Looks like FERC has its Grinch hat on this Christmas. On Wednesday, the Commission issued an Order to Show Cause and Notice of Proposed Penalty
to Kevin Gates, his companies, and trader Alan Chen and his companies.
FERC proposes that Gates and his companies cough up $22,358,208.00, while Chen is supposed to come up with $12,160,576 in penalties and disgorgement. That's nearly $35M. I'm wondering if Gates and Chen even HAVE $35m?
I've read some of the OE FERC staff report, and I gotta say I'm not feeling the outrage in the same way everyone was outraged at the Enron schemes. It reads like a witch hunt, and I kinda feel sorry for Gates and Chen. So, FERC staff is all up on its high horse about protecting consumers, but I'm left wondering where that $4.7M in marginal loss surplus allocations would have ended up if Chen had not made these trades. It would have ended up in the pockets of other traders. It would not have ended up in the pockets of electric ratepayers.
What is FERC going to do with the money, if it manages to prevail in this matter? $4.7M will be re-distributed to other traders, Robin Hood style. That leaves $30M in penalties. What is FERC going to spend that on? Maybe they could spend it hiring some smarter guys to design and monitor their markets... like Gates and Chen?
Like a persistent nightmare...
Richard and Kevin Gates say that they received this Notice of Release of Materials Obtained in Investigation
late last week, and that it may suggest that Powhatan may receive an Order to Show Cause from the FERC later this week.
Tit for tat...
FERCLitigation.com is now back online after a month-long truce, and the Gates brothers are ready to talk to the media. Looks like it's game on again. Merry flippin' Christmas!
It really is all about that number on a piece of paper, apparently.
FERC issues an annual report of its enforcement activities each November, to let the public know how FERC is protecting them. A big number on the report justifies FERC's activities.
Is it about doing the job, or is it about the number?
In 2014, FERC says its investigations produced $25M in civil penalties against energy market violators, and $4M in disgorgement of unjust profits. Just $4M? What percentage of annual energy market profits is that? How much money was actually made by manipulating markets?
FERC says it saved ratepayers nearly $11.7M by directing refunds and recoveries as a result of its audit activities. What percentage of the total amount of rates is $11.7M?
Audit activities included formula rate audits. FERC found much the same kinds of violations it found last year.
Formula Rate Matters. DAA continues to examine accounting that populates formula rate recovery mechanisms used in determining billings to wholesale customers. In recent formula rate audits, DAA observed certain patterns of noncompliance in the following areas:
• Merger Goodwill – including goodwill in the equity component of the capital structure absent Commission approval;
• Depreciation Rates – using state-approved or a blended depreciation rate consisting of Commission and state-approved depreciation rates without Commission approval;
• Merger Costs – including any merger-related costs in rates (e.g., third-party advisory fees, internal labor, severance, and other general and administrative costs) without Commission approval;
• Tax Prepayments – incorrectly recording tax overpayments not applied to a future tax year’s obligation as a prepayment leading to excess recovery through working capital;
• Unused Inventory and Equipment – including the cost of materials, supplies, and equipment purchased for a construction project without removing the cost of items unused in whole or in part from the cost of a project;
• Allocated Labor – using labor cost allocators not based on a representative time study to determine the amount of indirect labor costs to distribute to construction projects;
• Asset Retirement Obligation (ARO) – including ARO amounts in formula rates, without explicit Commission approval;
• Below-the-Line Costs – including below-the-line costs in formula rates (e.g., lobbying, charitable contributions, fines and penalties, and compromise settlements arising from discriminatory employment practices) without Commission approval; and
• Improper Capitalization – seeking to include in rate base (and earn a return on) costs that should be expensed.
So, when are utilities going to stop making the same "mistakes" over and over? Maybe when they are sure to be caught, or when "mistakes" come with penalties? Otherwise, it's like playing roulette for utilities. Over time, they can rake in more than they'll ever have to refund if they are caught. Why are there no penalties for continued violations?
During the year, FERC performed 19 audits. What percentage of the total number of formula rates overseen by FERC is this?
Do FERC's investigations promote transparency and encourage entities subject to Commission requirements to develop strong internal compliance programs? If they did, would FERC soon find itself out of a job? Or would utilities continue to play FERC-roulette because it's just so gosh-darn profitable?
Friday marked the first time the public has been able to take a look at what's shaken out of PATH's consolidated FERC case (ER09-1256-002 & ER12-2708-003).
Docket No. ER09-1256 deals with the three Formal Challenges to PATH's formula rate filings for rate years 2009, 2010 and 2011 that were made by West Virginia ratepayers Keryn Newman and Alison Haverty. The Challenges alleged that PATH recovered millions of dollars that it was not entitled to.
Docket No. ER12-2708 deals with PATH's recovery of $121M of stranded capital investment in the PATH project. In 2008, FERC granted PATH the right to recover all prudently-incurred expenses for the project in the event it was abandoned for reasons beyond PATH's control.
These two very different PATH cases were consolidated by FERC in 2012, forever joined at the hip for settlement and hearing purposes.
Earlier this year, the settlement phase ended and a procedural schedule for hearing was set. Under the procedural schedule, PATH filed its Initial Direct Testimony in May of this year, supplemented in July. Intervenors filed their Direct and Answering Testimony on Friday. The public, trial-type evidentiary hearing is scheduled to begin on March 24, 2015 in Washington, D.C.
Here's what was filed Friday:
Direct and Answering Testimony of Keryn Newman and Alison Haverty, along with testimony from their witness Doug Kaplan. Files are labeled, and the narratives are files number 2 of 20, 16 of 20, and 17 or 20. The other files are supporting exhibits as mentioned in the testimony. This testimony deals exclusively with the Formal Challenges in Docket No. ER09-1256.
Testimony and Exhibits of FERC Trial Staff. Witnesses Miller and Deters deal with the Formal Challenges, while witness Keyton testifies on PATH's return on equity percentage that is part of the abandonment docket.
State Agencies and Joint Consumer Advocates filed testimony. The testimony of witness Lanzalotta is with regards to the amount PATH should recover in the abandonment docket, while witness Woolridge deals with PATH's return on equity in the same docket. The third JCA witness questions the prudence of PATH's legal expenses.
Sen. Robert Casey, D-Pa., was the first to ask the inspector general to look at the way FERC has been investigating alleged energy market manipulation. Stressing the need for investigations to be transparent, Casey in July urged Friedman to look at seven specific aspects of FERC's enforcement program, including whether the agency has pursued enforcement actions against entities "that were not acting in violation of then-current applicable laws and regulations," and is "properly allocating its limited resources to investigation of cases that have the most deleterious effects on energy markets."
Then, in September, Barrasso and Sen. Susan Collins, R-Maine, asked the inspector general to explore allegations questioning the fairness and transparency of FERC's enforcement program, including those made in an Energy Law Journal article co-authored by a former FERC general counsel asserting that the commission's enforcement process has become "lop-sided and unfair."
The two senators specifically asked if FERC is holding certain parties to different standards with regard to market manipulation. For instance, Barrasso and Collins questioned whether the public is being given "actionable notice" of the types of conduct FERC considers to be market manipulation. They also asked Friedman to explore the article's allegations that the targets of FERC investigations and their employees are not being afforded the due process "required by FERC's own regulations and precedents" and that provided by other federal enforcement agencies.
The IG will also be investigating any "quid pro quo" connections between enforcement actions and other unrelated FERC actions, and some craziness about career vs. non-career positions.
FERC has publicly offered a recent defense against the allegations.
Some have wondered whether FERC applies different standards to those it considers outsiders to its little energy fiefdom. Does FERC go after its utility regulars with the same zeal it reserves for banks, traders, companies or individuals that don't regularly wander its halls and hearing rooms? Is FERC's OE all about big headlines, or is it about justice? Are utility transgressions dealt with by sweeping the matter under the rug or slapping the offender on the wrist?
It's going to be interesting. Let's hope we don't next have an investigation of DOE IG's investigation to determine whether that investigation was carried out in a fair manner. They could run out of inspectors to inspect each other at some point.
Just when we were ready to make Kevin Gates an official member of the Sodom on the Potomac Super Hero Club, he's folded his tent and disappeared.
Pretty disappointing, after the terrific fight Kevin and his brother Rich have been putting up, claiming to have been wrongly accused and harassed by FERC for years.
Powhatan Energy Fund has decided to take down its website at www.ferclitigation.com. And, while the site is down, Powhatan will be declining all new requests to speak with the media and requests to present at conferences.
FERClitigation.com has published a new letter to the U.S. Department of Energy's Inspector General from Senators Collins and Barrasso
The Senators are asking the same questions that have been stinking up the FERC's aura for months.
1. Are parties who "do not otherwise appear frequently before FERC" held to different standards than the utilities who are part of the daily scenery at FERC?
2. Are there clear rules about what constitutes market manipulation? Are market participants given adequate notice about what constitutes a violation and treated fairly during an investigation? Is FERC pursuing "market manipulation" that was perfectly legal when it occurred?
3. Are deals made with utilities that could be construed as quid pro quo enforcement settlements in order to receive FERC approval for a different transaction?
Tough questions. Where are the answers?
You don't have to be one of the "white shoe" FERC regulars to think that something's off here. There's been enough written to make even common consumers question whether our recently politicized FERC plays favorites with its incumbent utility friends while saving its scary investigations and worst punishments for energy "outsiders" that dare to venture into its lair.
The Wall Street Journal gets right to the point:
Ad hoc settlements win political plaudits, but because companies usually neither admit nor deny wrongdoing, the settlements set no meaningful or coherent legal precedents.
Does FERC's mindless pursuit of settlements really serve consumers? Or is it all about the occasional big headline to draw the passing attention of the common consumer and give him a false sense of security that regulation is working to protect his interests?
Does FERC play footsie with gigantic utility holding companies? Case in point: FirstEnergy's 2012 scheme to drive up capacity prices in ATSI, which cost consumers hundreds of millions of dollars. Regulators didn't bat an eye because what FirstEnergy did was legal when they did it. But, not so for some of FERC's red-headed step children that aren't regulars at the Sunrise Cafe. Their ignorance of FERC's mysterious enforcement methods has cost them dearly.
Will DOE's Inspector General shake some of the political rot and decay out of 888 First Street and restore the public's respect and trust in the important work of the Federal Energy Regulatory Commission?
I hope so.
The Pufferfish Foundation
wants to let folks know that the U.S. Department of Energy's Inspector General would like people who have been harassed by FERC's Office of Enforcement to contact their office.
They can contact the IG hotline at:
D.C. Metro Area: (202) 586-4073
Toll free: (800) 541-1625
FAX: (202) 586-4902
This information comes from U.S. Senator Robert Casey's office, and may be a response to the Senator's inquiry
into FERC's investigation of Powhatan Energy Fund. The investigation has been made public on the website ferclitigation.com
Powhatan sent this letter to the Inspector General in July.
So, if FERC's bullies come knocking on your door, who ya gonna call?
“Your preliminary findings make no sense. Should you choose to proceed with a public notice against Powhatan and/or Huntrise, please be advised that they will respond publicly and forcefully.”
So, just when FERC manages to get all its commissioner seats filled, a major public relations battle and search for a politically suitable commissioner starts all over again. Here's a better idea: Since FERC is all political now, maybe we should just start electing FERC commissioners, since they're supposed to regulate in the public's best interests?
I think PPL needs to do a round of drug testing of its employees. Whoever came up with this idiotic idea must be on something.
PPL announced today that it had "submitted an application to PJM" to build a 725-mile 500kV line, estimated to cost $6B, through four mid-Atlantic states.
Never going to happen.
Residents of affected states are still reeling from PJM's last big transmission building idea, Project Mountaineer, that cost them billions, including nearly half a billion dollars for planned projects that were never built. Try it, PPL, and you will experience coordinated, strategic opposition like you've never seen before!
The Morning Call seems to be the first media outlet to... err... call PPL out on its outrageous money-making scheme. PPL interstate transmission project both costly and lucrative: Project would fill utility coffers while costing ratepayers billions of dollars.
Morning Call says:
The project also would be a significant source of revenue for PPL Corp., PPL Electric Utilities' Allentown-based parent. Under Federal Energy Regulatory Commission rules designed to encourage infrastructure investment, utilities may earn a profit of 11.68 percent on transmission projects.
That translates into a profit of up to $700 million. PPL would share the money with any other utilities that participate in the project.
PPL customers, meanwhile, would see the cost, including utility profits, reflected in their rates — though the burden of paying for the project would be shared by ratepayers in all four of the states involved.
But, Morning Call only sees the tip of this iceberg. PPL can apply to the Federal Energy Regulatory Commission for transmission rate incentives that would up its profits significantly. In addition to incentive ROE adders that can increase the 11.68 percent several percentage points, PPL can also ask for guaranteed cost recovery in event of abandonment, a return on construction work in progress that enables them to begin earning that juicy return immediately, even before the project is completed, and many other outrageous financial rewards.
In addition, Morning Call's math is wrong. The $700 million profit the reporter calculated is only that earned in THE FIRST YEAR of operation. Transmission project rates work sort of like a 40-year mortgage. The return is calculated and paid on the depreciating balance of the project cost every year! So, in the first year of operation, PPL would earn a return on $6B and collect a certain amount of depreciation on the project assets that would lower the balance owed by ratepayers. The second year, PPL would earn a return on the depreciated balance, and additional depreciation. And so on, over the 40 year (or more) life of the capital assets. PPL's possible profit from this ridiculous project is a nearly endless goldmine!
And, one last thing Morning Call gets wrong -- this project will be paid for, in part, by ratepayers in all 13 states in the PJM region because of its size. A 500kV project built in PJM is cost allocated at 50% to all ratepayers based on peak usage, with the other 50% being assigned to the cost causers/beneficiaries.
Moving right along into PPL's feeble assertions that its project will:
If approved, PPL predicts, the project will improve energy reliability and security and provide customer savings by eliminating transmission bottlenecks and encouraging development of lower-cost natural gas-fueled generation plants.
The new plants would help replace energy supplied today primarily by coal-fired plants that, under increasingly stringent federal air quality standards, are expected to be retired in coming years.
This doesn't even make sense. The coal-fired plants that will be closing are located in the Ohio valley, not on the east coast. Once those coal-burners are offline, it will free up significant transmission capacity for any new "mine mouth" Marcellus shale gas-fired plants built in the Ohio valley. Why would we need to build a new west to east transmission line when there's already plenty of them sitting idle due to coal-plant closings?
PPL says they will have a robust public input process to find out where to site the line. Seriously? That strategy doesn't work anymore. It's all about need for the line in the first place, not where to put it. Get with the brave new world of transmission opposition, PPL!
And speaking of siting the line... where is that new Maryland substation supposed to be on that featureless map? If you compare it to a real map of Maryland, it looks like it's in Howard or Carroll counties. But, what if there was land available in neighboring Frederick County for a proposed substation? Oh, deja vu!
This has got to be the most thoughtless transmission proposal I've ever seen.
Never going to happen.