Transparency at Issue
By Rory D. Sweeney
PJM financial traders, who have been complaining for years that RTO rule changes and FERC enforcement have threatened their livelihood, now say they fear that Pennsylvania lawmakers may target them in efforts to close the state’s budget gap.
They say the situation might be different if PJM officials — who knew about a potential tax on virtual trades for nearly a month before bringing it to traders’ attention — had given them enough notice to develop a comprehensive response. Instead, they contend, PJM secretly supported the idea, then withheld that information when alerting stakeholders just weeks before the state’s budget deadline.
PJM has denied supporting the tax and says it followed its normal procedure in the matter.
Traders are hoping to head off the proposed tax this week, as state lawmakers attempt to close a $2.2 billion budget hole that has Standard and Poor’s threatening to downgrade the state’s already low credit rating.
The incident has raised questions about when PJM should alert its membership about interactions with other organizations. The RTO currently has no rules on the subject and says that, up until now, stakeholders have always trusted its judgment in such matters.
The controversy also marks another chapter in an ongoing feud between PJM and Shawn Sheehan, president of XO Energy, who has accused RTO staff of bias against financial-sector stakeholders. (See PJM Board Disputes UTC Trader’s Accusations.) Sheehan also is fighting in federal court over FERC’s attempt to collect $42 million in fines and profits for allegedly risk-free up-to-congestion (UTC) trades. (See Traders Deny FERC Charges; Seek Independent Review.)
On June 26, Sheehan sent a letter to PJM questioning its “independence and neutrality” and complaining that RTO officials only belatedly informed traders of the proposed tax. “Virtual transactions have been under attack — throughout the PJM stakeholder process as well as by physical asset owners, load-serving entities, the Independent Market Monitor and now PJM,” he wrote.
Sheehan’s letter cited PJM’s proposals to impose deviation charges on UTCs and reduce the number of biddable locations for them before turning to what he said “appears to be a coordinated effort between PJM senior staff and members of the Pennsylvania state legislature that would result in a gross tax on virtual transactions in PJM.” (See PJM MRC OKs Uplift Solution over Financial Marketers’ Opposition.)
PJM, which said it has consistently opposed the tax proposal, said it was first contacted in January by Pennsylvania legislative staffers seeking general education on its markets.
CFO Suzanne Daugherty told RTO Insider that she receives “dozens” of similar inquiries each month. Alerting stakeholders to all those inquiries would create an “unmanageable” volume of information, she said, so stakeholders have always trusted the RTO’s judgment on what needs to be disclosed to them.
“It is actually very common for PJM to get requests at the state level,” Daugherty said. “We don’t always know that when we’re providing that education, why we’ve been asked for it or what the information might be used for.”
PJM was asked to provide the same information in May but with state Department of Revenue representatives in the room. It then became clear that the state was looking at PJM’s markets as a potential source of tax revenue, Daugherty said.
According to Daugherty, PJM officials told the staffers the RTO opposed any new taxes on its membership and presented them with information — such as potential jurisdictional issues — to support their position. “We thought there might have been some possibility that PJM’s points, along with any other discussions that might have occurred in Harrisburg, had dissuaded them from pursuing any additional tax,” she said.
Daugherty said the issue was then discussed at PJM’s Finance Committee meeting on May 15, although the agenda for the meeting doesn’t list the topic and the RTO has not posted any minutes. Three stakeholders who attended the Finance Committee meeting — GT Power Group’s Dave Pratzon, Gary Greiner of Public Service Enterprise Group and Pennsylvania Assistant Consumer Advocate David Evrard — confirmed the issue was discussed there.
Pratzon said the issue came up when he asked PJM to provide an update. He said he was not certain when or how he first learned of the proposal.
Evrard said PJM reported that it gave “Pennsylvania officials reason to believe that a tax on physical transactions was not feasible, but that whatever the rationale for that position was, it did not apply equally to virtual transactions.” He also confirmed that PJM indicated it was not advocating for the tax.
However, legislative staffers returned in mid-June, announcing they had narrowed their interest to a potential tax on virtual financial transactions, such as UTCs. That’s when Daugherty began alerting financial stakeholders, including attorney Ruta Skucas, who represents the Financial Marketers Coalition.
Skucas said she received a call from Daugherty on June 13 and immediately alerted members of the coalition, including Wesley Allen of Red Wolf Energy Trading and XO General Counsel Carey Drangula. XO arranged a call the following day with Daugherty, who urged the company to contact state legislators “to try to put a stop to this,” Sheehan said in an interview. XO set up meetings with state legislators for the following week to oppose the idea.
Tracy Lawless, a government affairs adviser for XO’s lobbying firm, K&L Gates, said the idea began in the office of Senate Majority Leader Jake Corman (R), whose general counsel is Rik Hull, former counsel to state Public Utility Commissioner and FERC nominee Robert Powelson.
Lawless said the idea was delegated to Sen. Ryan Aument (R), a member of the Senate Finance Committee, whose chief of staff, Jake Smeltz, served as president of the Electric Power Generation Association between 2010 and 2014. Smeltz “was tapped to investigate various revenue ideas based on his industry experience,” Lawless said.
Through Aument’s receptionist, Smeltz declined to comment.
In his letter, Sheehan said that he was told that state officials had determined that although physical transactions could not be taxed — presumably because of federal jurisdiction over wholesale power sales — “virtual transactions could be subject to a levy because they are allegedly only transacted in Norristown, Pa., and allegedly do not have a direct connection to the physical grid.”
Sheehan said members of his company met with members of the legislature the prior week and “were surprised to learn from professional staff that the proposed tax was supported by PJM. There was also some suggestion that a tax on virtual transactions could help fund potential nuclear subsidies.”
If some senators remain interested, they seem to be on their own, according to tax opponents. “The House [of Representatives] wants nothing to do with supporting a virtual transaction tax,” Drangula said, relaying information she said she received from XO’s lobbyists.
“Any policy that makes it more expensive to buy or move energy in this state is a bad idea,” said Kevin Sunday, director of government affairs at the Pennsylvania Chamber of Business and Industry. “There’s no doubt higher electricity taxes will have a consumer impact, felt hardest by large industrials who go out and shop for their own power.”
However, financial traders aren’t assuming the idea is a dead letter.
The Republican-controlled General Assembly is struggling to find ways to pay for a $32 billion spending bill it approved last month. On Thursday, Standard and Poor’s said Pennsylvania’s credit rating — already one of the worst among the states — could be reduced further unless it shores up its finances.
On Monday, Gov. Tom Wolf (D) announced he would allow the bill to become law without his signature even though lawmakers haven’t resolved how to pay for it. Republicans previously rejected Wolf’s proposals to raise revenue, which included a tax on Marcellus Shale natural gas production.
“In the coming days, it is my hope that the General Assembly will come together to pass a responsible solution to balance our books,” Wolf said in a statement. “There are many options available to balance the budget in the long term like those I presented earlier this year. Our creditors and the people of Pennsylvania understand a responsible resolution must take real and necessary steps to improve Pennsylvania’s fiscal future.”
“That’s when this potential tax will be considered,” Skucas said. “It’s still very much live, and it will be under consideration.”
“A tax such as this could be dropped into a package of Pennsylvania tax code changes,” Drangula said. “If they were to go that route … we might see this in proposed legislation. … Even if this proposed tax slips through the cracks this time around, that doesn’t prevent it from resurfacing at some point in the future.”
‘Both Sides of its Mouth’
Traders say they want to know why PJM took so long to tell anyone about the tax proposal.
CEO Andy Ott responded to Sheehan’s June 26 letter three days later, calling it “unfortunate” that XO came away with “misconceptions” about the RTO’s position. Sheehan doubled down, forwarding the board an email in which Drangula recounted her interactions with legislative staffers who she said told her they received “support” from PJM for the tax proposal and warned XO that “PJM speaks out of both sides of its mouth.”
In an interview, Drangula declined to name the staffers.
Sheehan also said that he has witnessed PJM staff take one position in private conversations and another one in public discussion.
“We can absolutely attest to that” occurring at least five times in the last four years, Sheehan said. He and Red Wolf’s Allen cited several negotiations involving the Energy Market Uplift Senior Task Force, including one in which they said PJM failed to tell the traders it was going to propose a package opposed to the traders’ interests the following day. On another occasion they said PJM abruptly pivoted from its recommendations in a whitepaper on virtual transactions, supporting an opposite plan at the last minute.
Daugherty echoed Ott’s comment that the traders’ accusation is “unfortunate” but couldn’t provide any explanation for where it might have originated. She and Denise Foster, PJM’s vice president of state and member services, have been involved in every correspondence or interaction on the issue and the RTO’s opposition has always been the message, she said.
According to Daugherty, PJM didn’t alert stakeholders earlier because, prior to mid-June, it wasn’t clear what the tax might look like or who might be affected. PJM has no rules in its Tariff, operating agreement or manuals regarding what or when it must disclose external interactions to stakeholders, she said. She added that PJM doesn’t plan to address this issue with stakeholders at any committee meetings.
“In the 20-plus years that PJM has been an ISO/RTO, we’ve used our judgment essentially without any member questioning of when we engage them on information that we’re sharing with states,” Daugherty said.
Sheehan and Allen aren’t satisfied with PJM’s judgment in this case.
“It’s only by word of mouth coming from other market participants that I heard about this when I did,” Allen said. “Otherwise, I wouldn’t have found out about it until XO’s letters to the board.”
Sheehan said part of his motivation for sending the June 26 letter was to raise awareness. Beyond posting the letters, PJM has made no other announcement about the issue either on its website or through communication channels.
“Whatever [PJM’s] five core values are, it seems that they have broken each one of those core values with this matter,” Sheehan said, referring to the RTO’s employee Code of Conduct, which lists as core values integrity, communication, accountability, respect and excellence.
Under communication, PJM staff pledge to “distribute information promptly to all who are affected” and to “proactively share information, expertise, processes and ideas openly and accurately.”
“I don’t remember ever authorizing PJM to negotiate or transact on the behalf of XO Energy,” Sheehan said. “I don’t know what is really true or what is not true, but had there been transparency during the process, we would all know what is true.”
In addition to his dustups with PJM, Sheehan has been involved in an expensive fight with FERC over the commission’s demand for $42 million in fines and disgorged profits from a company he previously led, Coaltrain Energy.
Coaltrain is one of at least three firms accused by FERC of market manipulation for profiting on line-loss rebates from what the commission called risk-free UTC trades in PJM (IN16-4). (See Traders Deny FERC Charges; Seek Independent Review.)
Coaltrain maintains that it didn’t manipulate the market, that its trading strategy wasn’t deceptive and that it didn’t engage in wash trades or try to affect market prices. The case is pending in the U.S. District Court for Southern Ohio (2:16-cv-00732).