first refusal from FERC-jurisdictional tariffs or agreements.

Norris cited Order 1000-A, in which the commission said “[I]t would be an impermissible barrier to entry to require, as part of the qualification criteria, that a transmission developer demonstrate that it either has, or can obtain, state approvals necessary … to be eligible to propose a transmission facility.

“By excluding proposals from non-incumbents when the proposals are being evaluated based on a consideration of state law, we are effectively excluding non-incumbents from participating in the transmission planning process,” Norris wrote. “This is a fundamental change in direction that I cannot support. I simply cannot reconcile the language in the final rule with the approach taken in today’s orders.

“Clearly, incumbents already are well-positioned through their knowledge of the system, including issues related to reliability and congestion,” he continued. “Today’s orders give incumbents a further advantage over non-incumbents by limiting non-incumbents’ participation in the planning process.

“In my view, allowing non-incumbents to participate in the regional transmission planning process without consideration of potential state law restrictions does not infringe upon the state’s authority,” Norris said. “Using this language to exclude non-incumbents denies states and other stakeholders the opportunity to have all essential information regarding the more cost-effective and efficient transmission solutions.”

‘Coercive Pressure’

The Indiana Commission said that allowing a transmission provider to select a transmission developer that is ineligible to construct a transmission facility under state law would lead to increased litigation and “coercive pressure on state commissions.”

The North Carolina Utility Commission and its public staff agencies said the commission was acting inconsistently in requiring that PJM consider state renewable portfolio standards in its transmission planning process while insisting it ignore state rules restricting transmission development to state franchised utilities.

Other Challenges Rejected

While the commission reversed its position on acknowledging state rules, it largely rejected challenges to its previous orders regarding PJM.

It did, however, order PJM to make some additional Tariff changes and compliance filings, including one describing how local transmission owners incorporate public policy requirements into their transmission plans.

It also ordered PJM Transmission Owners to submit a compliance filing ensuring comparable treatment of AC and DC facilities.

May 20, 2014

Consumer Advocates to PJM: No More Changes, Please

CAMBRIDGE, Md. — Consumer advocates asked the PJM Board of Managers last week to assess the impact of recent capacity market changes before making any new ones and criticized what they called the RTO’s new “inflexibility.” Environmental groups, meanwhile, asked PJM to become “proactive” in addressing climate change and to do more to capture the role of energy efficiency in its planning.

The comments came at the board’s yearly meeting with consumer advocates and public interest groups on the first day of the PJM Annual Meeting here. The tone was a bit less rancorous than 2013’s meeting, with several activists praising PJM for its work maintaining electric service during January and for its response to generator retirements.

Still, the participants weren’t going to let their one shot to talk to the board — and it was almost entirely a one-way conversation — go to waste.

“Five major proposals in the capacity market in the last 12 months is a lot to digest,” said Assistant Pennsylvania Consumer Advocate Dave Evrard, who cited four changes that were approved by FERC and one that was rejected. Evrard noted that PJM had provided cost estimates on only one of the four proposals, a restriction on how demand response clears in the auction. (See PJM Wins on DR, Loses on Arbitrage Fix in Late FERC Rulings.)

“We watch somewhat nervously to see what the results of the current base residual auction will be,” Evrard said, noting that demand response offers dropped by 27% between the 2012 and 2013 base residual auctions. The question is whether the recent DR changes “[exacerbate] the decline or if that was simply an aberration,” he said.

Wil Burns, an attorney who represents environmental groups, echoed Evrard’s concerns, saying the board should not make any additional changes until it has analyzed the impact of the recent changes.

PJM’s `Inflexibility’

Brian Lipman, litigation manager at the New Jersey Division of Rate Counsel, criticized PJM for failing to discuss with stakeholders its position on a crucial capacity market rule before filing comments with the Federal Energy Regulatory Commission. PJM sided with FirstEnergy, which petitioned FERC on April 7 to change how the RTO calculates the maximum price generators can offer into capacity auctions (EL14-36).

“We didn’t find out about PJM’s position until it was filed,” he said. “That is concerning to us that we didn’t have any input into that decision.”

PJM’s “recent inflexibility” regarding rule changes “makes stakeholders worry about the future of consensus-building,” he added.

Lipman said PJM should take more time in stakeholder discussions, such as in the current discussions on the use of the Handy-Whitman building cost index in the calculation of the Cost of New Entry (CONE). “We could have been discussing that for a year now,” he said. “Decisions are happening before we have a chance to participate.” (See related story, PJM Proposes Changes to Capacity Auction Parameters for 2015.)

Role of DR, EE

Environmentalists, meanwhile, asked the board to incorporate demand response and energy efficiency into more of its planning efforts. DR and energy efficiency are “factored into one of your eight planning estimates only,” Burns said.

Yorktown Power Station (Source: Dominion Virginia Power)

For example, PJM should consider whether increased DR might allow Dominion Virginia Power to retire its Yorktown coal-fired generators as planned at the end of 2014 rather than continuing to operate temporarily to address reliability problems, Burns said.

Alison Clement, of the Sustainable FERC Project, said PJM could learn from ISO New England, where at least 90% of energy efficiency bids into the capacity market.

Rob Marmet, of the Piedmont Environmental Council, called on PJM to help states find the most effective ways to comply with pending EPA rules on greenhouse gas emissions for existing generators.

PJM Chairman Howard Schneider offered some brief remarks at the end of the session. “We value the issues you bring to us and the way you bring them to us,” Schneider said. “The relationship has improved vastly over the last several years.”

PJM CEO Terry Boston was the only other board member to offer feedback to advocates, saying he liked Burns’ idea of giving DR a bigger role in PJM’s winter reliability plans.

May 20, 2014

Monitor Suggests Price Gouging by Generators

Some generators may have taken advantage of January’s weather to boost their prices, the Market Monitor said in its quarterly State of the Market report Friday.

“The behavior of some participants during the high demand periods in January raises concerns about economic withholding,” the monitor said. “In particular, there are issues related to the ability to increase markups substantially in tight market conditions.”

The Monitor’s report cites the “markup index,” a measure of participant offer behavior. In the real-time energy market, 58% of marginal units had an average markup index at less than or equal to zero in the first quarter. But 14% of marginal units had average markups at or exceeding $150/MWh, compared to only 4% in the first three months of 2013.

In the day-ahead energy market, almost 87% of marginal units had average markups less than zero and an average markup index less than or equal to 0.03. “Nonetheless, some marginal units do have substantial markups,” the report said. Markups increased on days in January when demand was highest.

The markup index is calculated as (Price – Cost)/Price. The index ranges from -1.00, when the offer price is less than marginal cost, to 1.00, when the offer price is higher than marginal cost.

Competitive Offers Required

The Monitor said capacity resources should be required to make “competitive” offers into the energy market, an obligation that is not clear under current Tariff language.

“Selling capacity into the PJM capacity market but making energy offers daily of $999 per MWh would not fulfill the requirements of a capacity resource to make a competitive offer but would constitute economic withholding,” the Monitor explained in the 2013 State of the Market report. “This is one of the reasons that the rules governing the obligation to make a competitive offer in the Day-Ahead Energy Market should be clarified for both internal and external resources.”

The Monitor’s suggestion of economic withholding came a day after Federal Energy Regulatory Commissioner Tony Clark told PJM members that the commission had seen no evidence that market manipulation played a role in the high natural gas and electric prices in January.

In an interview yesterday, Market Monitor Joe Bowring said his staff will be interviewing generators with high markups and may refer the matter to FERC’s enforcement unit if it doesn’t receive satisfactory answers. “The Tariff requires us to refer potential enforcement matters to the commission,” he said.

January 2014 Outage Rates, Morning Peak (Source: PJM Interconnection, LLC)

Bowring said his staff is also investigating whether any generators engaged in physical withholding by improperly claiming outages. PJM saw as much as 22% of its generation out of service in early January, three times the normal winter outage rate.

Bowring said some gas-fired units took losses to operate in January. “We want to make sure that others also followed through” on their obligations, he said.

Inadequate Incentives

The Monitor’s report said the high generation outage rate in early January was an indication that the current balance of incentives and penalties is inadequate. “At present only half of capacity market revenues are at risk for failure to perform on high demand days. Gas-fired units with a single fuel are exempt from any capacity market revenue impact that results from lack of fuel outages on high demand days,” the report said.

The obligation of capacity resources to offer into the day-ahead energy market “exists regardless of whether gas procurement is difficult, regardless of whether gas prices are high and regardless of whether gas procurement is risky,” the Monitor said.

Stakeholders this month began work on developing potential winter testing requirements for generators. Consideration of incentives for generator performance and penalties for failures will be considered in a separate initiative, PJM said. (See PJM Seeks Action on Winter Lessons.)

Day-Ahead Scheduling Reserves

The Monitor also reported withholding in the day-ahead scheduling reserve (DASR) market, a problem it has cited before which worsened in 2014.

PJM uses the market to acquire supplemental, 30-minute reserves. Because the direct marginal cost of providing DASR is zero, offers greater than zero constitute economic withholding, the Monitor said.

In 2013, 12% of offers in the market exhibited evidence of withholding. The clearing price in the first three months of 2014 was $0.06 per MW, double the price for the first quarter of 2013.

About 74% of resources offered at less than $1 in the first quarter, with 11.5% of resources offered at more than $5 per MW.

The 2013 SOM report recommended incorporating the “three pivotal supplier” test in the market to prevent the exercise of market power during times of system stress, ranking it as a low priority item. PJM said it does not believe the change is warranted given the minimal impact of the market on consumer costs.

May 20, 2014

Exelon Sells Its Share of Safe Harbor Hydro

Exelon last week sold its 67% interest in Safe Harbor Hydroelectric Project, one of four run-of-the-river hydro facilities on the lower Susquehanna River, to Brookfield Renewable Energy Partners, L.P. for $613 million.

Brookfield operates 6,000 MW of generation, primarily hydro, in the United States, Canada and Brazil. It will be sole owner of the facility when the deal closes.

The deal is supposed to be finalized by the third quarter of this year, subject to regulatory approval.

Exelon inherited two-thirds ownership of Safe Harbor when it bought Constellation, parent company of Baltimore Gas & Electric. It still owns and operates Conowingo Hydroelectric Generating Station, the last dam on the Susquehanna River before it empties into the Chesapeake Bay, and Muddy Run Pumped Storage Facility, which is perched on the banks of the Susquehanna upstream from Conowingo.

Safe Harbor went into operation in 1931. It was a joint project of the two companies that would become PPL and BG&E. An affiliate of the LS Power Group purchased PPL’s share in 2011, and Brookfield bought it from LS Power in March of this year.

There are three other power-producing dams on the lower Susquehanna in Pennsylvania and Maryland. Furthest upstream is York Haven Dam, a small, 20-MW facility south of Harrisburg, Pa., owned by Olympus Power. Next is Safe Harbor followed by Holtwood Hydroelectric Plant, both between Lancaster and York Counties in Pennsylvania. Originally a 108-MW plant, PPL completed an expansion of Holtwood in 2013 that added another 125 MW.

The Conowingo dam is a 630-MW facility on the Susquehanna, between Harford and Cecil Counties in Maryland.