The bottom fell out in the hearing room at the Federal Energy Regulatory Commission (FERC) on April 5 when witness Joseph Bowring let it slip that, yes, he might well prefer more independence from his employer in his role as chief of the market monitoring unit (MMU) at the PJM Interconnection.
But he almost lost his chance, as he had to ask for extra time from Steve Harvey, the FERC staffer in charge of sounding the buzzer when each witness reached the end of his allotted time.
MR. HARVEY: Dr. Bowring, your time is up.
MR. BOWRING: Okay. Can I just make two points that I wanted to get to?
MR. HARVEY: Very quickly.
FERC CHAIRMAN JOSEPH KELLIHER: Very quickly.
MR. BOWRING: The first is that my experience — and it’s in my written document, as well — my experience at PJM is that we have not been permitted to be independent and there have been — we’ve seen significant issues with conflicts with PJM, and where there were conflicts, our independence has at times — not all the time, obviously — but has, at times, been compromised. (See, Review of Market Monitoring Policies, FERC Docket No. AD07-8, Technical Conference, April 5, 2007, transcript, p. 75.)
Well, then. That’s not your typical testimony at a FERC technical conference. But in fact, however, Bowring was not yet done. He continued that at PJM, the only regional transmission operator with an in-house unit for market monitoring (MMU), “it can happen” that RTO management might require the market monitor to alter the contents of an official report, presumably for political reasons.
Bowring’s written testimony was not available on the FERC Internet site as of April 18 (where the meeting transcript can be found), but someone somewhere did find the original and included a copy in the public record. (It’s from a photocopy. You can still see the shadow of someone’s highlighting marks in the margins.)
Thus, the complaint filed April 17 by the District of Columbia Office of People’s Counsel, and a host of other public advocates and public power utilities included Bowring’s original written testimony as an attachment. The complaint then cites that testimony as providing evidence of several concessions made by the PJM’s MMU staff. One was having to modify PJM’s recent “state of the markets” report. Another was delaying release of an MMU report because management had disagreed with its conclusion. The complaint and the cited testimony also suggested that PJM may have taken steps to deny access by the MMU to certain market databases, or at least to have begun pushing the MMU out by preparing to transfer access to a third party. (See, Allegheny Elec. Co-op., Inc. et al. v. PJM Interconnection, LLC, FERC Docket No. EL07-56, filed April 17, 2007.)
The purported written testimony is particularly interesting for its many real-world-sounding anecdotes.
For example, as reported by that complaint, the Bowring written testimony claimed that PJM CEO Phil Harris actually had told the MMU staff only a week earlier that PJM would replace them with an outside consultant. Moreover, if the staffers would play their cards correctly, they easily could lock up another plum job somewhere else within the organization, if interested, since the staffers were experienced and well-qualified for many other jobs requiring expertise in wholesale-power markets.
This written testimony claimed even that PJM management already had taken steps to hold on to valued MMU employees:
“A job description was posted this week that precisely matches the market monitoring duties of one of the MMU supervisors, a person with specific, virtually irreplaceable monitoring skills and knowledge developed both in prior jobs and while working at the MMU.”
Such a revelation would come as news to many — even to stakeholders who previously had urged PJM to tighten up its market-monitoring function. Yet things became even more curious when you consider that on April 13, a week following the conference at FERC, PJM issued a press release denying that PJM management ever had told the MMU that it would be disbanded.
“It has been erroneously asserted,” read the press release, “that PJM has already informed the Market Monitoring Unit that it intends to disband the group.”
The news release added that on April 6, the day after the technical conference at FERC, PJM had convened a special meeting of its Board of Directors to deal with the situation. Also, that it had hired an outside counsel to lead an investigation of market monitoring at the RTO, with CEO Phil Harris recusing himself from participating.
Now, in addition to its efforts at re-examining its long-running policy on RTO market monitoring, the FERC also must deal with the April 17 complaint cited above, which asks FERC to provide relief along several lines:
• Direct PJM to show cause why it should not be found to have actively attempted to undermine the market monitor;
• Direct PJM to show cause why it should not be found to be in violation of its tariff, requiring it to provide the MMU with adequate resources to do its job; and
• Direct PJM to comply with its tariff by giving the MMU full access to relevant data and databases, maintaining its staffing at the 2006 level, and ensuring that the MMU has sufficient independence to do its job.
This entire episode clearly has proven to be damaging for PJM, as Bowring’s testimony — his written version, at least — has questioned the very survival of PJM’s ongoing market-monitoring function:
“I believe,” writes Bowring, “that if PJM management continues on its current path with respect to the MMU, within a very short time we will not have adequate resources to meet our tariff-defined responsibilities.
“I also believe that if PJM management continues its current path, within a very short time we will not be able to collect and maintain information as we are required to do under the tariff.” (See FERC Docket EL07-56, Apr. 17, 2007, attachment A.)
Back at the conference, Bowring continued to speak extemporaneously, answering questions posed by the commissioners and Chairman Kelliher:
CHAIRMAN KELLIHER: Now, Joe, is it your suggestion that you think it either should be internal only or both internal and external …
MR. BOWRING: I think … … based on my own experience over the last couple of years and, particularly, more recently, that the market monitoring units [should] be accountable and responsible to some entity other than the RTO. …
Being an employee of the RTO … creates what I think are impossible ongoing differences because, for whatever reason, for better or worse, it’s not an indictment of either market monitoring or the RTO management.…
CHAIRMAN KELLIHER: Mr. Bowring has raised certain allegations. I saw them for the first time this morning. I think he might have given them to us late last night or this morning at some point.
I like Mr. Bowring. I respect him. But I don’t feel comfortable assuming that his version is the complete story … I have reviewed his comments and I think we’ll listen to more than one version of events, though.
Imagine waking up one morning in your home in Chicago — let’s say on January 2, 2007 — and discovering that your residential electric bill, courtesy of Commonwealth Edison (an Exelon subsidiary) suddenly has climbed more than 25 percent. Or perhaps 43 or 55 percent, depending on whether you use electricity for heating, and whether you live in single-family or multi-family housing.
Or you might wake up downstate, where service comes from Ameren subsidiaries Illinois Power, Central Illinois Light (CILCO), or Central Illinois Public Service (CIPS), and see residential bill increases running anywhere from 88 to 125 percent (heating), or 49 to 80 percent (non-heating service).
Commercial and Industrial (C&I) classes would see even higher hikes — assuming that the customer still was taking bundled, standard-offer electric service from the local distribution utility.
This turn of events has now come to pass under the retail-choice regime in force in Illinois, one of the few remaining pro-competition states, where ComEd and Ameren no longer own generation, having sold off their plants as directed by state policy on industry restructuring. Thus, they will buy long-run wholesale-generation supply contracts from independent power producers via the state’s newly established generation auction. (See, www.Illinois-Auction.com.)
The first auction was held for four days last year in early September, in which prices cleared for wholesale-power purchases for some 25,000 megawatts (about one-third of Illinois retail load served by the ComEd and Ameren), over contract terms of 17, 29, and 41 months. In future years, after the pattern gets set, contract terms will run a uniform 36 months.
Citing the afore-mentioned double- and triple-digit increases in retail electric bills, Illinois Attorney General Lisa Madigan has filed a complaint at the FERC. The AG asks federal regulators to set aside or modify the wholesale-power purchase contracts signed by the utilities as a result of the auction, to order refunds, and also to investigate certain allegations of price fixing or manipulation. (See, People ex rel. Illinois AG v. Exelon Generation Co. et al, FERC Docket EL07-47, filed March 15, 2007.)
The complaint pits the Attorney General against the state utility regulator, the Illinois Commerce Commission, and against the state’s regulatory regime in general. That’s because the Illinois commission has found officially that the auction was conducted fairly and has largely accepted the auction result.
“It was managed well,” the commission ruled last year.
“All the relevant rules were carefully followed, and there was no evidence that collusive or coordinated bidding behavior undermined competitiveness.” (See, Order Initiating Investigation, Ill. CC No. 06-0624, Sept. 14, 2006, p. 8.)
However, the state commission rejected the auction result and the implied contracts that were put up for bidding with an hourly price term. In the hourly section, suppliers bid for the right to collect a fixed-capacity charge, but with the price term for the generation supply component set to vary according to the hourly spot market price. For those contracts (which cleared at $175.35/MWh for Com Ed, and $276.19/MWh for Ameren), the commission found a fatal shortage of bidders.
According to the AG, the authority to modify the contracts would come in significant degree from the very newest interpretation of FERC’s Mobile-Sierra doctrine, which has received a lot of press recently, as handed down last year by the U.S. Court of Appeals for the 9th Circuit, most notably in the case of Pub. Util Dist. No. 1 of Snohomish County v. FERC. 471 F.3d 1053. This new version of the doctrine arguably would compel the FERC to grant a third-party request to modify a wholesale-power contract ex post facto if its terms are not “just and reasonable,” even if the “public interest” does not warrant such modification. This new interpretation has since won endorsement from the influential D.C. Circuit in NStar Elec. & Gas Corp. v. FERC, decided on March 9. In that case, the court said that the doctrine extended even to contracts signed to ensure reliability, such as where an RTO signs a “reliability must-run” deal with a producer in a load pocket.
(For background, see in this issue, “The Mobile-Sierra Doctrine: a Return to its Statutory Roots,” by Scott H. Strauss and Jeffrey A. Schwarz. See also, Commission Watch, “The Mobile-Sierra Doctrine, Part Deux,” by Stephen L. Teichler and Ilia Levitine, Public Utilities Fortnightly, March 2007.)
In Illinois, the auction returned prices of between $63 and $66 per megawatt-hour (MWh) for wholesale power supplies contracted by ComEd and Ameren for residential and small-to-medium-sized nonresidential customers, over terms running from 17 to 41 months. The auction price for a 17-month term was higher for C&I service ($90.12/MWh for ComEd; $84.95/MWh for Ameren).
Citing these clearing prices, the AG cries “foul.” She points out that the overall average clearing price of $70.14/MWh for 90 percent of all hours will run more than three times the marginal cost of producing electricity in the relevant area. She provides testimony, for example, from Stanford University Professor Jonathan Koomey, showing that marginal power production costs at Illinois nuclear plants operated by Exelon Generation Co. (ExGen) totaled only about $17.80/MWh in 2004. Madigan adds that a recent study by Argonne National Laboratory and the University of Illinois found that marginal-power generation prices in the region fell between $20 and $28 over 90 percent of the time. The Argonne study suggests that marginal production costs remain under $36/MWh for 95 percent of hours.
Add in the fact that one bidder — ExGen — won 97% of the single-tranche contracts to provide standard-offer power supply to ComEd via the most valuable contracts (the 41-month auction term), and Madigan begins to see evidence of some sort of manipulation or collusion. In a supporting affadavit, industry consultant and occasional Fortnightly author Robert McCullough had suggested that a dominant bidder like ExGen “could control the level of competition it might face by choosing which products to make available to other bidders through bilateral contracts prior to the auction.” That is, that a dominant supplier could corner the winning bids by selling power to competitors beforehand at the bilateral market price, thus encouraging them to skip the auction, or to submit only uncompetitive bids in the auction.
So why the high auction prices?
According to the analysis of the Illinois commission staff, the auction prices included risk premiums. These premiums stemmed largely from the fact that the auction required suppliers to bid not on a fixed quantity of megawatts or demand, but in tranches that each reflected a fixed percentage of load ultimately to be served, whatever that load might turn out to be. Thus, the risk relates to possible future changes in population or economic growth rates, and the propensity of customers (especially the C&I class) to switch to alternate suppliers. The staff pegged the implied risk premiums at 7%, 11% and 12% for the three ComEd contract terms, and 18,% 21%, and 25% for Ameren. The risk of switching explains why the C&I premium ran higher — at 53% and 68%, respectively. (See, Post-Auction Public Report of the Staff, Illinois Commerce Commission, Dec. 6, 2006, at www.icc.illinois.gov/docs/en/ Post_Auction_Public_Report_Staff.pdf.)
In fact, the commission staff suggests that the state’s retail choice plan has fared well, in terms of price comparisons.
After accounting for the initial rate discounts and freezes imposed after 1997 when Illinois took up retail choice, and after also considering general price inflation (23% from 1997 to 2006; 67.5% for energy costs over the same period), the staff reports a real rate decrease of 22% in real terms for ComEd’s retail residential nonheating customers, in comparing pre-1997 rates with post-auction bills. On the same basis, Illinois Power would show an 11% rate cut. Rates rise 5% for CIPS and 18% for CILCO.
Comments and answers to the Illinois AG’s complaint won’t be due until at least the first of June.
Much has been written already in other media — including this magazine’s electronic sister newsletter, Fortnightly’s SPARK — about the studies underway at the Maine Public Utilities Commission to consider whether Central Maine Power and Bangor-Hydro should quit the New England RTO.
The PUC bristles at the fact that the state must subsidize 8.5% of the cost of embedded transmission plant and further expansion across the entire RTO footprint (on a load-ratio basis), while it recovers revenues only for the share of grid investment (about 4%) that is located physically within state boarders.
In similar fashion, Maine ratepayers end up paying a load-ratio share of the RTO’s VAR uplift costs — costs incurred when power plants must forgo market sales and instead operate to supply voltage support for the largely out-of-state grid network, especially to bolster weak grid investment in the Boston area. Power plants must supply VARS when called, even if out of merit. (See, for example, “Maine Prepares Utilities to Leave RTO,” by Lori A. Burkhart, Fortnightly’s SPARK, March 2007, p. 6.)
But now we have two new recent developments.
First, the Maine PUC now has put its money on the table with a complaint filed at FERC. The complaint repeats the same two basic objections noted above, and thus puts the state on record as having pursued all available remedies before its two major utilities would propose such as drastic step as to leave ISO New England. The complaint will give FERC a chance to rule on whether the RTO policy in New England really discriminates against the state of Maine. (See, FERC Docket No. EL07-38, filed Feb. 26, 2006.)
Second, Maine PUC chairman Kurt Adams might have won some sympathy for his state’s cause at the recent technical conference on seams issues for RTOs and ISOs in the Eastern Interconnection, held on March 29 at FERC (Docket AD06-9).
Adams didn’t miss a beat when when FERC Commissioner and former Arizona regulator Marc Spitzer widened the discussion to compare the systemwide benefits of grid expansion with using the nation’s Interstate Highway System to deliver fresh Maine lobsters to the people by truck.
Adams picked up immediately that without enough toll booths, whether on the grid or the highways, a postage-stamp rate just creates a subsidized system that skews the economics, as seen in New England:
“You’ve got to move those lobsters. You’ve got to pay those tolls.”
Also, Adams knew it was Nat King Cole who got his kicks on Route 66.
COMMISSIONER SPITZER: Let me give you an analogy here. In the early 1950s the federal government decided that we needed an interstate highway system. There was some fight initially … complaining about Route 66 in the West. Yet the Sinatra song evolved into a new highway system … People in Philadelphia could get fresh lobster that evening …
You explained the dilemma confronting the state of Maine … that your people are penalized in two ways with transmission construction …
How, from your perspective, do you resolve that dilemma?
MR. ADAMS: I’m still thinking of the Sinatra song.