The insiders got together to talk about the outsiders last weekend.  I'm sure my invitation got lost in the mail, along with yours, dear reader.  Or maybe... gasp... we're outsiders?

At any rate, the insiders had a nice long discussion about energy markets and slipshod enforcement tactics.  I know Barney has been telling the kiddies that they're "special" for many years now, but he wasn't singing about energy markets.
Energy markets aren't special.

They're just another product of the PJM cartel's enabling  of its members profits.

Bowring said the process that RTOs use to create market rules is flawed because market players get to vote on those rules, and sometimes they block the passage of needed reforms because they are engaging in the behavior that a new rule would prohibit.
It's like attending goody-two-shoes-kindergarten if you want to participate in PJM's energy markets, and you're going to have to tattle on yourself if you make too much money:
Bowring said market participants also have a duty to inform market overseers of faulty rules and false arbitrage opportunities and to not engage in such behavior once they suspect it to be wrong. He said the "vast majority" of market players do just that, and that those who think "they're the smartest guys in the room" by figuring out how to exploit some rule loophole are usually not since others have also seen that opportunity but chose to do the right thing by not engaging in such behavior.
When is FERC going to "do the right thing" and get rid of its mysterious and dysfunctional energy markets?

They need to realize that they need outsiders to make their silly markets work.  If outsiders aren’t allowed to make money playing by the market rules without suffering the occasional random sacrifice from their ranks to serve as an example of a "bad egg" and a demonstration of FERC's power, then perhaps they should just outlaw their participation altogether.  Will the beatings continue until morale improves?

It’s like slopping a whole bunch of chum into the water and complaining when sharks show up instead of some pretty goldfish.
 
 
The embattled Clean Line Energy project that proposes to transport energy from rural America to the heavily populated Eastern Seaboard has had a series of major setbacks.

In Missouri, the PSC's own staff, which is made up of engineers, utility economists, and attorneys advised the Commissioners to deny the application. In their Conclusions of Law brief they stated, "Grain Belt Express has not shown electricity delivered over its high-voltage transmission line and converter stations will be lower cost than alternatives for meeting renewable portfolio standards and general demand for clean energy because it overlooks significant costs affecting the integration of wind energy in its production cost modeling and its modeling inputs are insufficient to predict electricity prices at specific locations." They also recommended  “The Commission finds that Grain Belt Express' HVDC transmission line project is not needed in Missouri."

On February 11th the commission took the unusual step of ordering Clean Line to submit a considerable amount of additional documentation after the final briefs were turned in. Among the many requirements: Grain Belt Express shall set forth the status of its efforts to obtain the assent of the county commissions required by Section 229.100, RSMo, in the eight counties crossed by the selected project route in Missouri and provide supporting documentation thereof, including any letters of assent from those eight county commissions.

Five of the eight impacted counties have rescinded support they had previously given Grain Belt. Given that the local sentiment against Grain Belt tends to be very high, and that nearly 2,000 people turned out at the eight public hearings opposed to the project, it seems unlikely that they would be able to secure the needed county assent.

Additionally, Clean Line is running into many roadblocks with its Plains and Eastern project in Oklahoma, Arkansas and Tennessee. Clean Line hopes to be the first company to utilize Section 1222 of the 2005 U.S. Energy Policy Act to obtain federal eminent domain after they were denied eminent domain authority by the state of Arkansas. This provision would authorize DoE to essentially act as a land agent for the private company and use the government's power of eminent domain to condemn the private property in its path.

Recently the Cherokee Nation and several county boards passed resolutions against Plains and Eastern Clean Line obtaining federal eminent domain authority. Earlier this week, the Arkansas House Joint Energy Committee unanimously passed a resolution to send a letter to the Department of Energy condemning Clean Line's use of Section 1222. Arkansas’ congressional delegation has also been seeking answers from the DOE in Washington, and were instrumental in extending the public comment deadline on the project’s federal environmental impact statement an additional 30 days.

Clean Line is also facing major problems for their Rock Island Project in Illinois and Iowa. The Illinois Commerce Commission voted unanimously to withhold eminent domain authority at this time. In Iowa, where Clean Line recently filed franchise applications, they have been met with fierce resistance and an organized opposition group who is taking their fight to the state capital building.

Jennifer Gatrel from Block Grain Belt Express Missouri states, "Overall the idea that a private company could seize privately-held agricultural land for its own private benefit is just wrong. Clean Line has brought together a vast group of very different individuals from around the country working united on the common goal of protecting landowner rights. This company has brought a major disruption to our community and much time and money has been lost. Clean Line’s proposals have also created an enormous, tightly-knit family formed in reaction to the crisis. We will not lose this fight!!"
 
 
Below is a press release from Powhatan Energy Fund.  Why mess with perfection?  Here goes:
------------

West Chester, PA -  Last week, PJM Interconnection stated that Powhatan Energy Fund's response to FERC’s order to show cause illustrates our “failure to appreciate the unique legal and regulatory framework governing organized wholesale electricity markets.” Yeah, perhaps we do not understand this “uniqueness” – we were under the impression that constitutional protections applied to all regulated markets in this country, including theirs. We’ve raised our voice against the bullying tactics that FERC has employed in this investigation as they have completely ignored these protections, including our rights to due process and fair notice. Powhatan is in the news and people feel compelled to respond to us because we’re not unique – a lot of people know there’s a fundamental problem here.
 
The industry struggles to understand the rules and the laws under which they can operate their businesses. PJM’s recent statements add to their confusion. PJM’s pronouncement that FERC’s regulatory mission “to protect consumers and other market participants” is held to a “higher standard” than the SEC’s mission to protect investors is simply wrong. We do not believe PJM could cite any authority to support this claim. The SEC’s mission to protect investors is every bit as stringent and important as FERC’s. FERC has even stated that its market manipulation rule is modeled after the SEC’s 10b-5 precedent.  
 
We wish PJM would stop pretending that this investigation has anything to do with “just and reasonable prices” for power, as they put it. There is no allegation that we increased power prices. As a matter of fact, Alan’s trading had no negative effect on prices or on the power markets at all. If PJM wants to argue, we suggest they find a different straw man.
 
PJM made the rules, and Alan traded under those rules. Our activities were perfectly legal. And the thing is – PJM knows it. Even after August 2, 2010, when Alan stopped trading, PJM continued to wire funds to us for the very trades that are the subject of the investigation. If they really thought there was anything illegal about the trades, we wonder why they repeatedly sent us money.
 
We suspect that every single UTC trader made money in the summer of 2010. Instead of vilifying us in the press, PJM should thank us for identifying the goose that was laying these golden eggs. If PJM feels compelled to run any more simulations, Powhatan suggests they quantify how much money the big utilities would have “lost” the last five years had PJM continued to pay UTC traders to take transmission service out of the system. It will show the big utilities are better today, in part, because of Alan’s trading.
 
Throughout this five-year investigation, we’ve been very cooperative. Over the last year, we’ve been very open. The analysis of our experts, the interactions we’ve had with the FERC, and even our legal correspondence are available to the leadership team at PJM, who can see it all at www.ferclitigation.com. We encourage a visit.
 
 
Powhatan Energy Fund (aka the infamous Gates brothers) filed their Response in Opposition to Order to Show Cause and Notice of Proposed Penalty on Monday.  Unlike FERC's accusations, this one doesn't require a secret FERCenese* decoder ring to understand, and actually has plain-English section headings that every DC energy lawyer probably wishes he could write, such as:
C. The Report Contains So Many Obviously Wrong Accusations That Some
Additional Comments On the Most Blatant Inaccuracies Are Warranted
1. Dr. Chen’s “Home Run” Trading Strategy Is Not A “Post Hoc Invention” Because, Among Other Things, 35 Is Less Than 50
2. The Staff’s Analysis Of The “Indicia of Manipulation” Misses The Mark Entirely
3. Dr. Chen’s Trades Were Not “Wash-like” Or “Wash-type” – Whatever The Heck That Means
4. The Staff’s Stubborn Reliance On The Unpublished, Non- Precedential Amanat Case Is Just Lame
5. Uttering the Phrase “Enron” Or “Death Star” Does Not Magically Transform The Staff’s Investigation
6. Who Cares What Bob Steele Thinks?
7. The Staff Has Not Identified Any Actionable “Harm”
Although weighing in at 49 pages, Powhatan's response  is a quick and easy read, heavy on the common sense, and light on the bafflement that DC lawyers like to rely on to confuse the decision-makers.  It's a modern-day, regulatory version of The Emperor's New Clothes down there, where the object seems to be to simply confuse the issues with lots of big words and complicated concepts until the decision-maker (who most likely doesn't have the technical background to appreciate all the little nuances) is left drooling in his chair, more confused than he was before he entered the room.  I believe they hope that the decision-maker, like the long-ago emperor, will simply be afraid to admit that he doesn't get it, for fear of looking stupid in front of his lawyer courtesans.  When that happens, the emperor may nod his head and agree with the sagest of experts before him.

And in that spirit, OE's self-designated little conscience has entered the room by filing a public protest on the debacle.
  Former compliance counsel and current Super Dad Eric Morris shares:
I would hope the four Commissioners voting on this docket would reflect on the unjustness of treating certain entities that have regular business before the Commission very deferentially and then outsiders who receive zero funding from ratepayers such as the subjects of this investigation very harshly. 
He also has some other interesting observations, such as:
If [Kevin Gates] had become rich and bought a utility or five, I would imagine you would treat that future version of Kevin Gates much more nicely.
But what would Kevin Gates want with a utility (or five)?  He'd have to abandon his morals in order to run them.

Even Eric can't seem to find the harm that FERC's OE claims was done by Powhatan:
And speaking of protecting the incumbents, all the “harm” is supposedly being done to them.  I’d love to see OE prove that that money would have lowered ratepayers’ bills; if so, PJM should be broken-up for ever allowing this.  I would guess it is much closer to the old story of private gains (to PJM Members) and public risk (ratepayers paying for this investigation), though.   Who knows, maybe the PJM cartel is smarter than the Wall Street banksters like Goldman and I am just not giving them enough credit?
I doubt it.
*FERCenese |ferk in knees| noun:  The incomprehensible, acronym-laden gibberish spoken at FERC that is hard for common folks to understand.  Origin:  Electric ratepayer Scott Thorsen, standing in a field in Illinois.
 
 
The West Virginia PSC has approved the settlement reached by the parties to FirstEnergy's request to increase rates, and your rates will go up 8% overall on February 25.  Yeah, rate increases suck, but I think the bigger question here is... Did you get a better deal in the settlement than you would have if this case had gone through the full evidentiary hearing and been decided by the Commissioners?

I'm thinking... yes.  And here's why:

Actual base rate increase requested:  $95.7M (9.3%).
Actual base rate increase granted:  $15M (1.45%).

Vegetation Management Surcharge requested:  $48.4M
Vegetation Management Surcharge granted:  $47.5M  HOWEVER, something good happened here that is not reflected in the number.  For the first time, FirstEnergy will have to account for every dollar spent on vegetation management and file semi-annual reports that true up its actual expenditures to actual rates collected.  The vegetation management expenses must be reviewed for prudence.  In the past, the company was simply handed a certain amount annually for "vegetation management."  The company never had to account for how (or if!) the amount was actually spent on vegetation management.  What happened is that the company wasn't doing adequate vegetation management, resulting in more severe and frequent outages, but was using the money to bulk up its balance sheet and share dividends.  Now all the money collected for vegetation management must be spent actually maintaining vegetation.  This is a very good thing!

Depreciation rate change increase requested:  $17M
Depreciation rate change granted:  None.

Requested increase in monthly customer charge:  $1 (up to $6 from the existing $5)
Monthly customer charge granted:  $5 (no change).


Deferred expense for 2012 storm restoration:  $45.8M.  The companies wanted to collect this with an annual return calculated on the balance.  Instead, they will collect this over 5 years ($9M/yr.) WITHOUT any return (interest) being paid
.

The company wanted to collect $60M in expense it incurred in closing its Albright, Willow Island and Rivesville generating plants.  Instead, it will collect zero.  However, the companies are permitted to defer this expense (hold it on their balance sheet) for the time being, and may request recovery of it at a later date.  At that later date, you bet the recovery request will include years of "interest" accrued during the deferral.   This bears watching!

The companies had requested a surcharge to pay for the cost of upgrading their generators to comply with EPA regulations.  They withdrew their request in the settlement, however, the settlement simply kicks that can down the road, allowing the companies to create a regulatory asset (deferral) for those costs and to collect them during its next base rate case.  In the meantime, the accumulating costs will earn 8.19% return (interest), which will be payable at the next rate increase.

But, it looks like the apportionment of rates between customer classes was adjusted to lower rates of the industrial users, while residential rates were increased.
  Remember, industrial users were a party to this settlement.

Do you think you might have gotten a better deal from the PSC Commissioners?  I doubt it.  They're used to giving FirstEnergy everything it wants.  The Commissioners aren't really fighting for you, but the staff of the PSC, and our Consumer Advocate WERE fighting for you here and I think they engineered the best deal possible.  There was never any chance that the PSC would simply deny the rate increase in its entirety.  It was all about "how much."  And you kept the pressure on by filing comments and speaking at the public hearings.  Get educated, stay engaged!

 
 
Wow, what a shocker, right?  What happens when a cartel has to make new rules whereby its members have to compete for projects? 

Complete and utter failure.

On Thursday, PSE&G filed a complaint against PJM at FERC.  The complaint is just a new wrinkle in PJM's failure to carry out a competitive transmission planning process ordered by FERC and set out in PJM's own rules.  PJM didn't seem to have any problem coming up with a competitive process in order to comply with Order No. 1000, but it completely failed at carrying out its own rules in its first attempt at a competitive transmission project window.

The complaint alleges that PJM altered all projects submitted in the Artificial Island competitive window, substituting its own project creations for the ones actually submitted, and then allowed a select set of project sponsors to continually alter their projects throughout the evaluation process.  PJM still has not selected a "winner," although the process has been dragging on for nearly two years.  PJM simply cannot resist using its heavy hand to unfairly influence selection of transmission projects that need to be built.

Funny that when PJM has to operate competitively, it cannot.  Everything falls apart.

Is it really about keeping the system reliable and cost effective, or is it about ensuring profits for its most favored members?  Where do consumers fit in?


So, why don't we just do away with PJM transmission planning altogether?  It's a miserable failure.
 
 
RTO Insider reports that FERC has issued a proposed policy statement regarding "hold harmless" commitments made during utility mergers.

The policy is intended to further define merger costs and how they are accounted for, as well as proposed accounting mechanisms to track them.

As if it's about some accounting "confusion," and not about utilities willfully violating the commitments they make as a condition of approval for their merger.  But, hey, FERC has to start somewhere, I suppose.   Maybe some proactive monitoring of utility financial filings could begin to put a damper on the merger cost recovery free-for-all.  But then will the utilities just find more creative ways to improperly recover their merger costs?  How about some penalties for utilities found to have improperly recovered merger costs?  I think maybe a $30M fine for each occurrence would be appropriate.
 
 
...hit the "record" button!

New information in the Powhatan Energy Fund case reveals that FERC may be withholding information.

In a motion filed yesterday, Powhatan says that it has become aware that FERC's Office of Enforcement possesses a recording of a telephone conversation between PJM's market monitor and traders at another company who were engaged in trades similar to the ones in this case, where FERC is seeking over $30M in fines for alleged "market manipulation." 
On that tape, Dr. Bowring says that the trades did not violate the rules, that he understands why the traders engaged in them, and that the rules need to be changed to remove the incentives that drove the trading. He also says that he would not refer the trading conduct to Enforcement if the traders stopped the trading in question.
Powhatan says that accused trader Alan Chen had a similar conversation with Bowring, but did not record it.

The problem here stems from OE's failure to turn over the recording when it was asked to produce exculpatory evidence, i.e. to disclose all evidence that is "favorable to an accused" or "would tend to exculpate him or reduce the penalty."

This seems to be a bit of a double standard, since FERC is relying on the statements of a different trader to make its case to the Commission.

Powhatan also points out that Bowring is obligated to refer trading that he thinks might be market manipulation to FERC's Office of Enforcement.  I wonder how many little phone calls he's made to traders over the years, instead of fixing all the flaws in his "markets?"

How is anyone supposed to know what's allowed and what's prohibited?  Or do those rules reside only in Bowring's head?
  So, keep that recorder handy, just in case... unless you've got $30M or so laying around and don't mind parting with it.
 
 
So, Grain Belt Express announced the opening of its solicitation of bidders for its proposed transmission capacity yesterday.

Big deal.

Remember these three words:  Utilities Hate Risk.
The solicitation for commitments, expected to last about seven weeks, will be a gauge in determining the interest in using the line.
GBE is soliciting customers in accordance with the plan it filed with FERC last year to negotiate rates in a fair and non-discriminatory manner that results in just and reasonable rates.

Despite GBE's media push that FERC has "approved" its project, FERC has no jurisdiction to approve the siting and permitting of the project.  What FERC does have an interest in is ensuring that the rates GBE charges to its customers are just and reasonable.  FERC simply approved GBE's plan to undertake this process fairly.  Once GBE completes the negotiation process and assigns capacity, it must make a compliance filing with FERC demonstrating that it complied with the plan as approved.  That may be be the tricky part!

Who wants to make a contractual commitment to purchase capacity on a transmission line that may or may not be permitted, and may or may not be built?  It could be generators, that Clean Line admits have not yet been built.  It could also be utilities, who commit to purchase the capacity.  Or it could be no one at all.

In the case of generators, the generators would need to have customers (utilities) that want to purchase their generation delivered to Indiana (and incur additional transmission costs on other systems to get the power to load).  Since these generators have yet to be built, and the transmission to Indiana has yet to be built, committing to a purchase price for delivered power could be risky.  Utilities hate risk.  A utility seeking to add renewable generation to its portfolio has many options, including existing generators and transmission.  Utilities plan their resources many years in advance as part of their obligation to provide a public service.  They are obligated to seek the cheapest price.  They want to know the resources they commit to purchase will actually be there when needed, not possibly unavailable at some later date, which would leave the utility scrambling to fill some hole in its plan at whatever price they can find.  Utilities hate risk.  Risk is costly.

In the case of utilities purchasing capacity directly... more risk!  Purchase of capacity on a transmission line that may or may not be there when needed, connected to unnamed generators that may or may not be there when needed, is risky.  Utilities hate risk.

I read an article long ago regarding Clean Line's business plan.  Some panned the plan, saying there is no market for this kind of risk.  So, I thought about it.  If Clean Line's plan is such a sure thing, why aren't there hundreds of transmission companies building merchant  lines outside the regional planning process?  Utilities have transmission affiliates, and they like to make money, too.  Maybe it's because experienced transmission developers know that there truly is no market for Clean Line's business plan?

Last year, Clean Line opened a different FERC-jurisdictional solicitation process for another of its projects, the Plains and Eastern Clean Line.  Regarding that process, Clean Line recently claimed:
It was encouraged by the strong response to a solicitation of customers for another power line it plans to build to deliver wind energy from Oklahoma to Southern states.
Encouraged?  Strong response?  If the response was strong and encouraging, Clean Line should have negotiated contracts with the respondents and made its compliance filing at FERC and announced to the world that it had committed customers for that project, right?  What happened?
From May through July of 2014, Clean Line conducted an open solicitation for transmission capacity on the Plains & Eastern Clean Line. 15 potential customers submitted more than 17,000 MW of requests for transmission service.
Clean Line's negotiated rate authority for Plains & Eastern requires the company to:
... make a compliance filing disclosing the results of the capacity allocation process within 30 days after the close of the open solicitation process, as discussed in the body of this order.
*crickets*

It's been 6 months.  No compliance filing.  No contracts.  No customers.  What happened?  Is Clean Line still negotiating?  Doesn't sound very strong and encouraging to me.  What if the bids Clean Line received were unacceptably conditioned to manage risk, or not satisfactory to economically support the project?  Remember, the bidding window has closed.  Would Clean Line have to award capacity to the top bidders, no matter the conditions?  If so, then perhaps it is busy evaluating the economic reality of its project.

Or is Clean Line planning to reject the first round of bidders and open a second solicitation window, hoping for better bids?  Would that be fair in FERC's eyes?

Don't forget to get your bids in. ;-)

Utilities hate risk.

 
 
It's really not news, per se, but it's now been verified by economic data -- regulated utilities with cost of service rates have no incentive to minimize their costs that are passed on to ratepayers.  In addition, state-regulated utilities may actually buy more expensive, in-state fuel to appease their political puppets.  And they get away with it because our state regulatory agencies are cozily captured by the entities they regulate.

These were some of the findings of a recent study by Asst. Prof. Steve Cicala from the Energy Policy Institute at Chicago that was
published in American Economic Review.  The study, When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation, was undertaken to study regulation to find the characteristics of "bad" regulation, instead of simply doing away with all regulation.
This paper evaluates changes in fuel procurement practices by coal and gas-fired power plants in the United States following state-level legislation that ended cost-of-service regulation of electricity generation. I find that deregulated plants substantially reduce the price paid for coal (but not gas) and tend to employ less capital-intensive sulfur abatement techniques relative to matched plants that were not subject to any regulatory change. Deregulation also led to a shift toward more productive coal mines. I show how these results lend support to theories of asymmetric information, capital bias, and regulatory capture as important sources of regulatory distortion.
The study looked at fuel deliveries to coal- & gas-fired electric power plants, to compare regulated to deregulated.
He found that the deregulated plants combined save about $1 billion a year compared to those that remained regulated. This is because a lack of transparency, political influence and poorly designed reimbursement rates led the regulated plants to pursue inefficient strategies when purchasing coal.
Deregulated plants paid 12% less for coal... because they have an economic interest in the cost to run the plant.  Deregulated plants sell a product, and all their costs to produce that product are included in the cost of their product in a competitive market.  In contrast, regulated plants sell a service at their cost, the supply of power.  You will pay whatever it costs to produce the power, plus a guaranteed return.  The higher the cost, the bigger the return.  With ratepayers footing all the bills, these plants have absolutely no incentive to purchase the cheapest fuel available. 

This is compounded by the "confidential," opaque nature of coal markets, where regulators may not compare prices to know when plant operators are paying too much for fuel.  The same effect was not found in deregulated gas plants, and this was attributed to the transparent nature of natural gas markets.

In addition, the study found that regulated plant owners are more likely to curry favor with state regulators by purchasing more expensive in-state fuel for their plants.  With ratepayers picking up the tab, why not?  This is how states like West Virginia continue to be ruled by a dying coal industry, and part of the WV PSC's basis for approving the "sale" of an uncompetitive deregulated coal-fired plant into West Virginia's regulated environment in 2013.

The study also found that deregulated plants increase their purchase of low-sulphur coal from out-of-state mines as a cheaper way to meet environmental regulations.  Regulated plants will choose installing expensive scrubbers, because ratepayers pick up the tab and the utilities collect a return on their investment.

Although the study only concentrated on fuel costs of regulated v. deregulated generators, its findings can be liberally applied across the board to all aspects of regulated electric utilities, whose cost of service rates are padded with all sorts of uneconomic purchases.  When faced with the cost of its own inefficiency, the utility will always find a cheaper way to get things done, but not when ratepayers are picking up the tab.